What is Risk Management in Forex Trading?
The importance of managing risk in forex is probably fairly obvious, just like in any type of trading or investing. In forex, however, there are specific factors affecting trades that you might not run into elsewhere. Knowing what to look for, what to be aware of and how to avoid fast-moving hurdles thrown at you can help preserve your account. Because what is the bottom line for those trading Forex? It’s making money. And the more money you can earn from your forex trades, the longer you can keep on trading. Unfortunately, it’s easy to get caught up “in the moment” when trading. So before you even start with your first trade, create a list of guidelines for yourself. When you’re unsure of yourself or which way you should go, refer back to your notes for guidance that will keep you on the trading path.
Looking for the Forex Jackpot
A huge mistake that many new traders make is to be careless in order to win big or to go for the jackpot. They don’t think far enough ahead to realize that if they throw all of the money in their account at one specific trade they could lose everything. Losing all your trading money means the end of the road for you as a forex trader. But it does not have to be like that if you use some of the basic rules to manage your risk. Any trader who has been in the business very long understands the importance of controlling losses. Determining how much you can possibly lose on one trade will protect you from the “jackpot” or “winner takes all” styles of trading. Think about those television movies wherein a tense, smoke-filled, dark room late at night there’s a card game going on. At some point, maybe the star of the show will take a risk and dangerously make an all-or-nothing type of move. The tension builds but then since he is the star of the show, of course, he will win. But that’s not real life. If you realize that one person won, then it means everyone else lost. And this is how forex can be. No trader comes out a winner every time.
Preparing for Potential Losses
Taking into consideration that not all of your trades will be profitable, the issue becomes how much are you willing to lose? It’s only natural to try to get the most out of each trade, but if the deal starts to go south, make sure you’ve put in an exit point. As traders know, there are many factors that can quickly change the direction a price is going, so don’t risk more than you can lose. Rather than hoping for wild wins, stay on the conservative side. Other factors to keep in mind when controlling risk are emotions. Don’t be stubborn and refuse to leave a trade when you should and don’t be over-zealous about grabbing that unreachable deal.