Risk is an essential element in any business. The chance of risk is the highest when dealing in a foreign exchange market and hence to protect oneself from devastating losses it is essential to manage this risk. Forex risk management techniques are the techniques that can help you minimize the risk factor while dealing in the foreign exchange market. Here are certain tips that can help proactive forex dealers to manage the risk witnessed in foreign exchange markets.
Setting orders and reward: risk ratio
The first thing to do when an entry signal is spotted is to fix a stop loss level and profit level. Once the reasonable price levels for the orders are marked, one can measure the reward to risk ratio. If a particular trade does not match the requirements of the person, one should let it go. Trying to achieve a higher reward: risk ratio either by increasing the profit level or minimizing the stop point of loss is not the right thing to do.
Say no to break even points
While a person will always try to avoid a situation of loss, it should be kept in mind that it is one face of the coin when the other side is profit. A person might thing of setting the stop level at the entry level I.e. creating a target of not witnessing loss at all. One should understand that this is not the right decision to be made and can create a number of problems. Although such a step might protect the person’s position it is considered to be an unprofitable move.
Combine win rate and reward to risk ratio
Win rate is often considered useless by traders dealing in foreign exchange markets. One should keep in mind that although win rate alone is of no use to the traders, win rate combined with reward to risk ratio can help one minimize the risk in foreign exchange.
Avoid using daily performance targets
Many traders to satiate their greed and grow at a great pace set daily performance targets for themselves. However, such an approach is unrealistic and creates a lot of pressure and a need to trade for the individual or company. Inability to meet the targets might also lead to disappointment. instead of daily targets weekly. Monthly or semiannual targets might be created.
Proper Position sizing
In most cases traders do not realize the value of position sizing, they randomly set it at 1%, 2% or 3% and then forget about it. Dynamic position sizing is needed to make profit and handle risk in foreign exchange markets. Having dynamic position sizing helps to improve the growth of the account and reduce volatility.
Take spread seriously
In most cases traders and companies dealing in liquid instruments see spread as nothing but a few pips and do not pay due attention to it. However, one must realize that these small costs add up on regular trading and can lead to significant loss of profits for the traders.
Correlations between trading instruments must be kept in mind while dealing in the foreign exchange. Trading instruments which are positively correlated can lead to increased risk and hence should be taken care of in the light of foreign exchange risk management.
Avoid over usage of Leverage
Leverages are considered a good way to multiply profits, however these leverages come with a considerable amount of risk. Over usage of leverages might seem to be a lucrative option to traders but is not successful in the long run. Thus, a trader should not open too big orders and use leverages moderately.
Get out at the right time
Traders often make the mistake of either getting out too early from the market and failing to realize complete profit or they might get out too late and witness losses. One must learn to adapt to the environment of the markets and get out at the right time as soon as possible.
Stop loss levels and profit points determined can help to calculate expected returns. This figure helps to manage trade and choose the most appropriate option for trade.
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