Forex Risk Management

By Author: george
Total Articles: 14
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The Forex market is the biggest globally traded financial market. A trader investing in such a business needs to be cautious as the market has financial resources, banks, individuals and companies trading around 5 trillion USD every day. The market is vast, and so are the risks involved in it. Therefore, the trader, before investing, should adhere to the risk management techniques. Traders must invest in such markets with proper precautions and take calculated risks.

Risk management is a potential requirement of forex traders for earning profits from the investments. It mucks in with the forex market trading well if the trader follows them efficiently. A trader should prefer giving in full time, dedication, and patience to gain immense forex trading profits.There are different trading instruments in forex Stocks, Commodities, Indices and Cryptocurrencies etc.

Types of Risks

There are various risks involved in forex trading that call for investors' compulsory attention. The trader should attend to these risks before investing funds in ...
... the forex market. The types of risks include:-

Interest Rate Risk: The market is wide, and so are the charges; traders as deals in huge financial markets may incur some interest charges. The banks, financial institutions, government or any other economic interest rate charged by such bodies over forex trading could affect the economy's currency. The charges could lead to a risk of unexpected interest rate changes.

Leverage Risk: Leverage is also referred to as margin trading, which allows the trader to open with a larger position in the market than the initial investment made. The traders using leverage trading open at significant investments than the capital invested. Most of the professional and experienced traders suggest not going for high leverage as it may incur a trader with huge loss. As it doubles the investment and if the trader goes in loss, they must pay the double amount than the investment made.

Market Risk: Traders of the forex market know the uncertainty involved in trading, which is the market risk. One never senses the risk coming their way without having a risk management technique. Market trading is the most unexpected trading, and that's where risk management comes into play. For instance, a trader decides to invest in gold due to the rising prices, but suddenly, the prices drop down because of the market changes. The risk is enormous for a trader as they may lose their invested capital. However, the trader with risk management could have some idea in advance about such volatility.

Liquidity Risk: Liquidity refers to the easy convertibility of the forex instrument into money. All the forex instruments differ in their liquidity; some are more liquid than others. Depending upon the liquidity of the instruments, a trader knows about the demand and supply of the instruments in the forex market. Therefore, the instruments/ currencies having less demand have delayed trading execution. This leads to trade not happening when expected at a high price, which means a trader suffers less profit or a loss.

Capital Risk: Running out of capital for execution of the trade. The trader experiences such risks when the unexpected happens, a strategy goes wrong in the forex market. It is a risk every trader has to face over long term forex trading. Traders should have enough capital and invest capital that could be afforded at the time of loss. Capital is the primary need of any trading and could lead to double profits or losses.

Nine Tips to Risk Management

Trading in the erratic forex market, prerequisites for risk management. The forex trader should follow the below-mentioned points for a deep understanding and clear mindset for forex trading.

Understanding and Educating

Traders of the forex market should be well informed about the forex market and its tactics. Understanding the market before going on the floor is what a trader should do—getting as much knowledge of the various instruments, trading platforms, brokers, and forex trading techniques.

There are various options available in the market for traders to learn from; videos, tutorials, articles, blogs and demo accounts. They all benefit the trader in avoiding risk and increasing their profits. A demo account option for beginners made accessible to traders by the brokers helps them practice trading online using virtual money and all the trading tools available for professional traders.

2. Stop-Loss

Stop-loss is a trading tool used by professional traders in the forex market to prevent unexpected movements. The technical platform automatically closes the trading price at the stop price decided by the trader. For example, if a trader invests in a certain instrument and believes the price will increase for the same, unfortunately, it goes opposite what was predicted, then the trade will cease at the stop-loss set. This will save the trader from drawing losses. There are different types of stop-loss like Equity stop, Volatility stop, Margin stop and Chart stop.

3. Consistent Methodology

A consistent methodology should be followed by the forex trader for gaining profits from the investments done. The prior understanding of the forex market will be of great benefit as they would be able to have a strategy and analysed plan for trading. The trading platforms and chart patterns help traders set a consistent way of trading. The methodology used should be as per the trade or instrument the trader invests in.

4. Reward Risk Ratio

Once entering the market, traders should set stop loss and have profit orders—the price level, when set, could help in deciding and measuring the reward risk ratio. When a particular trade does not match with the set ratio, the trader must leave that investment.

5. Do not take more risks than affordable

The forex trader should not be overconfident and take unnecessary risks. Instead, traders should invest only that much funds as much as they could handle.

6. Entry and Exit Points

The trader should be clear about the entry and exit points; the chart patterns followed by a trader should not confuse them in entry and exit. The primary trading directions and use of charts should be synchronised.

7. Analyse Weekly

The trader must analyse his trading transactions and methodologies used once a week. Trader consistent analysis helps in better trading understanding.

8. Records

The trader should maintain records to look at the trading or strategies followed in a specific condition of the forex market. Helpful in maintaining tax efficiency and trading data.

9. Leverage

The use of leverage should be limited, as it could incur a loss for the trader. Leverage sets the margin and shows a higher position than a trader invests. This could be risky and incur traders a loss due to uncertainty.

Conclusion

Trading is a mind game and involves a good understanding of the forex market. Suppose traders keep the points mentioned above in mind while trading; they will incur small losses comparatively.

The bottom line is that traders should consider risk management in the market. It reduces the risk and increases the profits for the trader—the best way of avoiding uncertainty and earning profits with understanding and knowledge of the forex markets.