How to manage risk in Forex
How to manage risk in Forex
Risk management in Forex allows you to implement a set of rules and take steps to ensure that any negative impact on trading is manageable. An effective strategy requires proper planning from the very beginning. Therefore, before you start trading in the real sense, it is better to have a risk management plan. In this article, Zand Traders team will teach you how to manage the risk in Forex.
Be sure to read: Choosing the best Forex broker
What is risk in Forex?
In general, the risk in Forex, which every trader tries to avoid, is related to trades that cause the investor to lose his entire fund.
Can Forex Trading Make You Rich? Yes, but trading in Forex is not a way to get you rich quickly and for this purpose you need to spend time, acquire the necessary knowledge and avoid possible risks in the Forex market.
In other words, when you deposit money into a Forex trading account, your goal is to do everything you can to make a profit on that investment and avoid anything that will reduce it.
Getting to know the types of risk in Forex
This is the risk in Forex trading that provides you with the conditions for your trading to be profitable. Forex traders use risk management techniques to use the risks of trading to their advantage.
The types of risk in Forex are:
-Currency risk: This type of risk in Forex is associated with currency price fluctuations and increases the purchase price of foreign funds more or less.
-Interest rate risk: This type of risk in Forex is related to a sudden increase or decrease in interest rate, which affects currency fluctuations. Changes in the interest rate affect the price of the currency because according to the direction of the change in the exchange rate, the cost and investment in a type of currency increases or decreases.
-Liquidity risk: A type of risk where you cannot buy or sell your fund quickly enough to avoid a loss.
-Leverage risk: This type of risk is related to increasing losses when trading with margin. In this type of transactions, since the initial cost is lower than the value of currency transactions, you can ignore and forget the amount of money that you have risked.
How to avoid risk in Forex?
To answer this question, we must say that in fact you cannot avoid risk in trading, but you can only recognize these risks and manage them.
This means that there are still losing trades in Forex, but by making the right decisions about each trade using a good strategy and proper risk management system, disasters like account explosion can be avoided.
What is risk management in Forex?
In simple words, it can be said that risk management in Forex means that you have the necessary preparation to control any risk that can affect your transactions, for example, you can manage your transactions correctly.
In the following, we have introduced you how to manage risk in Forex.
How to manage risk in the Forex market
In this part of the article, we will mention the things that by understanding and applying them, you can trade in this big market more successfully by managing risk in Forex.
Know the Forex market
In the Forex market, currencies from all over the world such as GBP, USD, JPY, AUD, CHF and ZAR are traded. Forex, also known as foreign exchange or FX, is primarily driven by the forces of supply and demand.
Forex trading works like any other exchange where you buy an asset using currency; the market price shows you how much you have to spend to buy another currency.
There are three different types of Forex market:
-Spot market: In this type of market, the physical exchange of a currency pair is done at the exact point of the transaction; it means “on the spot”.
-Forward market: In this type of market, the contract to buy or sell a certain amount of currency at a certain price, on a certain date in the future or within the range of future dates, is agreed upon.
-Futures market: In the futures market, a contract is concluded to buy or sell a certain amount of currency at a certain price and date in the future. Unlike the forward market, the futures contract in Forex is legally binding.
Know the leverage well
When you speculate on Forex price movements with spread bets or CFDs, you are actually trading with leverage; this allows you to gain full market exposure from a small initial deposit known as margin. But in order to manage risk in Forex, you should know that trading with leverage in Forex, in addition to having its benefits, is also associated with possible risks and you may lose too.
Have a proper business plan
A trading program can help you as a personal decision making tool by making Forex trading easier. In addition, it can help you a lot in maintaining discipline in the volatile Forex market. The purpose of creating a Forex trading plan is for you to know what, when, why and how much to trade.
Of course, pay attention to this very important point that in order to manage risk in Forex, your trading plan must be completely specific to you. Never copy someone else’s plan, because most likely that person will have different goals, attitudes and ideas than you.
Determine the risk-reward ratio.
Note that in every transaction, the risk you take must be worth it. Ideally, you want your profit to outweigh any potential loss. So as part of your Forex trading and risk management plan, you need to determine the profit-loss ratio or risk-reward ratio for the given amount you are trading.
Manage your emotions
The fluctuations of the currency market can affect your emotions and one of the most important key components that affect your success in any transaction is you. Emotions such as fear, greed, temptation, doubt and anxiety can cause you to make a move in transactions that does not give you the desired result. However, if your emotions prevent you from making the right decisions, it can hurt your trading results. So, to manage risk in Forex, it is necessary to control and manage your emotions well.
Follow the news and events
Predicting changes in the price of currency pairs is not an easy task, because several factors can cause the currency market to fluctuate. Therefore, to ensure your work, it is necessary to keep track of the news and announcements of the central bank, political news, etc., and be aware of market events.
Start with a demo account
The purpose of the demo version is to recreate the “real” trading experience as closely as possible, and to allow you to understand how the Forex market works.
The main difference between a demo version and a real account is that with a demo version, you will not lose any real money, which means that you can test your performance in a risk-free environment.
In general, it can be said that if you have a risk management strategy in Forex, you will have more control over your profits and losses. In this article, we have told you very important points about how to manage risk in Forex, there are also various tools that will help you be more successful in your Forex trading.