Risk management is a combination of two words involving the risk that means the amount of loss per trade and management that represents the way a trader wants to balance the amount of loss he can bear. Forex trading is majorly focused on making money in exchange of currencies. It is a known fact that wherever there is an involvement of money, there is also a great chance of losing that money. Fuad Ahmed, a currency trading expert thinks, that a trader as a strategist needs to look at all the aspects that can drive the danger of losing a big chunk of money from his trade. He says that it is the core nature of the currency business that a trader can lose a good amount of money in a single trade deal he makes. Fuad Ahmed believes that the job of a trader only becomes significant and relevant when he learns to trade using a good methodology to keep his trade different from gambling.
Since trading is the interchange of goods between two alliances or groups, each party needs to make an estimation of the amount of profit, they want as a return and also gauge the size of a loss they can easily tolerate. of He suggests that a trader should make risk management a part of his trading policy to remain aware of the size of a loss he can tolerate in business. By making risk management a strategy in business, a trader can also maximize the amount of profit he intends to make on a single trade.
What is Forex risk
The Forex market is the biggest of all financial markets that trades almost $ 5.3 trillion a day. The main participants of the market are big financial institutions, banks, organizations and individuals, therefore the chances for a loss and profit are both vitally steep. A smart forex trader always keeps his potential for profit or loss estimated, as these are both part and parcel of forex risk management. He forecasts the threats posed to his orders, analyses all the factors that can possibly influence his trade deals. Forex risk management is a large category involving the use of different strategies, management actions and precautions.
What is the Significance of Forex Risk Management?
The future is always a mystery and to decipher the code of this mystery is the job of a trader. He is supposed to forecast the future based on the little information available in the current time. The current information does not necessarily have to be taken from the present but also from the past events and precedents that can be used to generate results for the future. The same feature of Risk Management is offered by some algorithmic trading software too, in fact, the best trading platforms use expert advice as part of their system where they analyze the past results and make a forecast for better risk management.
This feature of algorithmic trading makes the forex business more manageable and saves the trader from a bigger loss. As things change and matters evolve, market analysis becomes difficult yet more vital for the trader. But, this is one option that can rescue a trader and help him resurface after a dip in the market. There is never anything like absolute forecast and it is the same reason that good Risk management can enable a trader to take the business on a long-term road with least fear of tiring away.
The broker provides the leverage while a trader makes the forecast and with the fact being established that no prediction is 100% correct, traders resort to the use of algorithmic trading platforms, that provides for them the analysis they require. The basic purpose of risk management is to terminate the level of danger from the trade deal whether through a trading software or by a trader’s own strategy.
One form of risk management is keeping a check on your losses. It’s important to remain aware of the amount of a loss you can handle in a trade. A trader can use two kinds of stops, a hard stop and a mental stop.
i) A Hard Stop.
A hard stop means setting yourself a stop loss limit level before initiating a trade.
ii) A Mental Stop.
A mental stop, on the other hand, is setting a stop limit level in your head before beginning a trade. Nobody more than the trader himself is aware of the level of pressure and burden he can handle, so it’s him who’s to set a mental limit for himself before using any automated trading software and inserting a stop limit level for oneself. If a person is ready and stable in his head, he can definitely face the possible challenges that the trade deals could bring him.
Using the right lot size.
Broker’s advertising can enable you to think that it’s appropriate to open an account with $300 and use 200:1 leverage to open a mini lot trade of 10,000 dollars and multiply the amount of money in one trade. There is no magical funda that can make the right estimate about the lot size, but in the beginning, it is often better to start with a small size. The smaller the size of your lot, the lesser the chances of a loss in your trade. Each trader has a different capacity for risk tolerance. Experts have recommended for the traders to remain as conservative as they can, before making a trade deal and bet for as low an amount as possible in the initial stage of their business. If a trader is a newbie, the best recommended practice for him is to initiate the trading journey with a demo account. He can gain practical trading experience without losing actual money. A demo account enables a trader to skillfully apply all the knowledge and techniques he has learnt without losing original money and come out as a fine trader. It’s also feasible for a novice trader to start an account with as low as $ 50, as not everyone can afford to open an account with $ 5,000 in the initial phase. If a trader decides to open an account with a large sum of money, he also needs to understand the repercussions that might come with it. A small account with larger lots always contains threat for a great loss that not everyone can handle. Therefore, knowing your risk estimates along with keeping the account size flexible and manageable is the key to success for a trader.
Tracking Overall Exposure.
As much as keeping the small lot size is important, not keeping too many lots is extremely important too. In Forex trading, where there is an exchange of two currencies, if a trader buys two different sets of currencies, it is essential he understands the association between pairs. For instance, if he’s short on EUR/USD on another hand long on USD/GBP, he is exposed to the USD twice more than the other two currencies in each pair. In the case mentioned here, he’s not just exposed to the USD but the currency is also present in the same direction in these cases. This way, he’s 2 lots of USD in his account.
With this kind of a lot in his account, a trader can face a major blow in case the USD goes down. That’s why it’s highly recommended a trader keeps his exposure tracked or rather low than exploiting all currency pairs present in the market. The lower he keeps his exposure, the lower the risk of a loss he has in the longer run.
Risk management is taking measures to minimize the level of risk in a trade. If the risks are under controlled, a trader can easily avail himself of all the opportunities and be more flexible with the orders and the amount of those orders. He just needs to identify the available opportunities and react to them. Taking measures for risk management ensure stability even in the volatile times. It keeps the trader equipped for hard times and lower the dangers of a terrible loss in a trade.
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