Those who are planning to pursue forex trading are always worried about the potential losses. All of us are aware of the vast amount of opportunities and profit potential offered by the forex market. But those who know about the volatile and unpredictable nature of currencies will also be concerned about the risk. Having a clear idea about the risk is essential for managing the same and avoiding unwanted losses in the trading process. Unfortunately, many beginners fail to focus on this aspect as they fixate on the rewards. But you can’t expect to reap the rewards of trading without paying attention to the risk. As a beginner, you may need some guidance to act in the right direction.
This article is also written to guide you in the process, as I am about to share 13 practical tips you can follow for avoiding losses in forex trading.
Can We Really Avoid Losses in Forex Trading?
Before moving forward with the tips, an important question needs to be answered. Can we really avoid losses in forex trading? In a practical sense, you can never fully avoid the potential losses, and you must be ready to accept them as a part of the process. The idea here is about minimizing these losses to allow you to explore these opportunities without any negative impact on your financial well-being.
The possibility of losses should be assessed in the planning phase itself. You will surely be setting some profit targets while devising a trading plan, which might be stated as the number of pips you wish to earn in a single trade. Along with this, you should also plan for the probable losses by setting a stop loss. You can make use of a profit calculator to estimate the outcome of your trades and set stop-loss and take-profit accordingly.
Now, we can move on to the tips that one has to follow to limit their losses in forex trading.
1. Finding the Right Broker
The first tip for avoiding unwanted losses in trading is finding the right broker. You need to accept that the forex market is also a playground for scammers and fraudsters. You will hear many stories about beginners who end up losing all their money to a scam broker. Hence, due diligence is a must when you are signing up with a broker by depositing real funds. I suggest you look for a regulated broker, as they can be trusted in this regard. Also, check their reputation, reviews, and the trading conditions offered. And don’t forget to check if they suit your trading style and preferences with the provided trading environment.
2. Research-based Learning
As a beginner, one has to learn a lot before entering the forex market. Becoming a self-taught forex trader is 100% possible when you engage in research-based learning. So, take your time to gain relevant knowledge, equip yourself with essential trading skills, and apply these to devising a solid trading plan. You can surely avoid unwanted losses in trading by ticking off the essential checklist: knowledge, skills, and strategy.
3. Trade on a Demo Account First
Trading without experience can result in a lot of risk, and you are more prone to losses when you are not well-versed with the market fluctuations. Forex demo accounts allow you to eliminate this risk during the initial phase. You will only be trading with virtual funds and can experiment a lot without losing your hard-earned money. Demo trading is essential for practical learning, and that way, you can avoid making beginner mistakes in live trading, where you will be risking real money.
4. Keep It Simple
Many traders tend to complicate everything, making the trading process harder and leading to silly mistakes and losses. This is especially true in technical analysis. Because those who crowd their charts with too many tools and indicators will have a tough time comprehending the information, this can lead to delayed trading decisions and losses. So, you need to simplify everything by keeping your charts clean with a limited number of indicators.
5. Start With Enough Funds
Starting with a small capital is a good way to limit your risk in trading, but it also makes you more prone to losses. Many traders who don’t have enough funds tend to use excess leverage to amplify their gains, which often results in huge losses. Hence, I will suggest you wait until you have enough funds and use that time for learning and practice.
6. Focus on Risk Management
Risk management is essential for safeguarding your trading capital and limiting losses. You don’t have any control over the market situation in forex, but you can control the risk you are taking as a trader. Automated trading calculators are the best tools you can rely on for the perfect execution of your risk management plan. They provide instant and accurate results for all trade-related calculations, promoting quick and better decision-making.
7. The Art of Moving on
Making mistakes is humane, and sometimes, the losses we encounter in trading are inevitable. Finding the reason for your losses and fixing those mistakes in time is important. But there is no use in fretting over your past performance and losses. As a trader, you need to move on after a losing streak, as being stuck in the past will stop you from moving forward.
8. Stop Yourself From Overtrading
Forex trading is always seen as a rewarding process, and the reward system in our brain often pushes us towards addictive behaviors such as overtrading. Overtrading is one of the most prominent reasons behind the failure of many traders. We think we have a better chance of making profits when we place more trades. However, we are also increasing our exposure to risk and potential losses. Thus, you need to stop listening to the voice in your head asking you to place another trade and stick to your plan.
9. Don’t Risk More Than 2% of Your Capital
A single trade should not be a determinant of your overall performance or results in trading. So, you must avoid risking it all for one or two trades to limit your losses. For this, you need to keep the risk per trade-in limit. Experts always recommend adjusting our position size to 2% of the account balance to minimize the risk. Following this rule is essential for avoiding excess losses.
10. Use Leverage to Limit
Forex brokers often provide high leverage for trading, and beginners risk losing a lot due to using excess leverage. Leverage is a great tool for growing your account to a larger scale as you open bigger positions with smaller margins. However, an excess amount of leverage can also blow up your account in an unfavorable situation. Thus, you need to limit the leverage per your risk tolerance and play it safe to avoid unwanted losses.
11. Start Journaling Your Trades
Keeping track of your trades and maintaining a record of your profits/losses is essential to evaluate your performance and identify mistakes in time. This helps you avoid repeating the same mistakes in trading and will encourage you to work harder and perform better. It is normal for a beginner to encounter frequent losses, and you will be able to cut it down later on with a trading journal that promotes continuous learning and improvement.
12. Be Professional
Forex trading is a serious business where your money is at risk. Hence, you need to see it as a profession rather than a hobby or leisure activity. A professional approach towards trading is essential to avoid unwanted losses in forex. As a trader, you need to have the same level of dedication as a business owner because you will be the only one responsible for the profits/losses.
13. Cautious Approach
The last tip for avoiding losses in forex is being independent and making decisions on your own. Blindly following others will never yield good results in the long run. But those who struggle to trade alone can find someone better to trade on their behalf. However, you need to be careful about whom you trust and the platforms you choose. Whether you trade yourself or rely on others, following a cautious approach and doing enough research is important to avoid adverse situations.
Finally, one bonus tip for avoiding excess forex losses is focusing on the process rather than the results. You should have a plan to get the desired results but not to the extent of being too afraid to lose a trade, as it will only limit your potential.