How Can You Protect Yourself Trading Forex?

If forex trading were easy, we’d all be millionaires. The truth is there is no magic formula to betting on the movement of currency pairings. Trading is hard, but if you take our advice, you’ll protect yourself from the common forex trading pitfalls and increase your chances of success.

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Money Management And Keeping Focused

By following a simple money management plan, you’ll be playing small ball, risking very little of your account at any one time. Baby steps is an important tactic for forex traders anyway. Unnecessarily big trades lead to unnecessary losses, and that leads to erratic behavior like chasing, becoming disheartened and diversion from your trading plan.

You will make errors. They’re part of just about everyone’s forex trading experience, but with sensible money management, you’ll protect yourself from major problems cropping up at any one time.

The next point to take on board is to concentrate on one area. Pick just one well-known currency pairing and trade on that alone until you are comfortable with forex trading.

It’s best to pick one of the bigger pairings and stick with it, if possible. In doing so, you’ll be immersed in researching a narrow subject and come to understand the signals that can make the price chop and change.

Spreading your trades across multiple forex pairs dilutes your attention.

It May Be Best To Avoid Exotic Forex Currencies

While it might sound fun to dip into a smaller currency, they can be way more volatile than the big beasts and certainly much harder to predict.

Try to stick with pairings involving the well-known currencies if you can.

Betting Against The Markets

If a market is trending, be careful if you're looking to bet against it. Go with the flow unless you have incredibly insightful reasons not to do so. A market is trending for a reason, so unless all the signals point to an imminent downturn, or there is major upcoming news, why not join the crowd?

Never Stop Studying Charts And Patterns

Technical analysis charts look bewildering. How can you even start to study a forex pairing chart and use it to predict what the future price movement will be?

But by studying the common trading chart patterns like ‘head and shoulders’, ‘double top’, ‘flags’ or ‘saucers’, you’ll start spotting these patterns as they form, indicating an entry point for a trade, and giving you a stop loss point (depending on your money management limits, of course) and a profit limit point.

Identifying prospects in this way ensure you trade sensibly with your head and don’t jump into a Forex position because you simply wanted some action.

But by studying the common trading chart patterns like ‘head and shoulders’, ‘double top’, ‘flags’ or ‘saucers’, you’ll start spotting these patterns as they form, indicating an entry point for a trade, and giving you a stop loss point (depending on your money management limits, of course) and a profit limit point.

Identifying prospects in this way ensure you trade sensibly with your head and don’t jump into a forex position because you simply wanted some action.

Ride Your Wins, Cut Your Losses

Stop losses and exit points are important in forex trading to maximize your wins and cut your losses. If your forex trade takes a turn for the worse, you have a stop-loss in place to get yourself out automatically. Never be tempted to lower your stop-loss in an open position because you’re convinced the market will eventually move with you.

If your trade is moving as you’d hoped, and you see a profit, don’t try and grab that profit too soon. It’s easy to see a positive figure in a trade and take it, but stick with your original plan for the trade and shoot for the higher profit you’d expected all along.

If you struggle with not taking profit, think about raising up your stop loss as the market moves in your favor, which, once the stop loss is above your entry point, is the same as banking profit without closing the trade.

Keep Your Emotions In Check And Don’t Give Up

You’ll have noticed the psychology of forex trading is a theme that keeps cropping up. It’s easy to let your emotions take over, and that’s dangerous for a trader. Expect losses; they are part of forex trading. Similarly, don’t get over-confident if you enjoyed a winning trade.

Be Patient

The importance of patience in trading cannot be emphasized. Being patient also makes it more likely you’ll stick to sound money management techniques. It’s tempting to lump too much on trades, options that could severely dent funds or even wipe them out. Patience also means waiting for the good signals and set-ups, trades that you think have a greater chance of success.

Jumping in the market because you’re eager to make any trade is a recipe for losses.

Sound trading money management, like that advocated elsewhere on this site, is vital to ensuring you protect your balance at all times. You need to set a limit per trade, a small proportion of your overall balance. For example, you might decide to risk only 2% of your balance on any single trade. You might also introduce rules about the number of losing trades in a day before you quit.

You can see that even this simplistic approach to money management greatly reduces the chances of you risking too much of your account at once.