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Approaches of Risk Management in Forex Trading

Risk management is crucial to success in forex trading.

What is Risk Management ?

Risk Management in forex trading means identifying exposure to various market or non-market factors that might impose negative impact on forex trading results, and applying trading rules to minimize trading losses.

There is one rule that is generally followed in risk management: Never risk more than 3-5 percent of your capital on any trade. In so doing, a margin call could be prevented and investment diversified.

Another approach of risk management is using proper risk/reward ratio as a criterion for determining whether to initiate a forex position. Risk/reward ratio in forex trading refers to the rate between the probability of loss and profit of a trade. It is a good practice to calculate the risk/reward ratio before opening a trade. Many forex traders set risk/reward ratio at 1:2 or 1:3 for initiation of a position.

Avoid over-trading. This applies to controlling the amount of money invested in each forex trade, as well as staying away from trading when there are no trading opportunities.

Use appropriate protective stops. Some people prefer mind stops to hard stops. The point is to determine the exit point before opening a position, whichever type of stops is used. Trailing stops could also be utilized when forex positions are in profit.

Having a trade plan beforehand and following the trade plan can also help with risk management. In the trading plan, define when to trade, what to trade, how much to trade, and how to enter, exit and manage trades. Following a well-defined trade plan helps overcoming psychological enemies of forex trading – greed, fear, boredom, anxiety, and anger – and protecting profits.


Related topics:

How to Use Commitments of Traders Report (COT) in Forex Trading

How to Choose a Best Forex Broker

How to Perform Fundamental Asnalysis in Forex Trading

How to Perform Technical Analysis in Forex Trading

Use Parabolic SAR in Forex Trading

Measuring Sentiment in Forex Trading



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