Using Price Action to Trade Support and Resistance
- In our last article, we looked at the necessity of managing risk for FX traders. In this piece, we delve into the mechanics of trading with Support and Resistance.
- Price action is the study of technical analysis without the use of indicators in the effort of removing ‘lag’ from technical analysis. Traders can utilize price action with support and resistance in the effort of taking a risk-efficient approach into markets.
- If you’re looking for trade ideas, please check out our Trading Guides. And if you’re looking for shorter-term trade ideas, please check out our IG Client Sentiment.
Price action is the permutation of technical analysis that involves stripping indicators from the charts in order to focus on the most important variable available to traders: Price itself. While battles are waged within the spread on short-term variations, longer-term charts can display potential entry and exit points that can assist traders with strategy planning. While no form of technical analysis will be perfectly predictive in nature, simply because the past doesn’t replicate in the same exact way in the future, removing technical indicators can allow traders to focus on near-term price movements without the lag often introduced with oscillators or moving averages.
In this article, we’re going to look at how traders can use price action to trade support and resistance.
Support and Resistance
Given that markets are unpredictable, and also given that history often rhymes while it never perfectly repeats: Support and resistance are probably one of the most valuable tools available to traders, technical or otherwise. We previously looked at the necessity of risk management, and with support and resistance – traders can more adequately manage risk for their trading activities. If one wants to buy – there’s no reason to get long and just hope that it works out: Instead, wait for support to show up, so that a stop can be placed underneath that zone so that if the setup doesn’t work out, the loss can be mitigated. But if the setup does work out and if support holds, traders can sit in a winning position and scale-out as prices move-up.
The key here is finding that area of support so that the stop can be properly placed. There are a plethora of ways to find support and resistance in a market, and we previously looked at a few of the more common in our Strategy Architecture series. On the chart below, we’re adding a Fibonacci retracement over a recent ‘major move’ in USD/JPY. Drawing the retracement involves starting at the beginning of the move, and ending at the finish of the move, which would encapsulate a ‘major move’ that’s been seen on the chart. Within the move, retracement levels are applied at pre-set intervals, and those intervals are based on the golden ratio of the Fibonacci sequence of: 23.6%, 38.2%, 50% (which is the half-way point, and not a true Fibonacci number), 61.8% and 76.4%. Some traders use slightly different retracements, choosing to use 78.8% as opposed to 76.4%; but for purposes of this article, we will stay with the more popular level of 76.4%.
Recent Major Move in USD/JPY (in Red) Helping to Define Support/Resistance (in Blue)
You’ll probably notice from the above chart that support and resistance is rarely ‘perfect’. More normally, we’ll see support tested before prices may move up or we’ll see resistance breech ever so slightly before sellers can take over. The reason for this is what we mentioned earlier: Inside the spread is chaos, and if we look at the way that price action moves during news announcements, with low levels of liquidity allowing prices to swing violently, this makes sense.
The key with trading support and resistance is to be realistic in the fact that you’re probably not going to catch many exact bottoms or tops. Trying to do so is usually a quick-way into the loss column, so traders will often evaluate support or resistance inflections with current price action in the effort of trading directional momentum in a market. Let’s look at one of those prior examples in USD/JPY on a much shorter-term chart to illustrate.
From the above chart, you’ll probably notice the double-top that printed in USD/JPY around 114.30. This was the top in May and again in July; but in each case, prices were on a bee-line higher until this resistance level came into play, at which point a rather extended reversal began to play out. On the hourly chart below, we’re looking at how the first of these two resistance inflections worked-out. Notice that price first resists at this level (blue box), only for buyers to jump-back in after prices softened. Buyers re-gained control after a quick pullback (green box), but on a subsequent re-test of that resistance, buyer motivation waned and sellers began to take-over (red box).
For the trader that was buying on the first break of resistance at 114.30, they probably ended up regretting it. Even buyers looking to trade the subsequent resistance break probably ended up regretting it. If we look at the same move on the four-hour chart, we’ll notice that each candle tapered up to resistance, with sellers keeping each candlestick body subdued below resistance (shown in blue). This capped gains in the pair until bears could take-over, and as we can see from the lower-low and lower-high showing after that second resistance inflection (each in red), sellers began to take over after resistance failed to yield:
Know Your Time Frames
The key variable in the above relationship was one of patience: To the trader quickly acting on the first test of resistance, they likely ended up in a losing trade. This is not to say that breakouts cannot happen and that every support and resistance level will hold; but for the trader taking a patient approach, they could’ve waited for the four-hour candle close to highlight those wicks above resistance as evidence that sellers were responding to this zone; opening the door to potential short-side reversal scenarios.
As those four-hour candles closed with wicks around resistance, this opened the door for a short-side reversal setup so that the trader can look to place stops on the other side of resistance. This would allow for a relatively small risk outlay so that if resistance did end up breaking – the damage could be mitigated. But if that resistance did hold and if sellers were able to take control, the potential upside could be rather large compared to that initial risk outlay.
We discussed the various time frame relationships in the article, The Time Frames of Trading. In that piece, we discuss multiple time frame analysis as a way to more-fully grasp what’s going on with price action at the time. This can allow traders to utilize longer time frames to read trends and grade market conditions, while using shorter-term time frames to look for entries in the direction of that ‘bigger picture’ market environment. On the table below, we look at popular time frames for various approaches or, by ‘desired holding period’.
Look for Wicks on Closed Candles to Highlight Support/Resistance Reactions
After traders have identified potential support and resistance levels and after the actionable time frames have been decided upon, traders can then look to confirm support and resistance by looking for reactions around these levels. Candlestick wicks can be used to help highlight reactions. If prices temporarily dip below a support level, only for bidders to bring price back-above, then a wick will show through that price, and this is highlighting a potential reaction that can be used to trade that level. Let’s look at a recent move in EUR/USD to help illustrate:
Coming into Non-Farm Payrolls last Friday, EUR/USD had been on a rather brisk top-side run. Over the previous seven months, the pair had climbed by more than 1,400 pips, with 700+ of those arriving since mid-June. If we draw a Fibonacci retracement around the major-move that started in latter-July, the 38.2% retracement from that level comes-in at 1.1743.
After Dollar-strength took over on the back of a rather solid NFP report, EUR/USD began to drive-lower in a counter-trend move. Prices moved all the way down to the 38.2% retracement, at which point buyers responded, as you can see from the under-side wick highlighted in red on the below chart.
EUR/USD Hourly: Three Consecutive Wicks at Fib Support Highlight Buyer reaction
The benefit here isn’t that the above wicks show that the down-side move is over; it’s in the fact that this highlights an area where traders can look at a risk-efficient way of trading the continued up-trend in the pair. The fact that buyers had responded in this region merely highlights the potential for support, with the possibility of a tight stop for continuation approaches. Let’s look at another example to help illustrate, but this time we’re going to look at the Japanese Yen. We’re going to look at a longer-term move here, as well, as we’ve drawn a Fibonacci retracement around the ‘post-Election’ move in the pair, taking the election night-low up to the high set on January 3rd, shown below.
Over the past two months, we’ve seen a rather range-bound move in USD/JPY, as the pair has oscillated between 109.00 and 114.50. But despite this lack of discernable direction on longer-term charts, the Fibonacci retracement produced from the above major move has helped to set support and resistance on the four-hour chart numerous times. On the below chart, we’re illustrating resistance inflections in red and support in blue; and notice how that while not every inflection ‘holds’, the ones that do lead-in to rather extended runs.
Notice how the apex of the reversal in the above chart shows right at the 23.6% retracement at 114.50, while near-term support followed by resistance showed at the 38.2% while, at least so far the lows have been cauterized at the 50% retracement. Each of these reactions can be actionable, in one way or another.
Applying Trend-Side Biases
Traders looking to trade a directional move can benefit greatly from support and resistance analysis, as it can allow the trader to buy uptrends at support or sell down-trends at resistance in a relatively risk-efficient manner. For up-trends, potential resistance can be used as profit targets, while support can be utilized for re-entry or stop placement. For down-trends, potential support levels become targets while resistance can be used to add to the position or to set stops.
We can even add support and resistance from other avenues, such as psychological levels or pivot points or even other Fibonacci retracements. This can add significant texture to the chart to allow the trader to more efficiently manage their risk. On the chart below, we’ve focused-in on this recent move lower in USD/JPY to illustrate how this can be done. In purple, we’ve outlined a prior support swing that eventually showed-up as resistance. We’ve also added a second Fibonacci retracement, taking the June 2015 high down to the June 2016 low, shown in Green.
After prices break below the purple zone, we have lower-lows and lower-highs. Traders, at that point, would likely want to move forward with a bearish side-bias in the effort of trading in the direction of the trend. And given that traders would likely want to be selling resistance to jump-in the down-trending direction, we’ve outlined four various areas where this took take place at. 1) Prior price action support around 112.83 becomes fresh resistance as prices break-lower. 2) Resistance shows at the 50% retracement of the longer-term Fibonacci retracement. 3) Resistance shows at prior support at the 38.2% retracement of the shorter-term move and finally 4) psychological support at 111.00 becomes new resistance.
For each of these reactions, the candlestick wick showing sellers responding to resistance open the door for entries in the direction of the trend.
Combining Methodologies: Sell Resistance on the Way Down, Buy Support on the Way Up
There is an important relationship between Gold and Oil in the Forex market. Because these two commodities are used as the leading indicators in trading decisions in the Forex market. According to a 2011 survey of mine production in various countries, China is the only country in the world, followed by Australia and the United States. Thus the production of different countries in different years hits the currency of that country. Note that the USD has an inverse relationship with the GOLD, despite the fact that the US is often the largest producer of the GOLD. The main reason behind this is that the price of GOLD is always set against USD. Another reason is that sometimes investors think it is safer to transfer their capital from USD to GOLD. Gold: See the image below Oil In general, we see an increase in the price of oil, especially transportation costs. At the same time, the utility and heating cost of the finished product also increases. Its impact is particularly felt in oil-dependent economies such as the United States, China, India and other developed countries. But the exception is Canada, the world's second-largest oil producer and net oil exporter, which has seen a positive correlation between the oil price and the Canadian dollar, which is not unique among developed countries. One of the things I have learned so far is the economic calendar, let's see how you can understand the fundamental issues with the economic calendar.
What is Forex Trading Signal? A forex trading signal is specific information about a particular forex pair (EURUSD – USDJPY GBPUSD, etc.). The signal is a recommendation for entering a position on a currency pair, usually at a specific price and time, take profit and stop loss targets. The trading signal can also include extra information like charts, graphs and market analysis. A Forex signal provider is a service, usually on a subscription basis (monthly or yearly), where a provider sends forex trading signals to subscribers to trade on. A good FX signal service does all the research and analysis of the forex pairs trying to find the best trade setups, which are then transmitted in the form of trading signals to their clients. Categories of Trading Signal Providers Foreign exchange signal providers may provide the signals for free, or they may require a weekly, monthly or yearly fee. Signal services use technical analysis to generate forex signals, or fundamental analysis to provide their trading fx signals. Technical analysis is the analysis of graphs and forex charts, looking at moving averages, candlesticks, flags, areas of support and areas of resistance, and other technical indicators. Technical analysis believe that recent and historical price action as seen on price charts should be the primary means to determine forex future price direction of a forex pair. The most intellectual foreign exchange signal providers have their own prop trading systems that produce these signals based on years of historical testing and quant research. Foreign exchange signals services that provide forex trading signals based on fundamental analysis rely on the fundamentals of the economy and news reports from FED or ECB such as interest rates, GDP, inflation rates, unemployment rates, and central bank announcements to help them make trading related decisions. What to Look for When Choosing a Forex Signal Provider Investors need to pay attention to all details regarding a signal service. So what are the factors to look for when trying to find the best forex signals provider? Here are some tips: Age of the account The first thing to look for when choosing a Foreign exchange signals provider is the age of the account. Start searching by looking at signal service providers who have a track record of at least three years. This will tell you the experience of the trader who is managing the signals. It will also show you how consistent the FX signal provider has been in the last three years of trading. Check for verified trading results and proven track record A track-record ensures that the claimed performance is real and is good if it is verified by an independent third-party, such as eToro , Myfxbook, FX Blue or ForexFactory etc. Some signal providers publish hypothetical or simulated track-records of their signals, which mean that their signals weren’t traded in the real market. Those records can be different from real track-records, and show that the FX signal provider doesn’t trade his own signals. Another major consideration is whether the signal provider uses a demo account or real account to trade the signals. Consistent Profits – Signals have to be profitable Before using any forex signals service, traders need to make sure it has a good track record. The best signals service provider must produce good, consistent trading results. Many signal providers claim to catch up to a few thousand pips per month, but without a verified track-record those numbers shouldn’t be taken seriously. Furthermore, if a provider “guarantees” a fixed amount of pips per month, you should delete that provider from your list. Nobody in this world can guarantee profits, and this is an early warning sign. Performance When comparing the performance of Forex signal services, you must look at the pips earned rather than percentage return. The reason for this is that percentage returns can be misleading as different leverage amounts will provide different percentage gain data. You must check the number of positive pips per transaction and compare them to the number of negative pips per position. Then compare the results to the total win ratio. Also, you should check how many weeks on average a forex service provider has gains against how many weeks it has losses. An important criterion is to find how many entry positions the forex signal service is offering. Most reliable signal providers will manage to balance the quantity of trading opportunities with the total transaction fees of the forex account. If the FX signal service is providing a big number of signals with arrow profit targets, you have to be cautious, this should be a warning and signals that making profits with that signal provider will be a difficult story. Win Rates Most professional forex signal services will only provide an entry signal that has an advantageous return to risk profile. That is the correct approach to trade the forex pairs. So these investors can make steady profits even with 30%, 40% or 50% win rates. Reliable forex strategy services have a consistent performance record and obviously they are not profitable every month, but in the long term they show consistent positive results. Traders must also analyze the average risk to reward in conjunction with win rate. There are strategies with 95% win rates that can lose money and there are also strategies with 25% win rates that can make money. It is all relative, so don’t let win rates fool you. Drawdowns Drawdown is the high-to-low decline in equity that an investor has in a certain period. Some investors refuse to take the losses from a position failing to use any stop loss. The trader keeps open the losing position waiting a reversal in the market. Turning a negative position into a winner sounds great, but it will destroy your margin and may never turn to gains. Some signals look really good because they risk hundreds of pips to only make 5 or 10 pips in profit. This approach works well over a short period, but signals like this nearly always blow up eventually. A successful FX signals service will not only provide excellent returns in terms of portfolio growth but will accomplish this with reasonable drawdowns. Demo and free trial Any reliable signal provider must offer a free or at small fee trial period to test and verify their service. If you can’t get a trial period, most likely the services are not transparent, real and reliable. Try not to use such services. If anyone is confident in what he is doing, he will definitely offer you a demo account first. Any graphs and analysis sent together with the signals is a great feature as they help in understanding the signals and offer valuable learning material. This learning material can also be used as a great educational resource to learn from, especially if you’re looking to become an independent forex trader. The signal service provider should also have strict risk management guidelines in place and keep you updated on any changes on the trade setup. Money management Many forex signal providers actually use a forex penny account. A cent account, as the name implies allows you to trade just in cents. This means that in trading there is very little risk. Copying trades from that kind of account to your real trading account with thousand USD in equity can be a bad investment. Pay attention to the trading equity of the FX signals provider. Researching and analyzing how the signals service trades (based on their trading record) will give you a lot more insight. The bottom line is that traders need to also focus on the money management strategy of the signals provider and not just how much returns they generate. Reliability An important factor to consider also is the software and tools a forex signal service is using. Do they have robust software to send out signal notifications and are they offering different channels for you to receive the trading signals on time? Another factor to check is the details that the forex signals provide. Do the signals always provide profit targets and stop loss figures or do they only provide just entry points but no exit points? Conclusion The Forex signal provider first of all has to be profitable and have a verified track record, ideally by a third independent party. Even if the forex signal provider does have verified results, make sure to open first a free forex signals trial account to assess the quality of the signals in real-time trading. You also need to make sure that the type of trades and times at which they are sent out suit your personal trading style and time-zone. Finally, always do your own research, check online reviews and get a free trial period before you buy any trading signal service.
Risk management in forex trading is the most important thing you’ll ever learn as a trader! Forex trading can be a roller coaster ride for unprepared traders. But, like any other form of investment, if you have strategies in place, you could even get to turn your forex dealing into a full-time career. One major area any forex trader needs to find out about when they learn to trade is the significance of risk management. Risk management in forex trading should be at the forefront of your trading strategy. Before thinking about how much you want to make from trading, you need to be thinking about protecting what you already have! If you lose it all, then you’ll never make your profit. You’ll have to quit and won’t get your break to trade again for a long time. Risk management is a concept that has existed for a long time and is relevant to all kinds of trading and all kinds of business ventures. Every time you make a decision, you rake up the risks in your head; what are the likely outcomes and is the potential result worth it? Learn how to trade forex You will get to appreciate all the ins and outs of risk management in forex trading much quicker if you sign up for a comprehensive forex trading course, and our trading course will soon help you learn about dealing with different foreign currencies. Forex trading can be a lot of fun for anyone making the effort to learn to trade, however, lots of people start trading and give up after experiencing one or two losses. One of the things you need to understand at the very start of your forex trading activities is that you are bound to have losses. However, once you’ve mastered the art of trading, you’ll learn just how to mitigate your financial risks and begin to launch your own successful trading career. You can earn substantial sums of cash from successful forex trading and our useful guide to forex trading and how it works will give you a head start if you plan to start trading forex immediately. This comprehensive guide explains all about currency pairs, forex spreads, and leverage, but doesn’t go into too much detail about risk management in forex trading. That’s the reason we’ve posted this article, to offer all our trainee forex traders bang up to the minute info on the management of risks in forex trading. What is risk management in forex trading? It’s recognised that up to 90% of new forex traders lose cash in their first few forex trades and many of them will give up trading at this point. But forex is a massive global financial market and over $5 trillion is traded on exchanges on a daily basis. Traders can be active on the forex market 24 hours daily, and, what’s more, you don’t need to invest tonnes of cash into trading. Plus, online forex broker commissions are competitive, making it easier to see profits from regular trades. One of the most important learning curves for newbie forex traders is risk management, though. Risk management in forex trading actually encompasses a lot of different aspects of forex trading, as we’ll find out in this article. But the riskiest thing you could ever do is not have a plan in the first place! In such cases, you are basically gambling, which is the exact opposite of managing your risk. Having a trading plan is particularly important for exiting a trade. Risk management in forex trading also involves abandoning strategies that no longer work. In the end, it’s all about reducing your exposure to risk in whatever form it may come. And risk can even boil down to simple things like not signing up to an unregulated broker just because they offer a bonus. Sure, in the short-term a sign-up bonus might be appealing, but in the long-term, you’ll be kicking yourself when you can’t get your money out! By having a risk management strategy you can save yourself from greed. Never let it take control! Always remember to be patient, especially at the beginning. Benefits of a proper risk management strategy in forex trading Having a proper risk management strategy in forex trading can help you become a consistent trader and being consistent is tied to being successful in the world of forex trading. In other words, not being consistent can be risky! If you at the last minute decide not to follow your trading plan, you don’t know what to expect, and when you don’t know what’s coming you have a lot more to lose. Plus, knowing how much to risk can make you feel more confident in your trades. You’re no longer thinking about what you could have gained, you now think about getting what you aim to get. You can then rid yourself of any frustration at not reaching the highs other traders did or anxiety of not knowing what you want from the market. The temptation of leverage Leverage allows you to invest more cash into your forex currency trades, potentially offering greater profits by effectively borrowing from your broker. Leverage in forex trades can be as high as 1:1000, for example, meaning that for every £1 you invest into a trade your broker will add leverage of 1,000 x, so you can trade £1,000 worth of currency with your £1. Of course though, different brokers have their own rules on leverage and the current allowed limit by UK and EU regulators state that major forex currency pairs should only be allowed 1:30 leverage. While less popular currency pairings can be leveraged up to 1:20. So, with that £1, you’re most likely only to be able to trade between £20 to £30. But still, it can offer a significant advantage. And in the US, leverage can be as high as 1:50. There are even some brokers in some countries that allow up to 1:3000 leverage, which is pretty crazy! However, applying leverage to your trades can be incredibly risky. If your chosen currency loses against the paired currency you will need to cover all losses made in the trade. Meaning, you will also need to pay your broker back for the money you borrowed, making your loss even greater. But even if your trade is successful, you will still need to pay back your broker. So, even if you make a profit, your net profit will not exactly be what you get back from the trade. Brokers always get their cut of the deal! That’s why it’s important to plan your forex risk management strategy in advance for all forex trades. But, of course, there are plenty of stories online of one-off traders who skip this vital detail and jump straight into trading and quickly develop what is referred to as ‘King Kong syndrome’. These are people who have never traded before (and never bothered to learn about trading!) who opened a trading account with a few thousand dollars and lost it all in a couple of days. Why does this usually happen? They trade far too much and use far too much leverage and lose it all! They’ll make ridiculous trades that take up a third of their trading account, plus leverage to the max. A couple of trades later and they’re finished! It’s pretty sad. If you do decide to use leverage, stick you 1:10. There’s no need to push it to the max until you are more experienced. And if you’re a new trader, we recommend that you stay away from leverage completely! Diversify your risk Diversification is also highly important to risk management in forex trading. Diversification is basically not putting all your eggs in one basket. For example, if you just trade the USD against the GBP, then you are especially susceptible to issues with that currency. If you trade several different currencies, you can avoid difficult situations and continue trading when your primary currency is down. Risk-reward ratios We all have a different appetite for risk. Without it, we would have no chance to make money. Low risk typically means low reward; don’t make the mistake in thinking there is ever a situation with low risk and high reward - that’s a dream. But it is something we can aim for, though a perfect situation will never appear. What we are willing to risk for profit is referred to as our risk-reward ratio. Paul Tudor Jones looks for a risk-reward ratio of 1:5. That means for every $1 he’s risking, he’s looking to get $5 back. If he can’t find such a situation, he won’t make the trade, it’s not worth his time. For him, it’s just too much risk, but for many though, a risk-reward ratio of 1:5 will be too high. Those opportunities are not always that common. Sure, when you’re rich like Tudor Jones, you can ignore plenty of opportunities, but most of us don’t have that luxury and have to take the risk. For the majority of us, a risk-reward of 1:2 is more realistic. 1:1 is, in most situations, is not ideal, the amount you could get back isn’t very appealing. What’s the point of stressing over something so little? Managing your risk in forex trading As can be seen, managing risks in forex trading can be the difference between losing a fairly large sum on your first trade or regular profitability over a longer-term. When you manage forex trading risks effectively you will probably never be in the situation of losing all your cash. Here are our top tips on effective risk management: Monitoring position sizes: Work out what percentage of your funds will be used for any trade and stick to it. So, if you have a £10,000 trading account balance (including any leverage), you may want to limit your risk by 1% or 0.5% per trade. This means you would risk a loss of £100 or £50 per trade. The other risk factor to consider is your pip risk, meaning you need to set a stop-loss order at the most appropriate point. Stop-losses: Placing a stop-loss order means the trade will close out after a specified total loss. You need to work out how many pips you are prepared to risk on any trade, ideally, this should be as close to your entry point as possible. You can find out more about pips in forex trading in our knowledge base. For many traders, placing a stop-loss is an absolute must. Take profits: Another common mistake made by new forex traders is failing to recognise the point at which to take profits. There are strategies you can use to manage the point at which to take profits. Probably the best solution for newbie traders is to put a ‘close position order’ in place to take profits at the appropriate level of resistance. Candlestick recognition and moving average crossovers are some of the other strategies used by traders, and you can find out more on our site. Having a trading plan: From all the above, you can see it’s vital to have a trading plan in place for forex deals. It’s important you don’t rush into trading and perhaps risk 10% of your capital on one trade, 20% on another and so on. Because this is the way to lose all your trading capital in just a few losing trades, and then you’ll have no option but to quit. Staying disciplined: Put discipline in place with all your forex trades, this way you can build your capital slowly but surely. You may not make thousands in a couple of days, but equally, you won’t lose thousands either! Keep a trading journal: A trading journal is the best way to learn what you’re doing wrong and what you’re doing right. As we mentioned earlier, risk management in forex trading is all about reducing any risks you might face. But unless you’re actively analysing your trades, you won’t be able to spot all the risks to your trading. A trading journal is the best way to do that. Look for ‘confluence’: Confluence means where two points meet. In forex trading, what we mean by confluence is when two indicators are giving you positive signs to trade. The second acts as a kind of confirmation that there is a good opportunity ready for the taking. However, it’s worth mentioning what you see as a point of confluence, another trader may disagree; it’s entirely subjective. All factors of risk management in forex trading Our brief forex risk management guide above really just scratches the surface of risk management for forex trading. It’s a pretty hefty topic when you do a deep dive! Once you’ve mastered the disciplines noted above, one other major risk management factor for all forex traders is to limit the use of leverage to levels that are more comfortable if losses are made. This way you’ll be sure to hold onto your trading capital for a longer period of time. And, finally, risk management in forex trading is probably the most important lesson to learn. If you understand all the risks you face when forex trading, and plan your trades accordingly, you will have lots more trading fun! Key points If you remember anything from this article, make it these key points. - Risk management in forex trading should be at the forefront of your forex trading strategy. Always think about preventing losses before making profits! - Leverage is super risky. Sure, it may be a great way to trade with a lot more than you have, but your broker always gets paid, even when you lose! - Diversifying your portfolio and knowing your risk-reward ratio is vital. Don’t put all your eggs in one basket and know how much you are willing to lose for certain opportunities. - Without a forex risk management strategy in place, you’re basically gambling! You have no control over your risk, and it can become very easy to lose it all.