Insurance was something that man created after he started cherishing things that take a long time to acquire. As you already know, insurance is for expensive items like vehicles, homes, and businesses. However, there are ways through which you can get insurance, or something similar, for your trades on the foreign exchange market as well.
You can insure your trades yourself in the foreign exchange market in a wide variety of ways. This kind of insurance would essentially allow you to not only prevent backbreaking losses from affecting you but also give you enough leeway to try to recoup what you have lost. Here is how you can insure your trades.
Using Stop Loss Orders
The most obvious and most effective insurance policy you can take out for each of your trades in foreign exchange is to use stop loss orders on all of them.
Proper use of stop loss orders would prevent you from incurring too heavy a loss on any single trade. This way you can ensure that on a net basis your account always grows.
Trading A Percentage Of The Total Account
Another way to protect your money is to set a percentage of your total account equity and never go beyond it when it comes to investing on individual trades. For instance, most traders either choose one percent or two percent. This means that if their accounts have 10, 000 American dollars then they cannot invest more than 100 or 200 American dollars on each trade respectively.
Utilising Half Of The Total Account Equity
There is another way to ensure that you have money to rebuild your career on the foreign exchange market in case everything goes awry the first time. Herein, you simply decide not to utilise half of your whole account equity and keep it intact, regardless of what the market throws at you. This way, even if you lose half, you will have the other half to rebuild.
Maintaining Margin Levels Above 500 Percent
Leverage use is the most dangerous thing in the foreign exchange market. Unwise use of leverage would easily see a margin call against your trading account which means that all your active positions will be closed.
Margin levels are used by brokers to determine when margin calls are called. If your margin drops below 100 percent then margin call becomes a possibility. Therefore, one way to insure your efforts on the foreign exchange market is to simply keep your margin levels above 500 percent and close to 1000 percent.
Reviewing Performance When Drawdowns Are Touched
Every trader should have a rough idea of the kind of drawdowns that his strategy can push him towards. At the same time, if you are good at trading in the foreign exchange market then you should never expect these levels to be touched.
However, if predetermined maximum drawdown levels are touched then you should immediately cease all your trading related activities and sit down to assess what you have done wrong.