Consistent and long-term profit in the Forex markets can be a difficult prospect, especially for a new trader. The idea of buying and holding might sound simple, and from an individual trader’s perspective, it might not appear to take any special skills to open and close trades while making money all the way. But in reality, the speed at which a transaction takes place in Forex can cause the risk associated with it to suddenly go out of control and incur huge losses to the trader. The key to profiting in the Forex market is to ensure that whatever losses you incur is outweighed by your profits – either by volume or by amount. This is where the concept of Risk Management comes in. Ironically, it is one of the most debated and overlooked areas in trading.
Forex Risk Management is can make the difference between survival and sudden death in Forex. The speed of executing a trade, instant gratification, and the instinct to make a profit in the shortest time possible can often trigger a gambling instinct. Many traders turn online trading into a form of gambling rather than approaching it as an investment with proper speculative strategies. It wouldn’t be far-fetched to state that the difference between trading and gambling is risk management. When you trade without risk management rules, you are in fact gambling.
So what exactly is risk management?
Risk management is a combination of strategies and ideas to control your trading risk. This can be many things like limiting your lot size, trading only during certain hours of the day, or knowing when to take losses. It is an easy concept to grab, but substantially more difficult to apply. Proper risk management will not only protect you but make can make you profitable in the long run.
Why is risk management so important?
The answer is quite simple – you never what will happen in the future. A trader speculates about the future based on the information available to him at the present. The information that the trader uses in based on what happened in the past. The Forex market is highly unpredictable, and this makes the prospect of analyzing the market incredibly challenging. Anything can affect the Forex market – the smallest news can affect the price of a particular currency. So every market analysis by a trader is still just a probability with an opportunity for failure. No analytical method will be work perfectly all the time and this is where risk management is so important. It can mitigate the damaged caused when your analysis doesn’t work out so that you never spiral into an uncontrolled loss of capital.
Without any kind of risk management, traders will be tempted to hold a position for too long. They will enter a trade with a lot of hope and little planning. When the position does not move in their favor, they hold on and maybe invest even more money into the losing trade under the presumption that the market is wrong. It is only a matter of time before their accounts are wiped out.
How to institute effective risk management?
A working risk management system requires knowledge of a few advanced concepts in trading like fundamental and technical analysis, using the correct lot sizes. But it starts with some basic steps. You should have a well-tested trading plan that is practical. The risk management strategy should be integrated into your trading plan to help you get the most out of Forex trading. One easy form of risk management is controlling your losses. Know when to cut your losses on a trade. Figuring out when to set up a stop-loss is another science to learn all in itself, but it can reasonably limit your risk on a trade. Using a stop loss in all your trades is a no-nonsense way to limit potential losses. Another important point to keep in mind is not to fight the market trend. There are always far too many stronger players in the market and the best you can do is to altering your strategy to reflect the trend.
Forex is a constantly evolving market. To stay ahead of the game, it is crucial to never stop learning and update yourself on the market’s changes.
Many Forex traders are just anxious to get right into trading with no regard for their total account size. This is a guaranteed way to fail at Forex. Risk management is all about keeping your risk under control. The more controlled your risk is, the more flexible you can be whenever necessary. Risk is inherent in Forex, but as long as you can measure risk, you can control it. Proper risk management can make the difference between becoming a successful trader, or one of the many failures in Forex.
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