Trading in the forex market is a daring job. It moves like a pendulum but speculating which it is going to swing is the hardest task. Traders are always looking to squeeze or drive the biggest chunk of profit possible while buying or selling a currency without risking or losing funds.
Interestingly, it is not always inexperience that becomes the reason for traders losing their investment. Sometimes, it is the poor management skills for risks or perils lurking behind huge potential gains. The article focuses on risk management skills in the volatile market of forex.
Forex Risk Management: What Is Risk Management?
The forex market is the most liquified one; the fact is known by all. Also, all trades, directly or indirectly, depend on forex exchange currency. So, when daily transactions are above USD 6.6 trillion worldwide, issues will occur in the market. And it is bound to put traders into a fix. So, for controlling them on a personal level, traders need to get equipped with forex risk management skills.
The basics of risk management remain similar for every sector trade, including commodity, indices, stocks, and others.
Here are the major risks:-
PS:- Know about them properly for avoiding applying forex risk management
While trading forex, you may come across a lot of liquidity. Some currency pairs are more liquid than others. That means they have high supply and demand. So, that’s good for traders. However, with quick trades comes the peril of losing funds. If you miss out on the timing, losses will occur. It is like missing a flight by a few seconds, as a passenger gets late by a whisker. Similarly, if a currency has less demand, it may not execute on time, considering low volumes.
Thus, the trade may not get executed on time as per the expectations. So, it may even result in a loss or lesser profit.
Leverage trading is the biggest prospect why traders try their hands in the forex trading market. They can borrow additional amounts and bid on larger quantities. So, that can exponentially increase their profits. However, when the market goes on the other side, you can lose all your money at once. Even all the profits ever earned by you ever will be forfeited in the market. The application of forex risk management can mitigate the issue.
Risk of the market:-
The market may not dance to your tunes. You may apply all indicators, and it may turn the contrary way. For example, if you predicted that GBP would increase against the Euro and if it does not happen, you will lose money by
If you do not have enough money or capital for the market, you won’t be able to buy the currency pair or execute it as per your requirement. For withstanding with your strategy, you would need the currency pair to produce results your way. And even if it does not, long term holdings would need more money for hedging. In the absence, risk of ruin will happen.
Here are some management skill tips:-
The first things first. Traders lose money in forex trading due to a lack of research and learning. Most people invest in the foreign currency exchange market due to peer pressure or watching their friends and relatives earn money. So, if you are new to forex trading, takes notes from experts or people who are veterans of the field. It will keep you on the other side of the risk. Also, before investing your money, take some online courses and follow the market trend religiously. Devote at least 2-4 hours a day and see how the market behaves.
Start predicting the forex market. Once you start getting it right, that’s about time you should find yourself a green signal for trading.
Brokers like T1Markets, 101investing and others offer ample educational courses that can open your eyes to forex trading. They can provide you with enough material to keep forex risk trading at bay, and there would be no risks in forex trading anymore.
Use the money that you do not require:
The biggest rule of trading forex is that a trader does not need to use the money through which their daily expenses are met. Instead, they must use that money which is either saved or left after all other savings. Thus, it makes trading totally risk free for traders. So, even if they ride into a risky zone, there’s no scope of losing but gaining. Therefore, an astute trader would always put that money to the task they are willing to lose.
The biggest benefit would be not having any emotional baggage or attachment that often triggers all hell break loose when people make losses. A trader would not need to put his/her abilities to strategise aside. Instead, they would be on the task drawing profits to them immediately.
When you put up the money that is required to run the household or business, that gets you in the loop of debits. That’s a tough thing to run away from and troubles you as an investor until you make a big profit. So you must always take a route of fetching funds from what is left relegated for avoiding risks in trading.
As forex risk management, one should not invest all money in currency pairs. Beginner traders must go slowly and see the market trend. Knowing about the stability of a currency can be helpful. So, going step by step and investing a few bucks at a time is a great strategy to avoid forex risks. That’s how they can gather courage while learning about market theatrics.
So, be aware that you do not get driven by the market for spending a lot. Keep your feet grounded in the forex market; otherwise, the dangers of forex trading are right around the corner. So, calculate the funds you have in your bank account. If that is sufficient, you still do not have to jump full-fledged in the market. Observe the market. Take tiny steps and seek the advice of a learned trader before adding pennies to a currency pair chosen by you. The importance of the strategy is known when the market does not perform at your will.
Traders who invest conservatively get an opportunity to hedge in the market. So, when the market plunges or rises in the opposite direction of your speculation, you always have money to buy more currency. That helps those traders who do not wish to invest much at once or are beginning to trade in forex. So, with a little investment, the profits will be bigger.
Put up a limit or stop loss:
It is immaterial whether you are a new trader or an old one. If you are trading without a stop limit, there may be a chance you lose your money. It is like you are a great driver and do not wear a seat belt, showing conviction on your talent, but meet with an accident due to other’s mistake. Likewise, you may be a great investor or a clever trader. However, there’s nothing you can do regarding the market forces. So, trade in the market after applying a stop-loss limit. A trader applies it while opening the position in the forex trading market. So, when the market starts slipping, your limits will let trends or movements do no harm. This is the most important forex risk management idea.
However, there’s an exception. When the forex market acts frantically and erratically, it may leave some price gaps during trading. So, stop loss may fail to protect your immediate losses. Meanwhile, it will be set itself automatically for next time when the price reaches the same level.
The best way to apply stop-loss is to place it at a level where you do not lose more than 2 per cent. That’s the thumb rule. However, at the same time, you should not hike your loss margin. Risks in trading are inevitable, but using a safety net is in the hands of traders. If you know how to get it right, profits get magnified.
Moreover, a protective stop is beneficial for traders as it can help buyers and sellers book profits before the market takes a u-turn.
Application of a take profit:
The take profit is quite similar to a stop loss and an essential strategy for forex risk management. However, its job is contrary, as the name suggests. It is here to help a trader book profit comfortably without moving an arm and blinking his eyes. On one side, stop-loss helps in stopping losses once the price of a currency reaches a certain level, the trader exits automatically. Likewise, in the take profit strategy, once the level of profit set by a broker is reached, the position gets exit on its own in the forex market.
Once you have clarity regarding the market’s movement, setting a take profit limit recedes to formality. However, overconfidence can incur losses. So, ensure everything about the trends. Fundamental analysis of a currency is essential in that case. Moreover, you can also decide the risk in trading and investing your funds by doing that. Most investors look forward to at least 2:1 reward to risk ratio.
So, if the profit set by you is 80 pips on your entry price, your stop loss would be 20 pips. It will be below the entry price.
So, a trader needs to spend some neurons and exercise to find the level of pinning a take profit level.
Control leverage :
Controlling the leverage is an essential point that must be considered by a trader while implementing forex risk management. Traders mostly report their losses while applying an excess of leverage over their currencies. Thus, they get driven by generating more money and targeting a bigger market with small funds in their hands. So, it inflicts sabotage on their funds and profits.
CFDs, spot forex, and spread bets are the leveraged products. They are double-edged swords that can work both ways. It can deliver you massive profits shortly and vice-versa.
Leverage essentially means holding more than you can afford in the financial market terms. So the forex risks are huge. A broker would always suggest putting aside a little portion of the overall valuation of the position a trader is looking to open as collateral.
Your profits are susceptible to bear losses in the absence of controlled leverage. So, prefer not to go over the board and begin using the least leverage in the forex market. For that, you need to learn about the process of margin and leverage trading.
Never get tempted by making huge profits. Learn about your requirements, see the market trend and look at the economy of countries. If everything is tailormade, go for considerable leverage.
Meanwhile, you should leave room for recollecting gains if some losses occur.
It is good to dream big, but feet should be on the floor while trading forex. It means casting away unrealistic expectations from the market can be a great tip for forex risk management. Do not pay heed to what others earned through trading in the forex market. Their thought, ideation, strategy, position and experience may be different from you. Also, each day or during every session, the forex market offers different hazards and opportunities.
Thus, keeping in mind the realistic goals, a trader should take a stride in the market. Aggressive trading may not always bear fruits. Some people try scalping in the forex market because it is known to give consistent profits. However, there’s no guarantee. What if the market acts contrary to what you thought? Such risks in trading are inevitable then.
Moreover, there’s no harm in accepting mistakes and vowing to never commit them again as realistic expectations. While you mess up with the forex trade, it is better to wind up the position.
Get a trading plan:
Forex risk management works on a strategy or a trading plan. If you can crack the code of forex trading or hatch an idea that goes by your investment funds. Going by instinct can work once or twice. Once you devise a plan, stick to it for a long duration.
Forex risk management tips save your time in the foreign exchange currency market along with money. Your approach changes towards the market. You stop committing silly mistakes and start thinking more objectively while investing in the financial market. The quotient of greed takes a back seat, and rational thinking drives your leverage. A trader should always apply stop-loss and take profit limits for averting the dangers of forex trading.