RISK MANAGEMENT

“The biggest risk is not taking any risk...in a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

Wise words from a man who is amongst those entrepreneurs that shaped the world we live in today. Mark Zuckerberg is a risk taker indeed. Because risk is involved in every achievement, individual or not, every success story has a chapter where risk played the leading role. Same thing applies to almost every failure story as well. But what really draws the line between success and failure? Since risk played a role in both stories, it’s the very thing you should focus on. Yet, solely acknowledging its existence will not do any good for your trading journey. Rather, you should learn managing it as a trader. Because even though it’s impossible to eliminate it entirely, it’s very possible to manage it to your advantage.  

Risks of Forex Trading and How to Approach Them

Forex trading has a deep bond with the term “Risk-return Tradeoff”.  Greater the risk, greater the reward. But it’s not that simple!

Due to the vastness and volatility of the market, there are countless factors that may have an impact on the trend direction and price changes. Some changes happen even though all data and analysis advice against them. Therefore, even the most experienced traders can fail when predicting market movements. This brings us to the first step of risk management: accepting it. Small losses are part of winning in the long run. The key is being able to afford these losses and it’s only possible with proper risk management.

How to manage risk in Forex trading

Knowledge is your best friend. Educate yourself about Forex before making an investment. You can read articles, e-books, watch video tutorials and test your skills on a demo account. Or you can get help from an experienced trader. By knowing more you’ll be able to develop better risk management skills. 

As we said before, loosing small amounts is part of CFD trading. Sometimes things may not go so well, and you may experience a “losing streak”. But don’t worry, it happens to everybody. You need to protect your capital and prevent its reduction in case of a losing streak. Setting a Stop Loss (S/L) and a Take profit (T/P) point is very useful in that sense. These two limit orders are among the simplest yet most important forms of risk management. 

In each trade, the correct approach is to risk only a certain percentage of your trading capital. The recommended percentage varies. This way, you will minimize the risk of loosing your capital. Distributing your capital on different trades is the complementary risk management method. In other words, you should avoid putting all your eggs in the same basket. These two methods are most effective if they are applied at the same time. 

Setting your reward-to-risk ratio will increase your profitability. How? Actually, we should’ve added “in the long run” to previous sentence. Because like all other risk management techniques we mentioned in this article, you will reap the fruits of setting a reward-to-risk ratio in the long run. Assume you set 3:1 ratio. This means you expect winning 3 times more than the amount you risk. If you can success, you will be able to compensate more losing trades and protect your capital, hence profit more.

CFD trading is not a risk-free investment avenue. But by applying proper risk management techniques, you’ll be better prepared against market volatility or other unexpected turns and changes. Know when to enter and when to close a trade, create your trading strategy or simply use copy trading. But in either case, stick with the rules you’ve set beforehand. This way you will lower the probability of getting affected by sentimentality and remain calm in critical situations.