Two types of risk management strategies
The best way to manage your risk is by setting up orders to take your profits when you first open your position. That way you don’t risk getting caught up emotionally in the winning moment and ride your profits to a loss.
Set up stop-loss orders when you first open your position. That way your logic will be in control rather than your greed or emotional disappointment if the trade doesn’t go as planned.
In fact you may use limit orders and stop-loss orders to help you manage your risk.
Limit orders:
Use a limit order to protect your profits. This will get you set up to exit the Forex market as planned without letting your emotions get the better of your. Avoid being tempted to ride a gain that could turn into a loss by sticking with the trade for too long.
If you are shorting a currency pair, your broker’s system should allow you to place a limit order below the current market price. When selling a currency pair, the profit zone is below the currency price. The opposite is true if you are going long on a currency pair.
The system will allow you to set up a limit order to secure your profits at a price above the current market price. When buying a currency pair, the profit zone is above the current price. The take-profit order helps you maintain a disciplined trading strategy.
Since you don’t pay commissions, you can always develop a new plan to buy or sell the same pair again, so it’s better not to get into the practice of changing your limit or stop/loss orders. Instead, let them play out and develop a new plan for the next trade based on the information learned during your previous trades.
Stop-loss orders:
Use stop-loss orders to minimize your losses. Set up your stop-loss order at the time of your trade to protect yourself from being driven by your emotions. A stop-loss order lets you set up an exit point as you enter a trade that will get you out of your trade before your losses become too large.
If you short a currency pair, the stop-loss order should be set above the current price. Remember that when you are shorting a pair, the profit zone is below the price of the pair. If you go long on a currency pair, set up your stop-loss order below the current market price.
Obviously, you hope your stop-loss orders will never be needed, but don’t forget to set them. When they are needed, you want the logic you used to set your entry and exit prices as you developed your plan to be in control, not your emotions.