Forex Risk Management
To succeed in the forex market as a trader, you need to develop suitable forex risk management strategies. Even if your trading system is the best in the world, if you fail to implement a suitable risk management, your strategies are as good as nothing. Forex risk management involves a combination of ideas that help you to manage your trading risk. Your risk management may include limiting trade lot size, hedging, trading merely during specific hours or days, or figuring out when and where to place your stop losses.
Numerous debates about forex risk management exist. Some traders are willing to cut the size of their prospective losses, while other traders want to make a huge gain from one open position. Obviously, to make higher returns, you’ll need to take greater risks. This is why you need to begin to think how you can implement proper risk management and what it should be part of it. Whether you progress and survive in the forex market or not depends on how efficient your risk management strategies are.
Tips for developing an efficient forex Risk Management Plan
Roughly three trillion dollars are traded in the forex market every day. To be able to trade the market profitably a good forex risk management strategy is extremely vital.
Although there is no guarantee that you’ll always be profitable, you need to manage your risk to be able to maximize your overall profit potential.
1
Choose a trustworthy and reliable forex Broker
You need to utilize a reliable and reputable forex broker as a retail trader. When you trade under the platform of a reputable forex broker, you have a lot of support that’ll minimize your risk including professional and expert advice.
2
Don’t invest more than you are comfortable risking
The primary step to effective risk management is to never risk the money you cannot afford to lose. Many people forget about this rule and invest the money that they need for their crucial day to day needs into the forex market.
They feel that they would always win their trades and unfortunately, they are dinged. Everybody that engages in forex trading does so to be able to make some profits. No matter how much you desire it, given the unpredictable nature of the market, the unexpected may happen. This is why it is never advisable to invest the money that would ruin your life if you happen to lose out on trade.
When you invest the money you can’t afford to lose, you would likely let emotions control your trading decisions and this will make you prone to unnecessary errors which would compound your problem and increase your risk.
3
Get rid of greed
The next risk management strategy you need to implement is to not let greed control you. Avoid anticipating undue profit generation. Frequently, you find traders who have accounts sizes of roughly 2,000 dollars or less anticipating to making huge profits of roughly 4,500 to 5000 dollars. Such mindset puts the trader under undue strain and makes him or her commit significantly much more blunders than they would have normally.
A wiser decision is to enter trading sizes that fairly reflect the amount of money you have in your account. It is advisable to be cautious while trading on leverage as they can serve as a double-edged sword. To help limit traders’ loss, the forex regulation in the US does not allow brokers to offer a leverage of more than 50:1. Enter big trades are not advisable.
It is irrational, really, to trade a position size of 100,000 dollars, for instance, in your account that has only 1,000 dollars. If you make a losing trade, the consequence can be outrageous and could wipe out your account. The ideal thing is for traders to gather regular profits instead of trying to make the whole profit at a single trade.
4
Use stop loss
One forex risk management method is to control your losses. You need to know the right time to cut your losses on a trade. You can utilize a hard stop or a mental stop.
A hard stop is when you position your stop loss at a specific level as you open your trade. A mental stop is a time you position a boundary to the amount of pressure or drawdown you will take for each trade.
Implementing stop loss helps you to make regular but small profits in bits. Stop loss helps you to generate steady and profitable forex risk management. A stop loss order is a trade order that stops your trades, thereby preventing additional loss on your account. By implementing stop loss on your trades, you limit your loss potential.
You need to be aware that trading the forex market is a 50/50 chance. There is no guarantee that what you project will materialize. Therefore to be on a safer side, you must have a system that’ll help you to cut losses when they happen. The solution is usually to place your stop loss at a position that you think that price would test, while at the same time factoring in your possible risk tolerance if your analysis fails.
Discovering the right position to place your stop loss is another skill by itself. The main idea is that it has to be in a manner that practically limits your risk on a trade. As soon as you set your stop loss in your head, or on the trading platform, you need to stick with it. Resist the temptation of falling into trap of shifting your stop loss a bit further.
When you do this, you’ll not be effectively limiting your loss and that could affect you greatly in the end.
5
Use Correct Lot Sizes
Broker’s advertising would have you think that it’s feasible to open an account with 300 dollars and use 200:1 leverage to open mini lot trades of 10,000 dollars and double your profit in a single trade.
Nothing could be further from the truth. There is no magic formula that will be exact when it comes to determining your lot size, but for a start, it is better to go smaller.
Each trader will have their own forbearance level for risk. Your best bet is to be as conservative as you can. Not every trader can open an account of 5,000 dollars, but it is essential to be fully aware of the risk involved in making use of larger lots with a lessor account balance.
Maintaining a smaller lot size will help you to trade in a flexible manner and assist you to manage your trades with reason instead of acting out of emotions.
6
Track your Overall Exposure
Although it is great to trade with a reduced lot size, too many lot sizes won’t be beneficial to you. It is as well significant to comprehend correlations between currency pairs.
For instance, if you go short on EUR/USD and long on USD/CHF, you’ll be exposing yourself to double amounts of the USD and in the equivalent direction. That would be equal to long 2 positions on the USD.
If the price of the USD falls, you will face double amount of risk. Limiting your overall exposure will minimize your risk and help you to remain in the forex market for a long time.
The significance of Forex Risk Management
One of the significant topics of forex trading is risk management. This is not without reasons. Forex trading is a business people invest in to make a profit and to be able to achieve that aim, it is essential for us to know how to manage forex risk. Notwithstanding how significant it is to manage risks, many traders ironically ignore this very important aspect of forex trading.
Majorities of traders just jump right into the market without giving consideration to the size of their account. They merely estimate the amount of money they are comfortable to lose at any particular trade and place the trade order button.
Forex risk management is one of the most significant concepts to remaining a trader in the market over a long period of time. Although it is very easy to grasp this concept as traders, the application is significantly much more difficult.
Frequently forex companies let traders know of the benefits of trading with leverage but the downside of it is not readily discussed.
This sends wrong signals to traders who jump into the market trading large volumes with the mindset that they need to take huge risks and strive for massive gains in single trades.
Those who traded with demo account frequently think moving to live account is as simple as that. However, they soon discover that when they invest real money emotions comes into play, changing everything around. This is why it is essential to implement forex risk management and where it sets in.
The Bottom Line
Managing your risk entails limiting the amount of risk you can take. By minimizing your risk, you’ll be making sure that you’ll subsist in the market when things start to move in the way you do not plan. Proper risk management strategies make the difference between a professional trader with a lot of experience and an inexperienced trader.
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