- January 6, 2022
- Posted by: admin
- Category: Strategies
RISK MANAGEMENT STRATEGIES: We all have a basic understanding of the meaning of trading. When we trade, we exchange money for goods and services, goods for goods, or services for services. Now, forex trading is quite different and requires a bit of expertise.
What is Forex trading?
Forex is the acronym for Foreign exchange. It is the type of trading that involves the exchange of one currency for another for several reasons that might include commercial, tourism, and international trade. Foreign exchange is usually carried out in the foreign exchange marketplace. It is a global marketplace, usually, an online platform where banks, institutions, and investors trade and make predictions on various national currencies.
Since Forex trading gained traction globally, it has become one of the world’s largest and most liquid types of trade. The estimated global turnover for the forex market per day has risen from $5 trillion to over $6.5 trillion over the years. The primary reason for the exponential increase is that more people have discovered forex trading as a very lucrative form of investment. If you are one of them, you must have witnessed huge returns or low returns depending on the volatility of the Forex market.
Although Forex trading is a good form of investment, it comes with its risks. Forex trading is as risky as trading stocks. No matter your level of expertise in the Forex market, you are still very susceptible to experiencing risks. Yes! Risks are inevitable, but we can manage them and use them to our advantage.
RISK MANAGEMENT STRATEGIES
What is Forex risk management?
Forex risk management uses a set of rules and critical analysis of the forex market to manage and limit the effects of the negative impacts on a forex trade. Some risk you might encounter in forex trading includes currency risk, interest rate risks, liquidity risk, and leverage risk. For a Forex risk management strategy to be successful, you must plan. To guide you in your risk management plan, here are some strategies you can implement.
Have a grasp on how the Forex market operates
Most inexperienced forex traders have no understanding of the Forex market, which is why they often end up with losses. To mitigate risks, you must make conscious efforts to educate yourself on how the market works continuously.
The Forex market is a culmination of currencies from around the globe. Some include GBP, USD, ZAR, CHF, AUD, and JPY. The weight of your gains and losses in forex depends on the forces of demand and supply. The first currency in a forex pair quotation is the base currency in forex trading. The second currency is called the quote currency. Also, the quote currency is always displayed on the chart and represents the amount you will need to deposit to purchase a unit of the base currency.
For example, the USD/ZAR currency exchange rate is 16.0000. It means you will have to spend 16.000 Rand to buy $1.
Only trade what you can afford.
There have been stories of traders borrowing money to trade in the forex market. Take it from here that is the riskiest thing you can do as a trader because the forex market is nobody’s friend. It is very volatile, and more often than not, the forex market predictions are false. Hence, only trade what you can afford to lose. Please don’t trade with funds you live on because you can lose your capital within minutes. This advice is not to deter you; it is only to prepare you for what is to come.
Better still, allocate funds to forex trading as you write your monthly or yearly budget. That way, you are never shaken when you make losses.
Use the stop-loss and limit orders.
If you are a beginner, it is essential that you always use the stop-loss and limit orders options to limit losses. This is how stop-loss works: you place your orders in an open position to remove you from a trade if the rates drop.
On the other hand, orders are instructions to your broker to trade on your behalf when the market is favorable or hits a specific rate. Limiting orders reduces the likelihood of experiencing unexpected losses. Also, your mind is at ease when you take your eyes off the charts because you are protected from the downsides.
Consider your risk tolerance.
Your risk tolerance can be measured using your age, current financial condition, knowledge of the forex market, experiences, investment portfolio, and investment goals. Everyone has a risk threshold—a limit they cannot cross because they cannot handle losses. While some are high-risk-takers, others are low-risk-takers. You must have heard people croon about how high-risk-takers make the most profits, don’t let that pressure you into investing more than you should in the forex market. Instead, invest at your own pace. Start with low risks and work your way up with time and gathering experiences. Always trade within your risk tolerance to prevent unwanted losses.
Set a risk-reward ratio
Before participating in a trade, ensure that the risk you are about to take will be worth it in the future. Don’t go into any transaction blindly. It is only standard for your profits to outweigh your losses on individual trades. The easiest way to control your returns and losses is by adding a risk-reward ratio to your risk management plan.
To calculate your risk-reward ratio, compare the risk capital to the potential gains from the trade. The minimum risk-reward ratio list is 1:2, especially for beginners.
By trading on products like spread bets, CFDs, or spot bets, you’re trading on leverage. To trade on leverage means to deposit more than you deposited before. Leveraged trading allows you to glimpse the market through the initial deposit, which is called margin trading.
In leveraging, your gains can be increased swiftly but never forget that the same can apply to your losses. That is why you must understand how margin trading and leverage can affect your trading performance.
By implementing the strategies above, you can stay steps ahead of risks and manage them better. For more financial advice, visit croft financial.