Trading Risk Management: Risk Management Tips
In this article, we will explain everything you want to know about risk management and give our top tips on the subject to help you on your way to having a less stressful trading experience!
Understanding trading risk management:
Forex trading risk is the potential risk of loss that may happen when trading. The rules for risk management in Forex that we will give in this article are not exclusive to forex trading. Whether you are related to risk management with :
-Energy trading.
-Futures, commodity, or stock trading.
These risks might include:
Market Risk: The risk that the market will perform differently from how you expect and is the most popular in trading. For example, if you believe the US dollar is going to rise against the Euro and you, therefore, decide to buy the EURUSD currency pair, only for it to fall, you will lose money.
Leverage Risk: Many traders apply leverage to open trades that are larger than the size of the deposit in their trading account. This leads to losing more money than was initially deposited in the account.
Interest rate risk: An economy’s interest rate can have an effect on the value of that economy’s currency, which means traders can be at risk of unpredictable interest rate changes.
Liquidity risk: Some currencies and trading tools are more liquid than others. If a currency pair has high liquidity, this means that there is more supply and demand for them and..therefore, trades can be executed fastly. For currencies where there is less demand, there is a delay between you opening or closing a trade-in your trading platform and that trade being executed. This means that the trade is not executed at the expected price, and you make a smaller profit, or even a loss, as a result.
Risk of ruin: This is the risk of you running out of capital to achieve trades.
Tips for forex risk management:
Here are top forex risk management tips, which will help you decrease your risk regardless of whether you are a new or pro trader :
1- Educate yourself about forex risk and trading
What is the first rule in trading? If you are a new trader, you will need to educate yourself as much as possible. No matter how expert you are with the forex market, there is always a new lesson to be learned! Keep educating yourself on everything Forex-related.
2- Use a stop loss
Traders lose money regularly. The aim is to ensure that your profits are bigger than your losses at the end of your trading session. One way to protect yourself against big losses is with a stop loss.
A stop loss is an instrument that empowers you to protect your trades from unpredicted market movements by letting you set a predefined price at which your trade will automatically close.
There are occasions where the market acts erratically and presents price gaps. If this occurs, the stop loss will not be executed at the predetermined level but will be activated the next time the price reaches this level. This phenomenon is called slippage.
A fine rule is to set your stop loss at a level that means you will lose no more than 2% of your trading balance for any given trade.
Once you have set your stop loss, you should never raise the loss margin.
There are various types of stops in Forex. How you place your stop loss depends on your personality and experience.
Popular types of stops include:
Equity stop
Volatility stop
Chart stop (technical analysis)
Margin stop
3- Limit your use of leverage
Leverage gives you the chance to magnify your profits made from your trading account, but it can also magnify your losses, enlarging the risk potential.
A sensible approach with regards to forex risk management is to limit your exposure by not applying high leverage. Consider only applying leverage when you have direct comprehension of the potential losses.
4- Have a forex trading plan
One of the mistakes new forex traders make is signing into a trading platform and then making a trade based on nothing but instinct.
To manage your forex risk, you need a trading plan that figures at least the following:
When you will open a trade!
When you will close it!
Your minimum reward-to-risk ratio!
The percentage of your account you are wanting to risk per trade!
A trading plan helps you keep your emotions under control whilst trading and will also prevent you from over-trading. With a plan, your entry and exit strategies are directly defined and you will know when to take your gains or cut your losses without becoming fearful or feeling greedy.
5- Control your emotions
There are many popular principles in trading psychology and risk management. Forex traders must be able to control their emotions. If you cannot control your emotions whilst trading, you will not be able to take a position where you can gain the profits you want from trading.
Emotional traders struggle to stick to trading rules and strategies. Stubborn traders may not exit losing trades fastly, because they predict the market to turn in their favor.
When a trader knows their mistake, they need to leave the market, taking the smallest loss possible. Waiting too long may cause the trader to end up losing basic capital. Traders must be patient and re-enter the market when a genuine chance presents itself.
6-Vary your forex portfolio
By having a variety of investments, you save yourself in case one market drops, the drop will probably be compensated for by other markets that are perhaps expecting stronger performance.
With this, you can manage your forex risk by ensuring that Forex is a part of your portfolio..but not all of it. Another way you can enlarge is to exchange more than one currency pair.
About Marketsbloom:
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