Follow 5 Simple Steps to Better Understand Forex Risk Management in 2020

by MD Ashik Finance & Economy Analyst

Welcome to the topic "Follow 5 Simple Steps to Better Understand Forex Risk Management in 2020"

First of all my deepest sympathies to all the people who have lost their precious lives during this pandemic.

Effective Forex or foreign exchange risk management allows Forex traders to minimize losses from exchange rate fluctuations.

Therefore, setting up an appropriate currency risk management plan can contribute to safer, better controlled, and less stressful foreign exchange transactions.

In this article, I'll discuss the fundamentals of FX risk management and how to integrate them into your process.

So, without any further ado, let's dive right in.

What is Forex Risk Management?

Forex risk management includes individual stocks that allow traders to protect themselves against the disadvantages of a transaction.

More risk means more chances of getting substantial returns — but also more chances of suffering large losses.

Therefore, being able to manage risk levels to minimize losses, while maximizing earnings, is an essential skill for any trader.

How does a trader can do that? Risk management can include setting the correct position size, defining stop loss, and controlling emotions when entering and exiting positions.

Properly implemented, these measures can make the difference between a profitable business and losing everything.

Top 5 Fundamental Principles of Forex Risk Management

1. Risk Appetite

Working on your risk appetite is essential for proper currency risk management.

Traders should ask: How much am I willing to lose in one trade? This is particularly important for the most volatile currency pairs, such as some emerging market currencies.

In addition, the liquidity of foreign exchange is a factor that influences risk management, as less liquid currency pairs may mean that it is more difficult to enter and exit positions at the price you want.

If you do not know how much you are willing to lose, the size of your position may be too high, which will result in losses that could affect your ability to accept the next exchange — or worse.

Let's say that 50% of your transactions are winning. In the long run, mathematically, you can expect to have a series of multiple losing trades as a result. Over a career of 10,000 traders, the odds suggest that you will face 13 sequential losses at one point.

This emphasizes the importance of knowing your appetite for risk because you have to be ready, with enough money on your account, to deal with poor performance.

So, how much should you risk? A good rule is to risk between 1 and 3% of the balance of your account per transaction. For example, if you have an account of $ 100,000, the amount of your risk would be $ 1,000 to $ 3,000.

2. Size of The Position

It is important to select the correct position size or the number of lots you take for an exchange, as the right size will protect your account and maximize opportunities.

To select the size of your position, you must determine the placement of your stops, determine your risk percentage, and evaluate the cost of your pip and the size of your batch.

3. Stop Loss

Using a stop-loss order — which is placed to close a trade when a certain price is reached — is another key concept to understand for effective risk management in Forex trading.

Knowing the point where you want to get out of a position means you can prevent significant potential losses. But where is this point? In general, whatever the point, your initial trading idea is invalid.

Traders must use stops and also limits to enforce a risk/reward ratio of 1: 1 or higher.

For 1: 1, this means you risk $ 1 to potentially earn $ 1. Place stops and limits on each trade, ensuring that the limit is at least far from the current market price as your stop.

4. Leverage

While looking at how traders behaved in terms of the amount of trade capital used, the experts found that traders with fewer balance balances generally had much greater leverage than whose balance was higher.

However, traders using less debt performed significantly better than low-wage traders using levels above 20 vs. 1.

Larger traders (with average leverage of 5 to 1) were more likely to 80% more profitable than lower-paid traders (with average leverage of 26 to 1).

Leverage in Forex allows traders to get more exposure than their trading account might allow, which means higher profit potential, but also higher risk. Leverage must, therefore, be managed carefully.

Based on this information, at least initially, traders are advised to be very careful about the leverage and the risks it poses.

5. Control Your Emotions

It's important to be able to handle the emotions of trading when you risk your money in any financial market. Letting excitement, greed, fear, or boredom affect your decisions can expose you to excessive risk.

To help you get your emotions out of the equation and negotiate objectively, keeping a Forex trading journal can help you refine your strategies based on past data — not your feelings.

FOREX RISK MANAGEMENT: TOP kEYPOINTS

In summary, to practice strong currency risk management, traders must:

Determine their attitude to risk by considering the risk/reward ratio, the size of the position, and the percentage of the account balance for each transaction.

Stop-loss place to protect against the market going against their position

Be wary of leverage and use too much

Keep control of your emotions

Use a journal to make decisions based on existing data rather than personal feelings.

To conclude, online Forex trading is getting more popular day by day. And everything has some risks or disadvantages. As a result, Forex also has some certain risks but I think if you follow these steps then it wouldn't be a major problem.

So, was it helpful? Please let me know. And if you have any topic in mind that you want me to cover for you then please let me know.