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What is Forex Risk Management?
When you discuss Forex trading you almost always come across the dreaded word risk.
Risk is indeed part and parcel of trading as you can never be completely sure of the outcome of a trade, and consequently you are always running a risk. However you can try to minimise those risks by ensuring that you have an effective risk management strategy. Such a plan can help you be a more successful trader too in the long run.
Forex risk management includes establishing a correct position size. A trader will also need to set stop losses. A vital part of risk management is to be able to control your emotions at entry and exit points. However all this may seem a bit complicated, especially if you are still starting out as a trader. We will try to make things a bit simpler for you by discussing Forex risk management in the following post. You will need to bear the following fundamental factors in mind:
1. What is the level of risk you are willing to take?
You need to be careful when trading, and this calls for controlling emotions and being realistic and prudent. Work out your appetite for risk for every trade in a way that you can ascertain a manageable level of risk. This is even more important in case of volatile currency pairs. It is generally recommended to stick to a risk level of between 1% and 3% of your account balance in each trade.
2. Choosing the right position size
You need to be careful when choosing the number of lots you take on a trade. This needs to be carefully selected so that you can protect your account as well as aim for good results that can maximise your trading opportunities. So, work out your stop placement, establish your risk percentage, and finally assess the pip cost and the lot size.
3. Using stop losses
It is best to know the stop loss point in advance. If you are aware from the start when you want to exit a position you can significantly reduce substantial losses. Ideally enforce a risk/reward ratio of 1 is to 1, or higher. Make sure that the limit is at least as far off from the current price as your stop.
4. Manage Leverage carefully
It is recommended that traders are wary of using leverage as it poses certain risks. Leverage in forex trading makes traders gain more exposure outside the limits of their trading account, and while this could mean higher potential profits it also presents a higher risk level.
5. Controlling Emotions
Last but not least risk management also requires you to be able to control your emotions. If you allow yourself to get too greedy, or too excited, you are bound to get carried away and probably you will be engulfed by too high a risk, which often results in high losses. On the other hand if you are too afraid to take a risk you will probably not manage to do much either. So it is important to be realistic and as level headed as possible.
6. Keep a Journal
It is a good idea to keep a trading journal so as to record your past decisions and ascertain areas of improvements for future trades.
Risk is indeed part and parcel of trading as you can never be completely sure of the outcome of a trade, and consequently you are always running a risk. However you can try to minimise those risks by ensuring that you have an effective risk management strategy. Such a plan can help you be a more successful trader too in the long run.
Forex risk management includes establishing a correct position size. A trader will also need to set stop losses. A vital part of risk management is to be able to control your emotions at entry and exit points. However all this may seem a bit complicated, especially if you are still starting out as a trader. We will try to make things a bit simpler for you by discussing Forex risk management in the following post. You will need to bear the following fundamental factors in mind:
1. What is the level of risk you are willing to take?
You need to be careful when trading, and this calls for controlling emotions and being realistic and prudent. Work out your appetite for risk for every trade in a way that you can ascertain a manageable level of risk. This is even more important in case of volatile currency pairs. It is generally recommended to stick to a risk level of between 1% and 3% of your account balance in each trade.
2. Choosing the right position size
You need to be careful when choosing the number of lots you take on a trade. This needs to be carefully selected so that you can protect your account as well as aim for good results that can maximise your trading opportunities. So, work out your stop placement, establish your risk percentage, and finally assess the pip cost and the lot size.
3. Using stop losses
It is best to know the stop loss point in advance. If you are aware from the start when you want to exit a position you can significantly reduce substantial losses. Ideally enforce a risk/reward ratio of 1 is to 1, or higher. Make sure that the limit is at least as far off from the current price as your stop.
4. Manage Leverage carefully
It is recommended that traders are wary of using leverage as it poses certain risks. Leverage in forex trading makes traders gain more exposure outside the limits of their trading account, and while this could mean higher potential profits it also presents a higher risk level.
5. Controlling Emotions
Last but not least risk management also requires you to be able to control your emotions. If you allow yourself to get too greedy, or too excited, you are bound to get carried away and probably you will be engulfed by too high a risk, which often results in high losses. On the other hand if you are too afraid to take a risk you will probably not manage to do much either. So it is important to be realistic and as level headed as possible.
6. Keep a Journal
It is a good idea to keep a trading journal so as to record your past decisions and ascertain areas of improvements for future trades.