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Risk Management in Forex Trading
Written by: PaxForex analytics dept - Wednesday, 21 December 2016 0 comments
Forex risk management is one of the most debated topics in trading. On one hand, traders want to reduce the size of a potential loss, but on the other hand such traders also want to benefit by getting the most out of a single trade. It is no secret that in order to gain the highest returns you need to take greater risks. This is where the question of proper risk management arises.
It doesn't matter how great your trading strategy is if you don't have a robust risk management system in place as well. Risk Management is the key factor that is the difference between success and failure especially when using leverage. Risk management should be seen as a positive part of your trading armory. If you use it in a premeditated strategic fashion, solid risk management can be used in an offensive and profitable way.
When you manage your risk properly, you take control of how much of your capital can be lost on a trade or set of trades. Risk management allows you to limit your risk even if the worst-case scenario takes place. In order to make consistent returns, a trader has to make sure that he will be able to bounce back from a loss in case price action does not go in his favor.
Determining how much to risk per trade depends on one’s risk profile, as aggressive traders tend to risk more while conservative ones opt for a smaller exposure.
There will always be losing days for traders, no matter how good one gets when it comes to understanding the markets. A trader who is able to manage his risk well can eventually make up for these consecutive losses with his winning trades later on. This can be done by practicing proper position sizing and taking the reward-to-risk ratio into account – concepts that will be discussed in a latter section. Without any proper risk management, forex trading becomes no different from gambling.
Taking your trading to the next level is usually very straight-forward because conventional trading wisdom solely focuses on blinking indicators and too good to be true trading strategies. Money and risk management is a very ‘unsexy’ area in the world of traders and it’s only after months of losing money and endless frustrations that traders start focusing on this aspect of trading. You can usually shorten your learning curve, by being more mindful about risk management and it does not take that much.