Loosing money in forex is the part of the game. Don't let it freak you out, however it doesn't mean you can be careless. Loosing money and learning from mistakes is one thing.
Careless trading is another story. If you aren't careful, your account funds can fall below the available amount (which is called Margin Call). When this happens, your forex broker has every right to shut down some or even all open positions to stop your account from getting into negative balance. A good thing about it that you will never lose more money than you actually have. The bad thing is that Margin Call are evil and here is why.
Stay away from Margin Calls by monitoring your trading activities and margin balance. Set stop/loss orders on your positions and minimize the risk of loss. There are many tools to help you out with almost all trading platforms we have reviewed over the years.
is an insurance deposit which provides cover of possible losses of a marginal trade, and is used as a pledge.
minimum amount on trader’s deposit necessary to maintain his open positions.
a message from a broker to a trader saying that it is necessary to increase funds on marginal account.
an indicator showing the state of a trader’s trading account.
If you do trade on margin account make sure to be very clear about the broker's policies and all those conditions written in very tiny font. The last thing you need is to get into trouble. For example, during the weekend the margin can raise from 1% to 2 or even higher.
The core concept of money management is to avoid risking more than 1-2% of personal funds on any single trade. This principle may greatly reduce risk exposure: provided that only 1% of initial deposit is at risk, even after several losing trades you are likely to retain the majority of account balance.
Risk to reward ratio denotes the potential profit in comparison to the amount you may lose for any given trade. For example, when you risk 100 USD on position to potentially gain 300 USD, the risk to reward ratio is 1:3.
Ratio of 1:2 is considered the minimum one should aim for as only a third of positions would need to be profitable to remain break even.
Potential profit and loss can be defined through Stop Loss and Take Profit levels.
Stop Loss and Take Profit are orders to close the position when price reaches a certain predefined level. Stop loss or Take Profit level can be identified with various technical analysis tools:
- Support and resistance: for a short position stop loss is usually placed just above resistance level, while a long position often has stop loss set a little below support level.
- Trend lines and channels: stop loss price is commonly placed outside the channel, above or below the trend line.
Risk management and margin call avoidance
Leverage is often and fittingly referred to as a double-edged sword. The purpose of that statement is that the larger leverage a trader uses – relative to the amount deposited - the less usable margin a traderwill have to absorb any losses. The sword only cuts deeper if an over-leveraged trade goes against a trader as the losses can quickly deplete their account.
If there’s one thing all successful traders have in common it's ensuring they take a structured approach to managing risk as part of their trading plan.
Top 4 ways to avoid margin call in forex trading:
- Do not over-lever your trading account. Reduce your effective leverage. Recommend ten to one leverage, or less.
- Exercise prudent risk management by limiting your losses with the use of stops.
- Keep a healthy amount of free margin on the account in order to stay in trades.
- Trade smaller sizes and approach each trade as just one of a thousand insignificant, little trades.
In the case of managing risk, correct position sizing is critical.
This means achieving the correct exposure on each position relative to the size of your account and taking the time to understand how volatility and the recent moves in price affect how much risk you’re prepared to take.
Other tools to manage your risk
Before you start your trading journey, you can:
- Use a stop-loss to define your risk exposure. A stop-loss is a great tool to manage risk and should be seen as an essential part of a trading process. A great trader won’t necessarily judge the trade by profit or loss, but by how they went about following their set process from start to finish
- Find out more about calculating position sizing. You'll be able to do this using the Calculators tool in your client area
- Practise on a demo account with virtual funds in real market conditions.
Once you feel confident in your ability to assess and manage risk, you'll feel more confident in your trading and will be in a better position to achieve more consistent capital growth in your trading account.