In many ways, it’s easy to understand the widespread appeal of the forex market. After all, this market sees an estimated $5.1 trillion traded globally every single day and offers inflated leverage and lucrative, margin-based trades to investors with minimal capital. As a small business startup consideration, companies leverage forex markets to get better pricing for their goods.
However, it is important to note that margin-based trading can fundamentally cause you to lose more than you can realistically afford to lose. Targeting specific markets or currencies (such as the Malaysian Ringgit) also exposes you to significant competition and macroeconomic risks.
With these challenges in mind, here are three effective ways of minimizing losses in the forex market and ensuring that you retain as much of your capital as possible.
1. Trade Pairings Rather than Single Currencies
When starting out as a forex trader, we definitely recommend focusing on one or two currency pairings as a way of channeling your investment.
Of course, this advice also holds value across alternative markets and asset classes, but it’s particularly important when looking to navigate the choppy and constantly changing waters of the foreign exchange.
On a similar note, it’s imperative that you focus your attention on trading pairings rather than individual trades. So, while your initial selection may be informed by the performance of a specific currency, the success or failure of any trade requires you to be right about the second asset that makes up the pair.
This is where an understanding of the market and a keen sense of determinism comes into play, as this helps you to accurately measure the interaction between specific currencies and the historical relationships that exist between some pairings.
2. Use Demo Accounts
Once you’ve targeted specific pairings and formed a viable strategy, you may feel as though you’re ready to crack the market.
However, even the best-laid plans and strategies can fall foul of market conditions, so it’s crucial that you leverage a so-called ‘demo account’ to test your reading systems and hone these further over time.
In simple terms, demo accounts work by providing a real-time simulation of the forex market, through which you can trade using virtual capital. So, it’s possible to accurately test your strategies without risking your hard-earned cash, providing a practical learning experience that actively prevents you from losing money over time.
Don’t be rushed into trading for real either, as it’s far better to perfect your trading strategies over time than race to the market and place your capital at risk.
3. Utilize Stop Losses
Another benefit of contemporary brokers is that they offer access to automated trading and intuitive risk-management tools, which can automatically curb losses in real-time.
Take stop losses, for example, which can be imposed on trades and establish a predetermined selling price as a way of limiting financial losses.
This is a tremendous tool when looking to balance a number of open trades in real-time, and automatically closing positions when you’ve already incurred a certain level of loss can really help you to safeguard your capital over time.
We recommend that you actively avoid imposing tight stop losses through brokerage sites, as this doesn’t allow for the market’s natural volatility and can close promising positions before they’ve been allowed to develop.