Trading involves a lot of important aspects. One of the most important ones is Forex risk management. Life or dead might happened in suddenly due to forex trading. You would be a looser without an appropriate risk management strategy even if you own a perfect trading system. In order to make your trading risk under control, you have to know well about the risk management which combining multiple ideas. The risk management can help on trade lot size limitation and allow to trade between hours or days. It also reports the profits or losses.
Importance of Risk Management
It can be said you are in gambling only if you are trading without risk management. Your investment does not aim to long term return and seems to look for a jackpot only. For long term running, risk management can play a role as not only protection but also profitability.
To a forex trader, one of the main concepts to surviving is risk management. It is easy to understand but hard on applying in fact. Brokers in the field usually have interesting to share the leverage advantages but often ignore the disadvantages. It leads many traders dropping into the pool with mindset then have to facing huge risk and big bucks. Demo is easy enough however all things will be changed when trading become true.
Whilst coming into the market, it is necessary that trader will pull up a chart as start to prepare the first entry. But the key stressed is that it has to pay more attention to risk management when most traders focus on the potential entries. Advisable risk management let us know where we can take profits and there is strict plan to stop loss in case the price go against us as well.
Know about Risk/Reward Ratio
How to understand the real risk reward ratio? It is talking about the amount of pips we wish to get on a trade vs. what risk of lost we are facing. We can limit the risk easy by fully understanding this function since we may set an exactly point to stop the trading. The importance is to find out a positive ratio then take action at your every position.
The 3% Rule
There is a form of risk management can help to know when you have to stop the trade so as to limit your losses. We’ll adjust your risk between 1-2%. It is preferred 1% of risk. However you may rise ratio of risk up to 3% if you have enough confidence to your trading system.
How to Track Overall Exposure
It is good idea to apply using reduced lot size. One point needs to mention that it will be less help when you open too many lots. Knowing well about correlations between currency pairs is also the key for your forex trading. Here is a short example, when you go short on GBP/USD as well as long on USD/CAD, then there are 2 times exposure of USD in the same direction. You will have a double dose of pain if the USD is going down. You can not reduce the risk unless to keep your overall exposure limited. It also can keep you in the game for long term with limited overall exposure.
Risk management is just talking about how to control the risk while trading. The more controlling, the more flexibility. Therefore you can do what you want to do. We can look forex trading as an opportunity simply. It requests traders to be able to take action immediately once these opportunities come out. Make sure the risk is under your control then you can go on your trading even if the things are out of your estimation or expectation as you are always ready. Applying risk management properly will make your difference, either to be professional of forex trading or being a quick blip on the chart.