5 Ways to Reduce Forex Trading Risk

When I asked a successful trader one time how he managed to make so much money on Forex, he smiled and said to me: "I just lose a lot less than the rest of you." This was the first time I realized that the real key to achieving a long term success in Forex isn't winning more trades, but losing fewer and cutting your losses to a bare minimum.

Since it's impossible to avoid losing entirely (unless you have a crystal ball lying around) you need to find way to reduce your risk as much as possible. This is a key to long term trading success.

A lower risk means less losing trades and smaller losses when they do occur, as they are bound to occur for any trader on the planet. Here are some tips to help you lower your risk:

1. Know how much you're risking - Is this something you even think about? Do you know how much you're risking on each trade? What's the highest possible amount that you'll lose if your trade turns sour. Most traders don't even think about this and it leads to bad decisions, bad stop loss prices, and massive losses.

2. Place a stop, for heaven's sake - If you're trading without a Stop Loss, then I should take you on a plane and throw you off the side... without a parachute. It's basically the same thing. Trading without a stop is madness. Yes, you might get away with it for a while, but sooner or later, there will come that one aching loss which will wipe your account right off. Trust me, it's coming like a tsunami and it's heading your way.

3. Size up each position - You shouldn't place too much potential risk on one position. Each trade you open should be allowed to lose, at the very most, 2% of your account. You control this with your leverage, lot size, and your Stop Loss.

4. Test any new method that you buy, hear about, or otherwise acquire on a demo account. Make sure that you know how it works. Then, begin trading small amounts with it. Again, see that it works for you and only then begin trading big amounts with it.

5. Leverage cuts both ways - I know that placing a trade with a 200:1 leverage seems like a super-duper thing to do. But leverage is a double edged sword: if you win you win big. If you lose, you lose big. Reduce your Forex trading risk by keeping your leverage to a modest level. 10:1 is the most I'd go for, and even that only in rare cases when I'm super sure of winning.

Above all, realize that Forex is a long term business, not some short lived experiment. Have patience, play it smart, and you'll have every chance to succeed.

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John Drummond works from home. He writes often on business, trading, and finances.

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