When dealing with risk, it is essential to remember a number of things. Forex traders should learn to quantify risks appropriately and have a plan for dealing with risks with several steps. Although a computerized trading system is helpful, it is essential that traders use their own brains and trading style to manage risk.
With that in mind, here are five tips for managing risks in Forex trading:
Know the difference between risk and chance.
Risk means the chance of a loss; chance means the likelihood of a loss. Both terms are necessary to have a clear picture of risk and understand the risk quantification process. For example, forex trading in south africa is less prompt to risks.
Understand the relative importance of risk and volatility.
Risk is significant because the probability of a loss increases as the number of trades increases. But volatility is also essential because it tells you how volatile an asset is. Volatility in itself is not always an indicator of risk, but it is the measure of how high or low the risk of loss is on a specific trade.
For example, a trade with high volatility might involve a large number of dollars with the same chance of profit. In contrast, trade with low volatility might only involve a few dollars with a high probability of profit. The key to using volatility correctly is to understand the difference between risk and volatility.
Accept that loss occurs, but not all trades will be profitable.
Be aware that there are instances in which you cannot successfully trade. However, keep in mind that you have a plan for dealing with the loss. This usually involves closing the trade and selling the underlying asset at a loss.
Accept that returns, on average, will be less than the standard deviation.
Be aware that returns will be less than the standard deviation on an average basis. This is not always true. However, suppose you understand how returns are calculated and can predict returns with certainty. In that case, you can trade away from the known probability of loss to a known probability of profit.
Keep records and track your performance.
Keep records of your losses and use them to identify your strengths and weaknesses. You can learn a lot from your past mistakes. One of the ways in which you can improve your performance is to consider adopting a plan of action for dealing with each risk and the ways in which you can manage risk in a consistent manner.
Increasingly, traders and financial professionals are calling for more transparency, particularly when it comes to understanding risk and applying a sound strategy to trade markets. By avoiding many of the traps, known risks, and intelligent strategies, traders are learning how to manage their trading risks effectively. By understanding your risk tolerance and investing the appropriate amount of capital, traders will be able to leverage sound trading strategies to further their objectives.