Develop a strategy for risk management Forex
| Posted in Forex Trading | Posted on 3:41 AM
Forex risk management
Before starting any business you must developing a strategy and plan so that puts the risks and losses of this work and the same thing in forex you must develop a strategy for risk management of FX
by : Ozforex
Investors need to be especially mindful of risk management when engaged in currency trading. The forex markets operate 24 hours and explosive movements can occur at any time which means investors can find themselves facing significant losses unless their risk is managed properly.
Trade Planning
The old adage "failing to plan is planning to fail" is very true of forex trading. Poorly considered rash trading will end in losses. Before each trade you should have trade plan that includes;
- The exchange rate where you exit the position because you want to limit your losses
- The exchange rate where you exit the position for a profit if the market moves in the desired direction
- The dollar amount of the maximum you can tolerate losing if the trade goes wrong
Stop Loss Orders
Human nature leads most people to think most about the profit they hope to achieve in the trade. However successful risk management means investors should firmly establish where they will exit a losing position and how much that will cost them. Once the exit rate is established the investor should leave a 'stop loss' order with the broker. This means that should the market move against the investor overnight the broker will automatically cut the position thereby limiting the potential for further losses.
Take Profit Orders
Of course if things go to plan and the market moves in the desired direction the investor will make profits as long as the position is closed before the market reverses. Investors should leave 'take profit orders' (also know as 'limit orders') to exit the position for a profit.
Position Size
Leverage may allow you to trade positions 50 times the size of your trading capital but that doesn't mean it is a great idea to do so. Every forex investors will suffer losses at some point and it is important to take potential losses into account when deciding on the size of a currency trade.
To be conservative assume you have three or four losses in a row and then ensure you have enough capital and to cover this scenario.
Once you know your stop loss rate and how much you are willing to lose, you can calculate the size of the position that you are willing to enter.
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