Anybody who tells you that the forex market is all about profits is an incredibly inexperienced individual. Risks and rewards go hand in hand in the forex market, as they do in other investment markets as well. This is possibly the reason why risk management is considered to be such an important component of virtually all forex trading strategies that you will come across on the internet.
Unfortunately, many novice forex traders do not take the risk management part of their trading strategies seriously enough. The result of this neglect is the logical progression of them losing all that they invest due to a single reversal in the forex market.
If you are also starting out in the forex market then you need to know how to manage the risk that you are going to face. Here are some of the more common techniques that forex traders incorporate in their forex trading strategies to deal with risks.
Trading with Risk Capital Only
The most basic method of keeping yourself safe from the inherent risks of trading in forex is to differentiate between savings and risk capital. Risk capital is usually a part of your savings while your savings amount to all the money you have saved for whatever future reason.
The mistake that many forex traders make is that they take everything they have saved and formulate forex trading strategies around this large sum because they think that investing more money would mean more profit.
While this logic is true, these people fail to take note that investing everything could result in them losing everything too. Risk capital would be the sum of money that you feel comfortable investing. Ideally, losing this sum of money should not break you financially.
Playing It Safe
Forex trading strategies can be tailored to be anything you want them to be. They can be daring and exciting or steady and safe. If you are not comfortable taking a lot of risk, you should simply customise your trading strategies to be safer. This would include not going for dodgy trades and closing trades well before they peak so as to avoid losing profits.
One of the best ways of managing risk is to only use around 2 to 3 percent of your total account balance on a single trade. Such trading strategies would allow you to lose 20 times straight and still have around 80 percent of your account balance. This money can then be used to recoup the losses.
Minimising the Use of Leverage
Using leverage would increase your purchasing power and, hence, your profits as well. However, at the same time, it would also expose you to more risk because reversals would wipe you out quicker. You should balance the use of leverage in your forex trading strategies so as to manage risks the best way possible.
Using Special Orders
Special orders such as Stop Loss and Limit are designed precisely for the purpose of negating risks inherent in the forex market. These orders should be an intrinsic part of your forex trading strategies.