Nine Key Rules for Forex Risk Control

The forex market is a highly risky market, primarily because there are too many variables that determine exchange rates. Risk control is essential for forex traders, and these nine key rules will help you manage risk effectively.

1. When trades are going badly:
   (a) Reduce trade size; remember, multiple positions in highly correlated markets are equivalent to one large position.
   (b) Tighten stop-loss points.
   (c) Delay entering new trades.

2. When trades are going badly, reduce risk by closing losing trades, not profitable ones.
   Recall Livermore’s conclusion in Reminiscences of a Stock Operator: “I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it. Of all the speculative blunders, there are few greater than trying to average a losing trade. Always sell what shows you a loss and keep what shows you a profit.”

3. Be extremely cautious—do not alter your trading patterns after making a profit.

4. Do not initiate any trade that appears too risky at the start of the trading process.

5. Do not suddenly increase position size within a typical trade. However, gradually increasing positions as net asset value grows is acceptable.

6. Apply the same common sense to both small and large positions. Don’t say, ‘This is just a small test.’

7. Do not hold large positions based on major reports or key government statistics.

8. Use the same money management principles for long-term and ultra-short-term trades. It’s easy to become complacent, thinking that long-term moves are gradual and don’t require strict stop-loss protection.

9. Do not buy at a price where a trade is about to close unless it’s part of your plan.