How I Manage Forex Risk

Many people believe foreign exchange (forex) trading is risky.

And they’re right.

Forex is the largest market in the world… and if you don’t know what you’re doing, it can be all too easy to blow up your entire account.

But like many opportunities, forex promises high rewards to those who can master its risks.

I’ve operated in this market since the ’80s… and I’ve traded more than $500 billion worth of currencies.

And today, I want to explain what the dangers of forex are… and show how you can turn them in your favor.

Choose Your Leverage Carefully

Currency exchange is something most of us don’t think a lot about unless we’re standing at the airport counter, swapping our dollars for euros, yen, or pounds.

Yet forex plays a big role in the operations of the world. International banks, commodity traders, and exporters/importers have to transact in the forex market just to accomplish their everyday business. That’s trillions exchanging hands each day.

And due to these huge money flows, you have the chance to make fantastic money with forex from very small moves… even just a cent up or down in the price.

If you have a small account, though, you might wonder how it’s possible to profit from such tiny changes.

It’s due to leverage. Leverage is both an incredible money-making tool… and a risk if you don’t know how to manage it.

In essence, leverage allows you to use your money to control a larger sum.

Most brokers require you to keep a percentage of a trade in your account as “margin.” So if they require 1% margin, then you could use $1,000 to control as much as $100,000.

So if your trade value grows from $101,000, you’ve just made $1,000 off a small 1% move. You’ve just doubled your starting capital. That sounds great!

But this would be using a very high amount of leverage – 100:1. And as quickly as it can bring you profits… it can also wipe out your account.

In this same scenario, if your investment drops 1% to $99,000… you’ve lost your starting $1k and are out of the game already.

And some brokers will allow you to use crazy levels of leverage… even as much as 400:1.

You’ll no doubt hear stories where people claim these kinds of leverage are how they made their fortune in forex. But far more traders have blown themselves up this way than become millionaires.

That’s why the first step of risk management with forex is to choose how much leverage you can truly handle.

In general, I don’t recommend using any more than 7:1. More conservative investors may want to use even less, like 5:1.

That leverage still has the power to amplify your gains significantly… without taking on such high levels of risk that will likely obliterate your portfolio.

Pick Your Levels

The currency markets can move rapidly, especially during announcements like interest rate changes or economic policy shifts.

And one of the features that makes forex unique is that it trades 24 hours a day, from Sunday at 5 p.m. ET through Friday at 5 p.m.

So unlike the stock market, you can open and close trades at any time you choose during the week – even after 4 p.m. or before 9:30 a.m.

Yet that very flexibility is also something to watch out for.

If your forex trade brings you a tidy profit at 3 a.m. while you’re asleep in bed, you don’t want to miss out.

Similarly, if a trade starts to go heavily against you, you don’t want to suffer a big loss because you were busy dropping your kids off at school.

That’s where another part of risk management plays an important role in forex.

With each trade, it’s possible to set price levels with your broker where you want to take profits or cut a losing trade. That way, your broker knows to close out your trade for you automatically.

With forex, these “take profit” and “stop loss” levels are a vital part of successful trading. It’s essential that you enter them with your broker with every trade.

That way, you can sleep well at night… and enjoy your day without obsessively checking to see how your trades are performing.

The Currency Window Is Opening

These are two risks to be aware of when trading forex…

But as you can see, there are reliable strategies you can use to manage those risks.

That’s the kind of guidance I want to offer everyone who’s interested in starting with currency trading.

As I mentioned above, I’ve traded currencies for decades… and they’re part of how I consistently generated profits for my $800 million hedge fund, even during the dot-com bust and the 2008 financial crisis.

And the opportunity with forex has gotten even better over the past year. After being quiet for the better part of a decade, a new “currency window” is now opening…

That’s why I’m holding a special meeting to go over this unique kind of trading… and show you how it can make a difference to your portfolio.

It’s happening tomorrow at 8 p.m. ET, and I’d love to have you join me.

To sign up with one click, simply go right here and RSVP.

I hope you’ll come and see what forex trading is all about.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict