Forex Risk Management is an important thing that each trader must know about it, Risk is associated with every trading market and so is with Forex market also. Risk is there on every trade you place in the Forex market. This risk can be of two types that are blind risk and calculated risk. Blind risk is what the uneducated or beginner Forex traders take. They simply place a trade without doing any technical or fundamental analysis and without knowing odds. The probability of going successful of these types of trades is very little and in most of the cases the traders suffer loss. Calculated risk is what the experienced traders take after carefully doing fundamental and technical analysis. Placing trades with calculated risk needs years of experience of the Forex market.
What Is Forex Risk Management
The more the risk you take, the more the profit you may gain or the loss you may suffer. The reward or punishment is directly proportional to the risk you take. Punishment is in form of loss and the reward is in form of profit. Every trader becomes happy to earn profit but same is not the case with loss. Majority of beginners leave Forex Trading because they cannot afford to accept loss. So it is better to limit your losses and this can be done if you know how to manage risk. If risks are managed properly then losses can be limited and you will have more profit in your pocket. To manage risk properly, you must know some factors described below.
Know the odds
The first important factor in the Forex Risk Management is of knowing the odds. The traders and investors must know the odds of their trade being successful. This can be done by those traders and investors who have good knowledge of the technical and fundamental analysis. The traders can calculate the psychological trigger points at which trade can execute. These trigger points can be calculated using the analysis methods and observing the price chart. Before attempting to manage the risk, the traders must first attempt to measure it.
Liquidity is the second most important factor that should be studied in the course of Forex Risk Management. Liquidity of a market shows that there is sufficient number of buyers to buy your trade and the sufficient number of sellers to sell you trade. Forex market is a global market and opens 24 hours so you have enough buyers and sellers every time. This means that Forex market has high liquidity.
Risk per trade
The third important factor is the risk per trade. You must know the risk that should be taken per trade. Risk per trade should not be more than 2% of your total investment amount. For example, if your investment amount is $10,000 then the risk should not be more than $200. It means you should not afford to lose more than $200 per trade. So you need a total of 50 trades before your Forex account finishes and it is not possible that after well did analysis you place 50 trades and all go wrong. So a risk of 2% of your total investment is good decision.
Leverage Has Important Effect On Forex Risk Management
With your $100, you can open a position of $10,000 value. How can it be done? Where from the remaining $9,900 comes to open this position? The answer is simple that this money is allowed to the traders only for trading and allowed by the bank or broker. The ratio of Leverage can be 100:1 or sometimes it may also be 400:1 but the traders and investors should not prefer to take leverage of more than 10:1 or 20:1 because using higher leverage will increase chances of your trade going in loss and sometimes all your investment amount may wipe out in a single trade. It means higher leverage is associated with higher risk so do not take leverage of more 20:1 and trade intelligently.
These factors will allow the traders to trade smartly and minimize their losses.