Risk Management While Trading

Risk Management While Trading

Business

The number of traders on the Forex market is increasing drastically. This means institutions of investors, hedge funds, insurance companies, central and commercial banks, or even individuals with laptops and some funds are part of the market. Low barriers of entry in the currency trading market are among the reasons for this.

Moreover, the Forex market’s liquidity allows actionable measures to secure trades and their adjustments. This is due to a lack of centralization of the market. Thus, it operates 24 hours a day and five times a week.

The Forex market is subject to political and economic prospects of major economies of the world, such as the USA, Japan, UK, etc. These countries’ currencies have high demand, making them among the most liquid and leading currency pairs on the Forex market. 

Some Common Management Strategies

A potential and very risky factor that can compromise your Forex investments is maintaining an emotional angle of trading. If you commit to trading emotionally, you put yourself in deep trouble. Being emotional about a small loss, greedy about the most volatile markets, or even stubborn in leaving a market can make trading a frustrating endeavor. 

Forex Trading- Risks & Their Importance

Leverage Risk

Leverage entails that you are going for a trade position size that is significantly greater than your actual trading balance. For example, under a leverage ratio of 100:1 from the broker, you can control a trade position of $100,000 against a trade account worth $1,000. This will definitely provide impressive gains in terms of a successful trade.

However, you may experience a margin call from your broker in case of a downward moving trade. The margin you use to leverage such trading positions can cause significant losses. This happens because, with high leverage, a minute movement of market trend against you will compel you to bear huge losses. You can even lose your trading account!

Political Risk

When elections form new governments, there are shifts in a country’s ideology. This is a consistent pattern. A change in the direction of a country’s policy from monetary to fiscal can immensely impact the Forex market, especially if it’s one of the world’s major economies. 

Political instability, unrest and riots in a country, or sudden bans on international trade with a certain country can hurt you financially if you’re using their currency.

Credit Risk

Often, the institutions and brokers that investors approach for Forex trading have gone bankrupt or are fraudulent. This is when regulations cause the institution to go bankrupt, or a fraudulent broker is interested in eating away your savings.

Other times, there can be compensation agreements for investors that do not offer real security in situations.

Exchange Rate Risk

The change in the value of one currency in terms of another determines the exchange rate. While your trades are open on the Forex market, they are subject to all small and excessive variations in the exchange rate. Your ask price and bid price may experience various changes. This can cause a low-liquidity problem, compelling you to incur losses.

Transaction Risk

This risk is associated with the exchange rate risk. Because of the variation in time of different countries, there can be a delay in information. Sudden news or change in the economic or political situation means that you incur heavy losses. However, this can be a plus point from another perspective.

Due to time delays and the availability of 24-hour trading, you can adjust your trades’ opening and closing according to the news.

Minimize Risks in Forex Trading

There are various methods to minimize risks and losses if you are a novice trader. The tips below might help you do just that.

  • Leverage: this term often comes up in Forex trading because of its appeal to new traders. Try focusing on potential losses that you might bear when using leverage to carry out trades on the Forex market
  • Research & Evaluation: always consider the different aspects of Forex trading, including social/ copy trading strategies, just like any other business. This will help you plan according to your investment ideas so you can monitor your progress
  • Stop-loss: do not act out of emotion. Avoid reaching super loss levels. Set specific loss levels – once you reach them, withdraw from further investment to avoid further losses
  • Connection and Links: find the right learning material and guides. Learn from the best of the Forex traders, and use an excellent computer with a fast internet

Conclusion

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In the end, Forex has its pros and cons. The Forex market offers immense potential for gains, and with proper guidance, you can make a fortune for yourself. At the same time, you can help others learn. 

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