Queconomics – When it comes to trade forex, proper risk management forex is something essential for traders. They are trading in among the largest financial markets in the world today and need the right decision in every step.
There are many factors involved such as banks, financial institutions, and of course, money. Traders can make huge profits but also can potentially experience huge losses.
A bank that lends money to borrowers should practice credit risk management so that they can ensure a return on the investments. This way, traders also should get a return on their investment.
Interested in understanding risk management is important for you. Whether it is energy trading, stock, forex, or commodity trading, they have a similar basis of risk management.
Proper Risk Management Forex, Risk of Ruin
This is the risk that makes you unable to execute trades since you are running out of capital. Just imagine that the value of security will change alongside your long-term strategy.
But the fact is in the opposite direction. You need sufficient capital stored in your account. With this, you can withstand the movement until it gets in the direction you mean.
If you do not do that, your trades can be automatically closed out. Everything you invested in will be lost although the direction of the security that you expected moves later.
The most common risk in any trading is the market risk. This condition is when the market performance is different from your expectation.
For example, you expect that the US dollar will rise against the Euro. Therefore, you decide to trade in EUR/USD only to fall and lose your money.
Leverage and Interest Rate Risk
Many traders open trades using leverage with a larger size compared to deposits in their accounts. This usually results in losing more money than the initial deposit.
The value of an economy’s currency can be affected by its interest rate. This means that unexpected changes in interest rates can be risky for traders.
Proper Risk Management Forex, Liquidity Risk Management
Some trading instruments’ currencies can be more liquid than others. If there is high liquidity of a currency pair, meaning that it has more demand and supply.
Therefore, there can be a quick-executed trade. Currencies with less demand can result in the delay between their opening and closing trades in traders’ platforms.
This means that you are not executing the trade at your expected price. And as a result, you can experience a loss or only get a smaller profit.
However, no all brokers are always providing this liquidity and across currency pairs, it is not the same. Traders are affected by a broker’s liquidity.
Unless you choose a large bank that handles forex to directly trade. You will most likely have to work with an online broker to execute trades and hold your account. Learn more about this scope to get further understanding.
It is simply that risk in forex trading is the potential of loss that happened in trading. You need to point out the proper risk management forex to be carefully executing your trade to minimize or avoid losses.
As with all aspects of trading, what best suits forex risk management is varies depending on your profile and preferences as a trader. Some traders are able and willing with more risk compared to others.
If you are a newbie, no matter who you are, starting conservatively is the best tip for reducing the risk. Using a demo account to practice new strategies in a less risky environment is a good way to start.
Now, you should be aware that some risks come with instruments and forex trading. And now, you will surely appreciate that proper risk management forex is important.