Forex Trading Risk Management Techniques
Foreign exchange is a dynamic and demanding investment arena, where only a true comprehension of the intricacies and complexities of the market can make your capital grow every day. Of course, there is no sure shot technique for success in the currency exchange market; however, here are some basic principles that you can follow to formulate a good strategy.
Calculate Your Risk Tolerance
As it involves high risk, it is important to decide the kind of risk one will be able to tolerate and be comfortable with. The trading size can be calculated before making the investment and it is based on the risk tolerance and profit targets. In forex trading, some currencies are more volatile than others and conservative traders follow money and risk management rules strictly, in order to avoid losses.
Follow the Trend
The current market trends provide important inputs for all good trading systems. The investor should take cognizance of moving averages and the government policies, in order to identify and follow trends. It is necessary to prudently decide the market you want to invest in. As trading goes on for 24 hours a day, it is not possible to monitor and trade in all the markets, at all times. The European and US markets are most liquid, but the profit made solely depends on the investment plans and strategies. Currency markets undergo huge trend changes when the fundamental consensus is extremely bullish or bearish.
Create Your Own Strategy
The most important technique is to create your own strategy. It is also necessary to keep on testing these strategies and making appropriate changes from time to time. Nowadays there is also a provision of demo accounts with the brokers, to test the strategy you have formulated. If the strategy works, it is better to stick to it for some time, before the trend changes.
Only constant research of the market and the changing policies can help an investor to come out with a profitable strategy. It is good to learn from previous mistakes and fine-tune your investment plans and strategies. As the investment and risk-taking capability of investors differ by huge margins, there is no common and successful strategy for everyone.
Capital Preservation
It is important to preserve the capital when you trade in this market. It is not very prudent to trade more than 10% of your deposit, in a single trade, if you are not capable of taking risks. If the total capital is USD 100,000, every trade should be limited to USD 10,000, in order to avoid a one-time big loss.
Avoid Over-trading
Without sufficient backup, it is very risky to over-trade in this market. In an ideal scenario, you should not hold more than 3 to 5 positions at a time. In case of over-trading, investors generally tend to be out of control and make emotional decisions. Such situations usually occur when there is a change in market.
Before jumping head into the forex market, an investor should remember that the two biggest emotions in trading are greed and fear. An investment should never be driven by any of these factors, as this is a mechanical process, not driven by emotions.
