Forex Risk Management
Risk management is a combination of various ideas for controlling your trading risk. It can be limiting your trade lot size, hedging, trading only during some hours or days, or knowing when to take losses.
Why is Forex Risk Management Important?
Risk Management is the essential ideas to surviving as a forex trader. It is an easy concept to understand for traders, but more difficult to apply it. Brokers in the market like to talk about the benefits of using leverage and keep the focus off on the disadvantages.
It helps traders to come in the trading platform with their proper mindset that they should be taking a large risk and aim for the big profit. It seems all too easy for those that have done it with a demo account, but once real money and emotions come in, then the things change. It is where the actual risk management is essential.
Click on below Video: Risk Management Strategies for Forex Traders
Control Your Losses
The best way of forex risk management is to control your losses. First, know when to cut your losses on a trade. You can use a mental stop or hard stop. A mental stop is when you place a limit to how much pressure or drawdown you will take for the trade. A hard stop is when you place your stop loss at a specific level as you initiate your trade.
Find it out where to set your stop loss is a science all to itself, but the main thing is, it has to be in a way that limits your risk and makes good sense to you. Once your stop loss is placed on your trading platform, stick with it. It is easy to fall into the trick of moving your stop loss farther and farther out.
If you follow this, you are not cutting your losses effectively, and it will ruin you in the end.
Use Correct Lots Size
Every trader will have their tolerance level for risk. Not everyone has $5,000-$10,000 to open an account with, but it is necessary to understand the risk of using the large lots with a small account balance. Keeping a smaller lot size allows you to stay flexible and manage your trades with logic rather than emotions.
Click on below video: What is the proper lot size for your account
Tracking Overall Exposure
While using reduced lot size is a good thing, it will not help you very much if you open too many lots. It is necessary to understand correlations between currency pairs.
Example: If you go short on USD/CHF and long on EUR/USD, you are exposed two times to the USD and in the same direction. It relates to being long two lots of USD.
Risk management is all about keeping your risk in control. The more you control your risk, than the more flexible you can be when you need to be. Forex Trading is all about the opportunity. Traders need to act when those opportunities come to you.
By limiting your risk, you ensure that you will be able to continue to trade when things do not go as per planned and you will always be ready.