Risk Management In Your Forex Strategies
As with almost anything in life, the forex market and forex trading involves a certain amount of risk. It is due to the risk:reward relationship in forex certain individuals either attain copious profits or successive losses. Regardless of the outcome, it is always in the forex traders best interests to incorporate a level of risk management in their forex strategies in order to ensure they are protected against any unforeseen harm. In this article we will identify three risk management markers which should be evident in all trading strategies.
Step no. 1: Trade within your means
The people of the 21st century have been dubbed the generation of debt. With the introduction of the credit card and easily accessible loans, it is no wonder society is living beyond their means and finding themselves in cavernous debt. It is the sensible trader who chooses to steer clear of this situation by trading within their capital limits.
The amateur trader often finds himself facing exciting trades with minimal income, and seeing he has made profits previously it seems reasonable to trade. After all, wasn’t the plan to make money? However, the act of trading with money you cannot afford to lose is a treacherous one as it will lead to emotional, high risk trades more likely to fail than succeed.
In order to avoid this event, it is advised one sets rules of what money may be traded and what is off-limits – and stick to it! Profits are not guaranteed in the forex market and trading on a whim with ‘off-limits’ capital is not good risk management.
Step no. 2: The option of trading small
When we are young we are told to ‘reach for the skies’ and fulfil our potential. It is instilled in us that we can achieve our dreams if we shoot for the stars. Well not all of us I guess! It is best to begin on the ground and work your way up if you wish to remain among the heavens and not fall back to earth.
The second feature in a strong, sound strategy is to begin by trading small. This involves making trades of lesser value, or lower capital input. One should grow in experience, knowledge and capital before considering the larger trades with more competent traders. Furthermore, by trading in a smaller capacity you will have a chance to improve and refine your forex strategies.
Step no. 3: Look at stop losses
Stop losses are known as the ‘parachute’ of forex trading due to their trade-saving nature. If you do not include stop loses in your strategy you are surely leaving yourself vulnerable to detrimental trading behaviours.
The most important aspect of a stop loss is the position in which it is placed as its position within the strategy can cause either profits or losses. If it is placed too low losses will occur, however if it is placed too closely to your entry price the trade may be closed of its own accord.
In conclusion, the forex market is a volatile one filled with high-paced trading and risks. In order to manage the risk, and ensure you are not affected by them, it is best to include risk management in your forex strategies.