This is something like the golden rule in business: No risk, no profits. Imagine if you could achieve good returns without taking any risks. Or imagine you had to take high risks in order to achieve low yields. All this would make no sense. You can deposit your money absolutely safe at a bank for a fixed yearly interest. But for a safe investment, you cannot expect a return of 10% or more. You can also buy highly speculative and volatile stocks. Then you may well expect 10% return – you must even earn such a return, considering the risks you are taking.
So basically it is all about keeping the right balance between potential profits and potential risks. The same applies to Forex trading – at least in principle. What makes the Forex market so risky are the volatility and the leverage. The markets are changing incredibly fast and you will experience strong swings in the value of your trades. And when trading with a leverage of 200:1, an increase by 0.1% translates into a 20% change in value of your investment.
If you decide to enter the world of Forex trading, be sure to specify a previously defined bankroll as your venture capital. It is in fact risk capital, which implies of course that you can handle a complete loss without getting any financial problems.
A common beginner’s mistake is to risk too much and not to trade cautiously and deliberately enough. The procedure is as follows: A novice trader reads some information on the Internet, makes his first trial trades with a Forex demo account and developes the basic skills and conditions to become a successful Forex trader. Then they scan all the charts, trying to find the acquired signals, etc. Then the first trade for real money starts, but nothing happens. Almost no price movements and no big profits. Therefore, another position is opened. And another one to get enough action. Then the overview is lost and some important signals are missed and trades are closed too late and with a loss. This is a beginner’s mistake that can happen to anyone. The more vulnerable are surely Forex traders who want to gamble. Carelessly chosen trades increase the risk considerably, and it is quite possible that such traders will lose much more money than they will gain with such a FX trading strategy.
Of course you can limit your risks in Forex Trading with Stop Loss and Take Profit orders. It is important to know that in particular also take-profit orders minimize the risks. One might think: “Why? With a take-profit order I limit my potential gains but not my risks”. But the risk in financial markets is defined by volatility, so how much your returns deviate from the expected value. And without take-profit orders your returns will deviate more. But that’s not all. With a take-profit order you define what profits you want to achieve. While it is always possible that you limit your profits with a take-profit order (after all, you could make even more profit), you ensure that you make a minimum profit with your successful trades. As you will not be able to track your trades 100% of the time and as the Forex market moves quickly, a small short-term profit above your take-profit limit might be lost quickly.