Low Risk Forex Trading Strategies – How to save your money

Every Trader is looking for low risk forex trading strategies and how to save money and to increase his profit. But before you can start searching, you have to be clear about your risk. What do you mean by “low risk”? And what is the risk?

The definition of risk is very soft. Wikipedia says:
“The possibility that an actual return on an investment will be lower than the expected return.”
And Investopedia is even softer:
“The chance that an investment’s actual return will be different than expected.”

So, if you invest and expect 20% gain and you get only 15%, then it is lower than expected and that is your risk? Obviously not.

Some measurements, calculate the standard deviation of the historical returns. The conclusion: The higher the standard deviation the riskier the investment.
This is better than the first one, but it contains the past and the future can and will differ. Look at all the forecast and how they fail. My professor at the university said:
Predictions are very difficult, especially when they concern the future.” 🙂

For me as a trader the risk is what I am willing to lose with one trade.
For example: I enter a trade and get out, when the position hits a loss at $ 100.
Depending to my capital it may be low risk (0.1% of my capital) or high risk (100% of my capital).

Why Forex for Low Risk Strategies?

One advantage of the forex market is its low entry barrier.
You can start trading in the forex market with less capital, sometimes only $1,000 Dollars.

Furthermore many brokers offer you a leverage.
With this leverage you can easily scale up your trading volume.

What requirements must be met for low risk strategies?

First and foremost, you need a stop loss for your strategy. You have to know at which loss you will close your trade. For me this is the risk you take. Due to unfavorable circumstances, for example a lost internet connection, broken computer or unexpected event, your loss might be (substantial) higher.

animals-35972The second point is the leverage you take. The higher the leverage, the higher the potential gain, but also the higher and faster the potential loss. To image the impact of the leverage look at a seesaw. If you have no leverage, then both legs are equal. If you have a leverage of 1 : 10 then one leg is 10 times longer than the other. Sometimes you can use a leverage of 1 : 100 or even 1 : 400. Image, your trade moves 0.25% against you and your capital is blown away!
My advice: Use the leverage very, very carefully.

The third feature you have to look for is the volume of the market. You have to be sure, that enough money and player are in the market. in order to enable you to exit the market at any time. It is nasty, if you want to sell and nobody wants to buy. The price drops and drops and you will get a very bad fill. In hindsight your risk (loss) is much higher as wanted or even as you can afford.

The fourth item is connected to the volume. It is the spread. The Spread is the difference between the bid price and ask price. This is the main trading cost of the forex market. The spread should be as low as possible. It differs from broker to broker and market to market. The biggest forex market, the USDEUR pair has the smallest spread. As a rule of thumb, you can say, the smaller the market the higher the spread. For more details regarding trading cost look at my article: “Low cost stock trading.”

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The fifth point is the time. Each forex market has its own main trading hour. The volume peaks in this time and the spread shrinks. Outside the main trading hours the spread increases and so your trading cost.

The last point are events, such as announcements from the FED or other central banks. But also major political speeches or decisions can heavily impact the forex market. In this time the market is confused and the price goes up and down like crazy. The spread breaks up and you are not able to make a low risk trade.

Conclusion

What are the components of a low risk forex strategy?

  1. Stop loss approximately 1% of your capital per trade
  2. Appropriate Leverage
  3. High Volume Trading Pairs
  4. Low spread
  5. Trading only during the main trading hours
  6. Avoid event with a massive impact on the market

What do you think? Do you have other points in mind? I would like to know what your experiences are. Please leave a comment. Thanks.

 

8 thoughts on “Low Risk Forex Trading Strategies – How to save your money

  • 15. March 2016 at 16:53
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    Hi,

    I’m really glad I found this article because I’m just starting to learn about forex trading and I feel like you’ve explained it in a way that I can understand.

    You mentioned how major political speeches can affect the markets in the area. Now I’m guessing this can work out to have a positive effect or a negative effect depending on the speech. So would you say that it’s important to pay attention to these things so that you can leverage it to your benefit? Or would you say that we should instead avoid these markets completely during these events?

    Thanks again for the info. Very helpful.

    Robert

    Reply
    • 15. March 2016 at 17:05
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      Hello Robert,
      thanks a lot for your comment and your question.
      Yes, you should pay attention on major political speeches and avoid to be in the market at this time unless you know the outcome 🙂
      After the speech is public you can enter the trade because normally it will establish a long term trend. That is very profitable.
      Kind regards
      Bernd

      Reply
  • 16. March 2016 at 2:24
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    Hello Bernd,

    Thank you for the great information I’m just beginning my research on forex trading, I found you have a lot of knowledge and I’m glad I happen to run across your page. I look forward to learning more from you in the future.

    Thank you,
    Melanie

    Reply
    • 16. March 2016 at 13:30
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      Hello Melanie,
      thank you for your comment and your interest in trading. I encourage you, to read also my article about Best Day Trading Strategies. There you will find some additional point to risk and how to handle it.
      Kind regards
      Bernd

      Reply
  • 16. March 2016 at 15:09
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    Hello Bernd,

    I am really fortunate to have found your article as I am just getting into the business of trading. I am always looking for ways not to lose money in this very risky business.

    You have really provided some useful tips for me as a newbie, which will enable me to make much wiser decisions when I decide to do live trading.

    I will continue to do more searches on Low Risk Forex Trading Strategies so that I may start earning some decent income.

    Thank you again Bernd, and I will be looking at some more of your very informative articles.

    Best,
    Jason

    Reply
    • 16. March 2016 at 17:03
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      Hi Jason,
      thanks a lot for your nice comment. In order to check out a good trading strategy I also recommend reading my article: “Automated trading systems for Tradestation
      There you will find some more insights about a trading strategy.
      I hope it helps to reach low risk strategies.
      Kind regards
      Bernd

      Reply
  • 7. April 2016 at 2:54
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    Hi Bernd,
    I’ve traded Forex for 10 years. I haven’t been active in the last 5 years or so. I’ve used many automated system such as Forex Megadroid, Forex growthbot. I was having a lot of success with Megadroid, However after an update the robot seemed to open a position in the upset direction of the market! I kept loosing and eventually I close my account. I highly recommend trade station. I’ve used it for a while however could not effort the monthly dues. Are you familiar with Track and trade?

    Reply
    • 7. April 2016 at 10:34
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      Hi Farshid,
      unfortunately I’m not familiar with Track and Trade. I took a look at magdroidresults, where a trader posts his results with his several accounts. It is very interesting, because it are real trades, which can differ significant from backtested trades. If you subscribe to my newsletter to get the ebook “How to read a performance report“, which unlocks some secrets about this issue.
      Thanks a lot for your good comment.

      Reply

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