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What is Risk Management in Forex Trading
Written by: PaxForex analytics dept - Monday, 29 May 2017 0 comments
According to prominent, and successful, traders one of the primary tasks of every trader is risk management. Some even say that traders are basically risk managers with a bit of an interest in financial markets. Although that might be an exaggeration, it is undeniable that even traders with brilliant performance records might end up losing money without a proper a risk management strategy. 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.
Risk management is one of the most key concepts to surviving as a forex trader. It is an easy concept to grasp for traders, but more difficult to actually apply. Brokers in the industry like to talk about the benefits of using leverage and keep the focus off of the drawbacks. This causes traders to come to the trading platform with the mindset that they should be taking a large risk and aim for the big bucks. It seems all too easy for those that have done it with a demo account, but once real money and emotions come in, things change. This is where true risk management is important.
For starters, trading always has an element of uncertainty, as no one can possibly foresee future events that might affect the price of the traded asset. But predicting the future is not the goal of trading in the first place. Predicting the probabilities of future price movements is the real goal of a
trader, and this leads to the conclusion that you don’t trade because you are sure of what is going to happen. With that in mind, it is easy to see that you have to prepare yourself for losses, even with the most successful and reliable strategies. This means that you have to have a risk-management strategy before you start trading and entering positions.
It is often seen that on one hand, the traders want to reduce the size of potential loss but at the same time, some traders want to make a profit through getting the most out of a single trade. In addition to that, it is also true that one has to take greater risks in order to get high returns. It is often stated by the experts, and it is true indeed that forex trading market is not so easy to compete in – no matter how good is the trader, the fact always remains that it is the riskiest business platform. So without having proper forex market risk management no one will be able to survive for long in this business.
Risk is inherent in every trade you take, but as long as you can measure risk you can manage it. Just don't overlook the fact that risk can be magnified by using too much leverage in respect to your trading capital as well as being magnified by a lack of liquidity in the market. With a disciplined approach and good trading habits, taking on some risk is the only way to generate good rewards. Managing your risk is vital if you want to succeed as a forex trader. This is why you should adhere to the aforementioned principles of forex risk management.