Forex trading involves balancing between risk and reward. The goal is to take enough risks to enable you to make a healthy return on your investment without necessarily exposing yourself to the possibility of losing everything. It is a tough balancing act that can sometimes make the trading journey a little bit stressful.
The good news is that there is a way to beat the market without suffering under the weight of fear of losing everything. If you are using a good online forex trading platform, you should be able to take calculated trading risks without necessarily suffering all the consequences that such risks pose. You can do this by taking advantage of different types of orders that forex trading platforms make available. Given the role that these orders play when it comes to limiting your exposure, it is imperative that you use them if you want to succeed as a forex trader. The following are the orders that every investor should use as part of their risk management strategy.
Limit orders
As an investor, it is important that you keep any gains that make in the forex market. As a result, there is nothing as painful, both financially and emotionally, as seeing all your hard-earned gains erode as a result of unexpected changes in trends.
Limit orders are designed to allow you to keep as much of your gains as is possible. They achieve this by automatically getting you out of winning positions once you have made certain gains. This is even in cases where you are still in a winning position.
While it is tempting to hold winning positions for as long as possible, doing so is risky because things in the forex market can change in a heartbeat. To avoid losing your gains, and to ensure that you stay disciplined as far as your strategy is concerned, you should set up limit orders. They will protect you from unnecessary risks and hence will improve your odds of becoming a successful trader.
Stop orders
Unlike limit orders, that are designed to protect you when things are going great, stop orders come in handy when things are not going your way. With a stop order in place, you will be able to get out of losing positions automatically, once you incur a certain loss amount. Therefore, a well-placed stop order will shield your portfolio from the devastating effects of holding a losing position for an extended period of time.
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Setting a stop-loss order every time you make a trade is advisable. This is because doing so will shield you from having to make decisions when you are under pressure. It will protect your portfolio from having to deal with more losses than it can handle. As a result, this type of order is necessary to ensure that you have the opportunity to keep playing even when things are not going your way.
When setting up your stop-loss orders, it is always advisable that you consider the percentage of capital that you are willing to lose on any given day. Taking into account the potential upside of a given deal, and your overall trading strategy is also recommended. And once you set the stop-loss order, it is always important to remember to resist the temptation to change it.
Trailing stops
Trailing stops are different from limit and stop orders in that they are dynamic. They don’t involve setting a hard limit or price point at which the order comes into effect. Instead, trailing stops work relative to the current rate.
With a trailing stop, you can set it up such that you get to ride a trend for as long as it is in your favor. In such a case, an order will only come into effect if the market moves against you by a given margin. In a way, this is a hybrid order in that it protects your hard-earned gains while also shielding you from catastrophic losses that may occur in case of a significant change in a market trend.