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The Importance of Risk Management in Forex
Written by: PaxForex analytics dept - Tuesday, 16 January 2018 0 comments
Every trade on the currency market is exposed to some level of risk. To reduce possible losses and increase the profit, traders use some methods of the risk management. Many novice forex traders begin trading without a trading plan, and this is one of the primary reasons why the vast majority of new traders lose money. Even with a trading plan, if the plan lacks a good risk management component, regardless of how well the plan may work initially, a trader can eventually lose everything.
Forex risk management can make the difference between your survival and sudden death with forex trading. You can have the best trading system in the world and still fail without proper risk management. Risk management is a combination of multiple ideas to control your trading risk. It can be limiting your trade lot size, hedging, trading only during certain hours or days, or knowing when to take losses.
In forex trading, there are several factors that you can’t really control. While you can be able to make predictions based on fundamental analysis or a review of past price action, the element of uncertainty is always present and you can never fully eliminate the possibility of losing a trade. Risk management separates successful traders from those who wind up blowing their entire trading account. 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.
The excitement of real time trading and the thrill of seeing an investment rise, or fall, can sway anyone. That's why finding an appropriate trading style, and staying with it, is crucial for risk management. Staying detached or objective about the investment while keeping emotions in check allows for the clear thinking required to make appropriate trading decisions. Keeping a neutral outlook as trading occurs allows the larger picture to be evident, and ensures that the planned trading style is fulfilled without being biased by temporary changes.
Trading with money that you can afford to lose in worst case scenario, trading with reasonable lot size, and controlling your risk with stops will prevent you from having a major trading disaster. These steps won't prevent you from losing money, they will just give you a chance that you will survive. Far too many traders take a Wild West approach to trading and sometimes it works for a while, but when it is over, it is really over. Trading while keeping your risk low will keep you in the game and put money in your pocket at the same time. Forex trading is a legit thing you can make money, if you don't get carried away with taking on risk.