10 methods of risk management at Forex
Risk management at Forex is an important point on which the error-free actions and profitability of transactions largely depend. In fact, we can say that any transaction in the foreign exchange market is a high-risk enterprise, which does not guarantee a favorable outcome. But it is in the hands of each trader that the key to solving this problem is, because by applying methods of risk control, it is possible to significantly increase the overall profitability of transactions at Forex and ensure the minimization of losses, preventing them and reducing losses.
Risk management is based on four main factors
- the speed of a trader’s reaction when the market moves backwards;
- Analytical approach to forecasting the degree of risk of a transaction;
- Distinguishing between acceptable and unacceptable risks;
- elimination of unjustified risks through clear planning of actions.
And the main rule of thumb that should be followed is the need to combine accurate calculation and luck, not exceeding the level of weighted risk. Only such an approach allows to provide reasonable risk management in any situation.
However, in addition to that, there are a lot of rules, compliance with which allows to minimize the risk of transactions
1) Any doubts should be interpreted against the market
In fact, the existence of doubt suggests that the action plan is not as good as one might expect. And if the market is unstable, beyond forecasts, or doubts do not allow the trader to act in cold blood and thoughtfully, it is better to leave it, minimizing losses.
2) Excessive emotionality hurts
The inability to control emotions for a trader is a sign of unfitness. Trading on the currency market simply requires coolness and sanity, without which it is impossible to ensure sufficient predictability of actions. If the nerves cannot hold out and the emotions prevail over the mind, it is necessary to get out of the trade and temporarily withdraw from the situation. To cope with oneself, it helps to change the activity (intellectual to physical), or to communicate with other traders who have been in such a situation and managed to curb their emotions.
Read more about the trader’s psychological mood in the article: Top 7 psychological tips for successful work on the Forex market.
3) Better less
The practice of currency trading shows that traders who concentrate their efforts on preparation for a single transaction demonstrate much greater efficiency than those who disperse their attention in several directions. A well-prepared deal will always be less risky than the results of intuitive trading. A smaller number of transactions saves the trader from the need to pay excessively large commissions.
4) Protection against attack
Starting trading, you need to be ready for the fact that the market may turn against the predicted direction. Before starting work, it is necessary to calculate all possible risks, protecting the transaction from losses.
Protection measures can be called
- the installation of “stops.”
- calculation of the maximum allowable loan amount in the current situation;
- safe and prepared exit from the market, based on preliminary planning.
5) Trend trading
Trading by trend is one of the ways to minimize risks. If the market reverses against a trend or deliberately fails to open positions, it is worth reducing the amount of risk by using one of the available methods. But it should be remembered that even losses provide an opportunity to accumulate your own experience, allow you to assess actions and analyze the causes of errors, having worked out ways to eliminate them later.
6) Stop Loss and Take Profit
The use of stop-loss and take-profit restriction levels is the main way to minimize risks. If the levels are set correctly, it is possible to achieve the fastest possible closing of the deal at the initial stage of the negative market movement. And the use of time stop-signals allows you to cope with the situation in case of uncertainty of the trader in the decisions made or the choice of trading strategy.
7) Risk diversification
The popular statement that you shouldn’t “put eggs in one basket” doesn’t make no sense. Having a certain amount of funds at their disposal, only a part of them should be put into use, retaining a certain part of the capital as a reserve fund. And when concluding several deals, it is necessary to calculate the size of the amount that will be used to secure each of them, in advance, allocating on average no more than 5% of the total amount of funds for opening one position.
8) Trading systems
The presence of own trading system gives the trader an opportunity to minimize risks due to systematic trading based on forecasting and application of analytical data. You can read about how to create your own trading strategy in the article “Forex. Development of a trading strategy”.
9) Technical failures
Avoid the risks associated with technical equipment failures and other non-standard situations by abandoning the “physical” use of the computer in favor of virtual servers with the possibility of permanent remote access to the terminal operation control.
10) Broker’s bad faith
In fact, it is possible to reduce the risk of fraud on the part of the broker only by collecting data about his work in advance. When choosing a brokerage company, it is necessary to carefully check all the information about its reputation and weigh the decisions made based on their own preferences and objective assessment of the situation.
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