Forex Trading Tips for Managing Risk by the Forex Trader

LONDON, April 10, 2012 /PRNewswire/ --

Trading forex enables you to speculate on the movements of forex prices by depositing only a small fraction of the total value of each trade, through its leverage feature.

This also offers traders easy access to a range of currencies as well as the potential to magnify their return on investment (ROI).

However, the leverage feature also presents significant risk; traders can incur losses that exceed their initial deposit.

Below, The Forex Trader offers advice on some of the issues affecting traders and how they can rectify them - looking closely at the risk management tools offered through City Index.

Problem: "I have 'Eyes Bigger Than My Belly'"

"Traders have a tendency to get 'caught up in the moment' whilst trading the forex market, particularly during volatile market conditions, i.e. when a market's price moves quickly.

Trading on impulse can result in unrealistic trade sizes and a lack of risk management, including illogical entry and exit points, forgetting to apply stop loss and limit orders, and so on.

As a result, traders can end up supporting positions too large for their accounts and ultimately heightening their risk potential."

Answer: "Create a comprehensive trading strategy."

"The key to avoiding this is to create a comprehensive trading strategy which you can follow whilst trading forex."

Problem: "Bank that profit!"

"Similar to above, it's easy for traders to get 'caught up' when they are in profit and this can entice them into locking in a profit too early.

This can often leave those traders somewhat disappointed, particularly if the market continues to move in their favour and had they waited, they could have netted a much larger gain. One common theme amongst new forex traders is to run their losses and lock in their gains too early. Experienced traders will tell you that the balance should in fact be the opposite, with profits run and losses stopped early."

Answer: "Employ stop losses to prevent losses from escalating."

"Minimise your potential losses by employing stop-loss orders on every trade.

A stop loss automatically exits your position when a trade reaches a certain price point (pre-arranged by you), therefore limiting losses to levels that you are comfortable with. Many traders use stop losses to close out trades when the price movement dictates that their rationale for entering the trade has been deemed as false."

Problem: "Well, I never saw that coming..."

"It is imperative to your trading success that you get to know your market through analysing your chosen market and the activity around it.

Sandy Jadeja, Chief Technical Analyst at City Index, states: 'The methods of utilizing technical analysis are many and varied. They include such ubiquitous concepts as head and shoulders, support and resistance, trends, moving averages, and double-tops.'"

Answer: "Analyse your chosen market"

"You can analyse your chosen market in two ways; through technical and fundamental analysis.

Use technical analysis to analyse past technical data, such as price movements, to identify trends in that market's movement.

Fundamental analysis brings to light a number of potential catalysts; such as major economic reports and news events, which can ultimately effect a market's price movement.

Armed with this analysis, you'll always be prepared."

Summary

Trading forex with City Index enables traders to employ various risk management tools to help limit their potential losses.

According the The Forex Trader, it is important that when trading forex, you remember the substantial risk of loss involved and that it is not suitable for all individuals.

Limit potential losses through a comprehensive trading strategy, employing risk management tools whilst trading and analyzing your chosen market fully.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

As a group, we transact in excess of 1.5 million trades every month in over 50 countries worldwide. We provide access to a wide range of instruments including margined foreign exchange, CFD trading and, in the UK, financial spread betting.