Monday, October 8, 2007

Forex-Trading Foreign Exchange Using Risk Management Tools

Trading in the foreign exchange (FOREX) market offers both tremendous profits and substantial risks, as does many business opportunities. Have you ever wondered how you could trade the FOREX while controlling and/or reducing the risks involved? Has the fear of losing in a big way kept you from entering this fast-growing market? This article explains several steps you as a trader can take to better protect your investment in this dynamic marketplace.

For starters, understand that your long-term survival and ultimate success necessarily depend on a cautious approach to the market from the start. Among other things, this means that the percentage of margin put at risk in each trade must be reasonable. Within reason, limit the amount of money put at risk. Naturally, what is reasonable to one person may have a different meaning to the next person.

Regardless of the amount of available margin in the account of the investor, the percentage traded must not be so great as to significantly deplete the trading resources if a trade turns unfavorable. Many successful traders refuse to exceed one percent of the tradable margin when executing their orders, while others may go high as ten percent. Putting an amount higher than ten percent at risk would probably qualify as aggressive trading.

Because the amount of leverage applied to the trade can have a profound impact on the outcome, it is better to trade at a level of leverage that matches your trading experience, proficiency and style. Beginning traders may not fully understand that leverage is a double-edged sword, capable of enhancing profits as well as losses. A conservative application of leverage should certainly be the practice of every new trader.

As the proficiency and confidence levels grow, a higher level of leverage may be utilized. Many brokers offer online platforms which allow the trader to pre-select the amount of leverage sought. Depending on the broker, the leverage allowed may go as high 400:1. The average maximum leverage allowed by most online brokers is closer to 100:1.

Consider utilizing the built-in safety features such as the stop loss, trailing stop and limit to help control the risks. A stop loss is a feature offered by virtually all online trading platforms. It allows you to predetermine at which price level your trade will automatically closed if the market moves unfavorably against you. News traders and day traders will typically utilize a smaller stop loss as opposed to the wider stop favored by long-term traders whose positions may be open for several days or longer. A trailing stop will allow the stop loss to be moved in the direction of your profit and has the net effect of incrementally bagging your profits as the price movement continues to move favorably.

The limit provides a capping of the profits much in the same way that the stop loss minimizes the losses. Similarly, it automatically shuts the trade down once the predetermine threshold is reached by the moving price. It is quite advantageous in circumstances where the market experiences a major whipsaw or in the event of a disconnection from the brokers server or the traders internet service provider while the trade order is open.

The occasional loss aside, trading does not have to be a traumatic experience. As the saying goes, nothing ventured, nothing gained. Still, your trades must be properly planned, executed and managed. Utilizing the safety tools designed for the protection of your trading positions is a smart way to ensure your longevity in a business where so many fall by the wayside as a result of failing to understand and properly manage the risks.

Sandy Robinson, J.D.
Copyright 2007

If you are ready to change your future by stepping into the exciting world of trading FOREX, go to for more information. Author Sandy Robinson, J.D. is part of the Winning Traders Association, an educational organization founded by John Beiler, President. The organization consists of a network of committed trainers and motivated traders willing to provide support to those interested in trading foreign exchange. Many of the members work from home.