Risk Management

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As a trader, we tend to focus on knowing when to buy or sell in the Forex market as the most important part of trading. While it is very important to know when to buy and sell, it is only the first piece of the puzzle, next and just as important is a Forex risk management strategy. At the very mention of risk or risk management most people simply glaze over. We live in a world full of risk; around every bend is potential disaster. Whether it’s getting on an airplane to go on vacation, downloading an attachment in an email, or touching a public door knob, we are faced with risk that we would rather just ignore.

But when it comes to trading the Forex market, we must face the risk head on. Because unlike the one in a million chance of being involved in a plane crash, taking an unprofitable trade is a regular if not daily occurrence. For this reason, Forex risk management needs to be at the forefront of every traders mind if he is going to be successful.

Consider some of the risk issues that need to be considered and managed

Forex Risk Management Issues

  • Individual risk appetite and tolerance
  • Correct trade selection
  • Account management/ Lot size
  • Broker selection
  • Market conditions

Risk Appetite

Like all speculative markets, high risk and high profit potential go hand and hand. Regular and rapid changes in currency value create many trade opportunities and potential for profit. The Forex market is a high risk/reward market; if you are not comfortable with this fact the Forex market is not for you. Currency can gain or lose value compared to other currencies in a matter of days, hours, or even minutes. It is this volatility that makes the Forex market so attractive to traders. It is imperative that you are honest with yourself about your personal risk appetite or tolerance before you get involved in currency trading.

Trade Selection

Obviously, knowing when to buy and sell in the Forex market is a very important part of Forex risk management. The ability to watch the market and identify trade opportunities using several market indicators requires skill and risk tolerance.  If you take two losing trades in a row, will you have the confidence to take the next trade? Educate yourself about the Forex market and find ways to help your trade selection, such as with Forex signals.

Account Management/ Lot Size

Unfortunately, some have advertised the Forex market as a way to make easy money with a small investment. Many people new to Forex believe that with a just few hundred dollars they can double and triple their money over a short period of time. This is false and will usually lead to unpleasant results such as market calls and losses that can clean out trading accounts.

To grow your trading account you must have good account management skills. Some questions you should be asking yourself are:

  •  Will you be trading standard or mini lots?
  •  Is my account capable of withstanding a string of losing trades?
  •  How many lots will I take per trade and what will be the impact on my account when I lose a trade?  What will be the impact when I win a trade?
  •  What is the risk/ reward of my trading strategy? – If I lose more trades than I win, will I still be able to profit?

Avoiding mistakes and mismanagement of your trading accounts is vital to a good Forex risk management strategy. Take the time to look at your account management on a regular basis as market conditions change and as your account grows or if it shrinks.

Forex Broker Selection

There are several different brokers of varying size and geological location. Different brokers offer different fees and spreads on currency pairs as well as other features. But there is more to choosing a broker than just finding the lowest fees or spread. Selecting a good broker is very important to your overall Forex risk management strategy.

Although one broker may offer lower spreads, they may have poor execution of trades making it difficult to get your desired entry price, stop loss, and exit level. A slightly less spread is of no use to a trader if trades are not executed accurately by the broker. In fact, poor accuracy and slippage can cause significant losses.

It is important to select a well established and stable broker. Unfortunately, some of the “discount” brokers have actually gone out of business, costing traders massive problems. Do your research and be sure that the broker you select is well established, stable and has strong positive financials.

Other features to look for:

  • No conflict of interest between broker and trader.
  • No dealer intervention in trades.
  • Price providers (Banks) do not see your stops, limits, and entry orders.
  • Competition reduces the potential for market manipulation by price providers.
  • Ability to trade during breaking news.
  • Ability to place entry orders anywhere—even inside the spread.
  • Ability to scalp the market.
  • Rollover transparency—all amounts are displayed in advance.
  • Receive positive rolls at all margin levels.

Forex Market Conditions

As previously mentioned, the Forex market is volatile. This means that market conditions can change rapidly and often. You need to be able to adapt both trading and your Forex risk management to market conditions in periods of strong trend and in periods of difficult range bound conditions.

This is the reason that many Forex robot programs work for a period of time and then seem to get it wrong other times. If you are not able to watch the market every day, you need to find a way of keeping up with market conditions. (Forex signal services can be an effective way to help traders keep abreast with conditions.) By keeping up with market conditions you will be able to optimize your profit potential during strong trending markets and minimize risk during difficult market conditions. All this adds up to good Forex risk management.

 

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