When a person hears about the word “Forex,” the expected initial reaction is that it is a mind-bugling and tricky thing. Although it is valid to some extent, it does not actually go that way always, especially if a person is aware of all the prerequisites of it. This foreign exchange market has a remarkable position of being the world’s biggest financial market for financial institutions, corporations, and high net worth people.
Since the interest in this market has expanded into the retail sector lately, the need for educating traders on the use of appropriate risk and money management tactics has too grown substantially.
A renowned forex trader once said, “When trading in the forex market, don’t focus on making money; focus on protecting what you have.”
This saying completely does justice for everyone. A trader cannot control the markets, but he can manage the risk and control the money on each and every trade that he makes.
What is Risk Management?
It refers to the process of knowing, accessing, and mitigating risks of losses while trading in the forex market. The risk of loss usually arises whenever the market moves in the opposite direction of what we have had expected. Applying right and effective risk management strategies is important to minimize losses and ensure you can endure the losses if things go sour and unexpectedly opposite.
What is Money Management?
Odds are you may think the name itself makes this concept easy and simple to implement – and means how to manage all your funds wisely, but it is much more than that. Money management is an educated process of how to invest, save, spend, and budget your funds. Almost each one of us practices money management in our everyday life, but it requires a proper discipline to do money management in forex trading.
If you wish to gain long term gains from this industry, you must have proper knowledge of the elements that are vital.
Trading Plan to Manage Risk And Money
The only difference between the successful and unsuccessful forex traders is the quality of their trading plan, and how effectively they have strategized the risk and money management approaches. An effective trading plan must outline where to set limits, which financial instruments to target, when to enter and exit the trades, what precautions to take and when, how to deal with emotions effectively, how to determine the right opportunities, what to do when market conditions go opposite to what they have expected and more.
Principles to Follow
While profits in trading are usually associated with risks, there are a few principles one must always follow to manage it more effectively –
- Know your trading risks
- Analyze all the risks
- Make a constant practice on position sizing
- Create solutions so as to reduce risks
- Apply solutions on regular basis
Once a trader follows these principles, he’ll be able to manage both risk and money effectively.
Risk and Money Management is Important for Long Term Success
Forex currency trading market is a tempting one, having so many trading opportunities that make potential traders get more profits quickly. But, it is not as easy as it may sound to you; wrong moves and continuous loss can wipe your portfolio. Having a detailed and effective risk, and money management strategy will work great and help you remain profitable in the long run.
Risk and Money Management Tips for Active Online Traders
Outlined are some simple tactics that can be integrated and practiced to generate some lucrative trading profits.
Follow the 1% Rule
So many forex traders follow this rude. Generally, this rule suggests that one should never invest more than 1% of his of his funds in a single trade. For example, if you have $10,000 in the trading account, you should never put more than $100. Although there are some who even go as high as 2% too, it is all about how much a trader can afford to risk.
Plan your trades properly
One must “plan the trade and trade the plan” to make smarter choices and win. Planning and strategy is the key to win trades and can make a big difference between success and failure. Stop-loss and take-profit are two key methods in which online traders can plan ahead what to do and how to do. This way, they can know the expected returns against the odds of the stock hitting their goals.
Setting stop-loss and take-profit points
A stop-loss point is the value at which a trader sells a loss and takes a loss in trading. This usually happens when a trade does not go out the way a trader has expected. This way, a trader can limit all the losses before they even occur. Whereas the take-profit point is the value at which a trader is going to sell a stock and take profit on the trade. It usually happens when the additional upside is limited, and so are the risks.
Do your own stress test
This is one useful strategy in deciding on how much capital and risk to allocate to trading. One must calculate the possible worst-case loss at a time. Decide if you will be able to afford it or would deal with it emotionally. Trading experts suggest limiting your trading position to something you can manage under all the circumstances. One must also make sure to have liquid funds available to support planned trading activities, too, if needed.
Various risks are involved in running a forex trading that needs to be managed, mitigated, and monitored in order to ensure everything goes fine. In fact, research shows that having a proper trading plan and strategy at a place that includes sound risk management and money management practices too often goes a long in ensuring that you will become a successful trader in the forthcoming.
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