How To Manage Risk
Every trader makes investments they believe will yield profits. Successful traders make wise choices as to which products to trade on, how much to invest and when. But even the most experienced traders may make investments which end up causing them to suffer losses. Practicing risk management ensures that losses never exceed debilitating sums. Only traders who complete their profit yielding trading tactics with effective risk management strategies can truly go on to build long term large profit generating investment portfolios. In the following paragraphs, you'll find useful information about different risk management strategies you may choose to adopt.
Basic But Effective, the "Stop Loss" Tool
Forex risk management allows Forex traders to benefit from the great potential Forex trading offers while ensuring that they do not suffer losses which may impact the way they lead their lives or their trading habits.
Many Forex trading platforms, and our cutting edge one naturally between them offer a stop loss tool which, when used effectively, allows traders to limit the amount they may end up losing if, on certain trades, things do not turn out the way they had believed they would.
The basics of using the stop loss tool are simple. Setting a bottom limit to the value of the product you are trading on will trigger an automatic order to sell ending the trade if the value had indeed depreciated to such a level. Setting a stop loss limit allows you to predetermine the size of the greatest loss you may suffer, you thus know in advance just how much funds you are risking.
Deciding How Much You're Willing to Risk
To trade successfully and generate substantial profits, you must take chances. Even if you've followed closely the pattern of a certain currency pair's exchange rate and feel sure that trading on this currency pair at a certain time holds great potential, things may turn out differently. Some unforeseen factor may come into play, the exchange rate may shift unfavorably causing you to suffer a loss. It is therefore highly advisable to take the risk of suffering losses into consideration and to adopt some Forex risk management strategy.
A good risk management strategy will ensure that you never find yourself in a position where you just do not have sufficient funds with which to continue trading.
Careful traders work out just how much of their capital they can stand losing while still having enough left with which to go on trading and earn back what they had lost. Once you've figured out just how much of your capital you are willing to risk you can set a stop loss limit and ensure that there is no chance of suffering a loss greater than the predetermined sum.
Sticking to Your Risk Management Strategy
Whatever risk management strategy you've decided to adopt it is essential that you adhere to it. A common trap traders must avoid falling into is the "it will bounce back" one. A trader may calculate how much they feel comfortable risking, they may set a stop loss limit accordingly, but then remove the limit or lower it if the value of the product they've traded on (or the exchange rate of the currency pair traded) approaches this limit. This happens because the trader believes the value (or exchange rate) will begin rising again, and that preventing the trade from ending will allow them to reduce the amount they lose or even end up making a profit.
In the long run, sticking to risk management strategies will undoubtedly prove to be the right thing to do. Removing, or lowering, stop loss limits will render them ineffective, you may then find yourself suffering losses which have a real impact on the capital at your disposal or even terminating altogether your ability to go on trading unless you make a deposit.
The Volatile Market Challenge
The Forex market may be quite volatile, especially when trading on certain currency pairs. In markets where the values of products traded may rise and fall quickly, it is important to set a stop loss limit in a way that does not trigger a sell order due to normal fluctuation.
Values of different products are affected by different occurrences; there may be periods of slow, long term changes, ones with drastic climbs or drops and periods of fluctuation with values climbing and falling alternately. For your risk management strategy to be effective, you must take into consideration the current state of affairs.
Take Profit Points as Part of Risk Management
Take profit points ensure that the trade ends at a point where you will be making the profit you're after. Setting a take profit limit will ensure that you sell when the value rises to the level you believed it would rise to. Just like stop loss limits a take profit point must be set carefully. Also like stop loss limits, take profit points will only be effective so long as you make it a habit of sticking to them.