Risk management plays a crucial role in forex trading. Without proper risk management, no one can succeed even with the best trading system in the world. Risk management is a combination of various ideas to control your trading risk. This can be achieved through proper volume adjustment, hedging or even limiting your trading days and hours throughout the day, because sometimes you just suffer loss by entering the market.
Why is risk management crucial?
Risk management is one of key factors in surviving in forex. Understanding this concept is much easier than actually applying it in the trading process. Forex brokers talk about the benefits of using leverage, to deceive people’s minds from its dangers. This causes traders to think, that no benefit will come without a large amount of risk.
This may seem a little easier for those who did this in demo accounts, but as soon as they enter the real market and start trading with real money, emotions change everything. This is why risk management is important when trading in forex.
One way to control risk is to control loss. Knowing when to cut the losses could really prevent drastic disasters from happening. You could specify a stop loss either by placing stop loss order when opening a new order in trading platform, or specify the amount of risk you would be able to take in your mind.
Placing stop loss needs knowledge, but the key point is to limit your loss to a point where it makes sense. When placing stop loss either in your trading platform or in your mind, don’t neglect it. Your emotions could always trick you into holding a bad position and keep drowning in loss. If you don’t cut the losses in time, it will eventually cause your capital to shrink very quickly.
Adjusting your trading volume
Broker’s advertisements induce you to open a trading account with 300 U.S Dollars and start trading with 1:200 leverage. This means that you could involve up to 10,000 U.S Dollars in only one trade and double it instantly. This is not true. There is no such thing as a miracle in financial markets. Therefore, always start with small amounts. Each trader has a risk limit.
The best general rule is to stay cautious as you can. Not all traders are able to create an account with 5,000 U.S Dollars initial deposit. So if you don’t have much money, start with small trades, this way you could control your positions rationally rather than emotionally. The worst thing you could do is to involve all your money in one trade.
Control your positions
Although small trades help you manage your investment more efficiently, but opening a countless number of positions doesn’t help either. On the other hand, try to understand the relation between currency pairs you trade.
For example if you sell EUR/USD and buy USD/CHF, you are exposing yourself to U.S Dollar two times, and you are taking two steps in the same direction. This is pretty much like trading 2 lots of U.S Dollar. If U.S Dollar falls, your loss will be doubled. Controlling your positions help you reduce your risk exposure and remain in the forex market.
Risk management means controlling your risk and knowing what portion of your capital you may loose. The more control you have over your risk, the more flexible you will become when necessary. Forex is the market of opportunities. You can’t afford to loose a lot of opportunities in forex. You will make sure that you are ready to take any opportunity at anytime, if you have a proper risk management. Using risk management properly marks the differences between a novice and a professional trader.
In Aron Groups Broker, traders are allowed to trade several financial instruments such as energy, commodity, precious metals, cryptocurrency and currency pairs. In MetaTrader 5 trading platform, traders have also access to numerous pending orders and risk management tools such as stop loss and take profit.
Written by: Mohsen Mohseni (Aron Groups).