Why Risk Management Is Important in the Forex Market?
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Forex trading has always been very popular for several reasons. One of the most important reasons is its high-profit potential, which is provided by the financial support of intermediary companies. This has been achieved using leverages that span a range of ratios from 1:2 to 1:1000. When using leverage, risk management is a very important part of forex trading.
Risk assessment is the foundation on which the accuracy and profitability of forex traders’ performance is mainly based. In fact, any transaction in forex has a high risk that does not guarantee the desired result. In this article, we are going to review risk management methods in the forex market.
Risk Management Is a Trader’s Most Precious Asset
The basic and main rule that must be followed is that accurate calculations and the chance of success of the transaction should be combined, and the maximum risk level should never be exceeded. Only such an approach can guarantee reasonable risk management in any situation. Risk management is based on four main factors:
- The speed of the trader’s reaction to the movement of the market against the direction of the trade
- Analytical approach to predict the risk of transactions
- Separation of permissible risks from unacceptable risks
- Eliminate unjustified risks according to a clear trading plan
By using risk control methods, every trader will be able to significantly increase profits and minimize losses. In addition, there are many rules that can be followed to minimize the risk of transactions, which we will explain in detail below.
Any Doubt Should Be Interpreted in Favor of the Market
The presence of doubt indicates that the trading plan is not as accurate and suitable as expected. And if the behavior of the market is unstable and moves beyond the predictions, or doubts do not allow the trader to act with peace of mind, it is better to exit the market and minimize losses.
Too Much Emotion Makes Trading Risky
The inability to control emotions for a trader shows their incompetence. For trading in the foreign currency exchange market, calmness and sanity are very necessary, without which it is impossible to be sure of predicting actions.
If you are unable to control yourself and your emotions are overpowering your logic, you should get out of trading and stay away from this situation temporarily. A change in activities (mental or physical) or connecting with other traders who have been in a similar situation and managed to overcome their emotions can be helpful.
The Less, the Better
Forex trading experience shows that traders who focus their energies on preparing for only one trade perform much better than those who divide their attention for different purposes. Qualitatively, prepared trades are always less risky than emotional trades. Opening a small number of positions also prevents brokers from charging too much commission.
Set Take Profit and Stop Loss
There is still no specific strategy that is completely profitable and does not issue any wrong signals. Therefore, to prevent the accumulation of losses, it is necessary to set a stop loss. Take profit and stop loss and reduce trading losses.
If you set these levels correctly, you can quickly exit the trade in the first steps when the market moves in the opposite direction of your prediction. Also, by using the time-based stop loss limit, you can have a good performance in situations where you are not decisive to make a decision or hesitate between choosing different strategies.
Whenever you enter a trade, you must be prepared for the fact that the market may move in the opposite direction of your prediction at any moment. Before any action, it is necessary to calculate all the possible risks. In this way, the position is protected from possible losses. Protective measures include:
- Determining a stop loss
- Safe and clear exit from the market according to the trading plan
Trade in the Direction of the Trend
Trading in the direction of the trend is one of the best ways to reduce risk. When the market moves in the opposite direction of a trend, it is better to reduce the amount of risk and loss by applying one of the mentioned methods. Even losses increase your experience and allow you to evaluate performance and analyze the causes of mistakes. As a result, you will be aware of the methods of fixing such errors.
Use a Trading System
A trading system provides the trader with the opportunity to minimize the risk by making regular and principled trades based on forecasting and using analytical data. A trading system is a set of rules and parameters according to which the trader is allowed to enter the trade. In the forex market, traders adopt different strategies based on the time of trading, the indicators used, the amount of risk-taking, and the prevailing trend.
Choose a Suitable Broker
Brokers also play a significant role in the success or failure of a forex trader. If the broker is regulated and follows international financial regulations, the trader can safely earn profit in this market. Also, if the broker’s spread and commission are reasonable, the trader’s risk level will be reduced and their profitability will be maximized.
Determine the Maximum Amount of Risk for Each Position
Most traders’ capital goes up and down in waves. This happens due to the strange and incomprehensible characteristics of the market, i.e. the trends suddenly turn into neutral movements and the upward movements of the chart quickly change to a downward one.
With a certain amount of capital, it is necessary that only a part of it is involved in transactions and a certain part of it remains as a reserve. When opening several positions at the same time, the amount of capital required to maintain each of them should be calculated, and in addition, first of all, it should be considered that no more than 5% of capital is allocated for each transaction.
Take Risk Management in Forex Market Seriously
Surprisingly, risk management in forex is completely under your control. By taking a few steps, you can greatly increase not only your chances of survival but your profitability. When you open a position, the market will do whatever it wants. However, if you are always prepared to protect your account, you can prosper in the long run.
Aron Groups is a reliable and active broker in the forex market. The Aron Groups users benefit from analytical and educational articles for risk management on a daily basis to minimize the risk of their transactions.