RISK MANAGEMENT

Risk management is one of the most important key concepts for surviving as a forex trader. It is an easy concept to grasp for traders, but more difficult to actually apply. With an average daily volume of $1.4 trillion, the forex market is larger than all the futures markets combined and managing forex trading risks is essential for success.

Forex trading is now available to the public along with the same risks and rewards. More than any other market, the forex market can move against you quickly. The best way to manage your risks is to thoroughly understand how this unique market works and what drives it up and down. Your experience with other markets can help you understand but still, the foreign exchange market is difficult to predict.

The risks of forex trading are high as price can fluctuate for reasons that are out of our control and unpredicted including shifts in political and economic policy. These unpredictable circumstances are what drives the value of these currencies up and down and changes their value in respect to other currencies.

Further, determine a percentage you are willing to risk on each trade and stick with it. Some traders are willing to risk up to 3% or more on every trade. This may not seem like a lot to risk, but 3% of $100,000 is $3,000. When you have multiple trades open, it’s important to stay on top of the percentage that you have at risk because multiple losses can be devastating and one big loss can wipe out all of your other profits.

Most forex brokers provide the ability to set stop losses. You should determine your stop loss at the time when you enter a trade, and set the stop loss in the trading program. It is advisable to place a protective stop-loss for every open position. Stop-loss is a point when the trader leaves the market in order to avoid further loss. When your stop loss is reached, your trade will be automatically closed out, limiting your potential loss.

Another smart risk management strategy is to avoid holding positions in two currencies which tend to move together like the British Pound and the Euro. These currencies are correlated. The most common pairing of currencies is the US Dollar and the Euro. Since the British Pound and the Euro typically move in the same direction up or down, you should look to select a second pairing of the US Dollar with a currency other than the British Pound.

You should also avoid taking a long and short position in currencies which generally move in opposite directions.