Forex trading is the most actively traded market in the world with an average daily trading volume of $6.6 trillion. There is no doubt that forex has become a source of income for many traders who enjoy investing in it, even on a part-time basis. However, forex trading can be difficult since its market is unpredictable. Traders must exercise extreme caution when indulging in the market, as little volatility might turn into a risk for them.
What is a Forex Risk?
Forex risk is a financial risk that is caused by market fluctuations which results in loss for traders. As trading in forex involves a degree of speculation of international factors, the risk is unavoidable. But a trader can work out to manage the risk that is involved in forex trading.
Types of Risks involved in forex trading :
- Currency Risk - Currency risk is the possibility of losing money due to fluctuations in currency prices.
- Interest rate risk- It is the type of risk that is influenced by the sudden increase and decrease of the interest rates. Changes in interest rates also affects forex prices as it changes demand and supply factors for currencies.
- Liquidity risk- It is caused because of the shortfall of buyers and sellers in the market who are prepared to trade an asset at the given price.
- Leverage risk- It is the risk associated with buying and selling on margin.
Risk Management in Forex-
Risk Management is the key to success in forex trading. To maximise profits, it is necessary to keep losses under control while trading. Effective strategy requires proper planning, which can be accomplished with the help of appropriate risk management tools mentioned below.
- Clear mindset and proper research-
While trading, a trader should always do proper research about the market and trading platforms. A trader should know about the trading patterns, strategies involved and the factors influencing the markets. Reading books related to trading or taking up courses will also help a trader navigating his way in the forex market.
2. Always start with a demo account-
The forex market is very complex therefore, a newbie should always start trading on a demo account. With this, one can learn to trade without risking the actual amount and gain enough experience as well as confidence to trade with real money.
3. Build a good trading plan-
A good trading plan can be of great help while trading in forex. Traders should always lookout for a good strategy to minimise the risk of blowing up their account. One can always go to various copy trading platforms to copy professional traders and learn from them to better understand the market.
4. Consistency is the key to shine in forex-
Consistency is the most integral part of trading and helps a person to become disciplined in order to earn regular profits.
It also begins with identifying a strategy that best suits the traders needs and resources along with building self control in trading.
5. Avoid Over-Risking
New traders often become greedy and invest more than they can afford, as a result they end up facing huge losses. One should always start with a small amount that allows traders to evaluate their trading plan and emotions, as well as acquire more practice in executing their strategies without over-risking their trading account.
6. Using Stop Loss and Take Profit-
When trading, there are times when a position can go against the analysis which can result in a loss. Therefore, one should always use a stop loss that closes out the positions when a specific price level is reached, keeping the account protected from an unforeseen loss due to volatility.
Similarly, Take-profit is used to book profits as the position reaches a certain price level.Setting up Take profits levels is just as important as setting stop-loss levels. Therefore, both these tools offer significant advantages in managing the risk while trading.
7. Learning the concept of Leverage-
The use of leverage is one of the most critical aspects of risk management because leverage can maximise gains but simultaneously increase losses as well. Forex traders are often tempted to use high leverage to make significant profits, but a simple mistake can result in huge losses. That is why it is important to understand how leverage works and how it affects overall trading and success.
Hedging is a powerful risk management tool that secures a trader's position from market risk. It is not used to make money, but rather to avoid or limit potential losses.
9. Staying updated with global events
When trading forex, traders must stay updated with the latest news, economic indicators, social updates, and announcements to manage risk because they all have an impact on the worldwide markets, including forex
10. Managing emotions-
While trading, one may experience a variety of emotions such as greed, anxiety, fear, and so on, but to be successful, one must keep these emotions from influencing their decision-making process. Emotions have shown to be a roadblock in the lives of every trader which negatively affects their trading decisions..
To keep emotions under check, one must formulate a trading strategy based on the needs, market knowledge and should avoid over-risking. One should identify and set up risk levels and benchmarks on when to enter or exit the market and with what risk. Constant refining of the strategy should be undertaken to ensure one’s on the right track.
Managing risk is one of the most important aspects to a trader’s success. Understanding the risk and preparing to trade accordingly with a thorough understanding is extremely important. Time, patience, consistency, hard work, and dedication are all required for an effective risk management mechanism that can enhance a trader's long-term survival in the forex market.