mohamed_nour433
New Member
Understanding Trading Risk Management
The Forex market is one of the biggest financial markets on the planet, with transactions totalling more than 5.1 trillion USD every day! With all this money involved, banks, financial establishments and individual traders have the potential to make both huge profits and equally huge losses. While banks lending money to borrowers must practice credit risk management, to ensure they make a return on their investment, traders must do the same with their investments.
Forex trading risk is simply the potential risk of loss that may occur when trading. It's important to point out that the rules for risk management in Forex that I provide in this article are not exclusive to Forex trading. Whether you are interested in risk management with energy trading, futures, commodity or stock trading, the basics of risk management are very similar when trading with each instrument.
These risks might include:
Market Risk: This is the risk that the market will perform differently to how you expect and is the most common risk in trading. For example, if you believe the US dollar is going to increase against the Euro and you, therefore, decide to buy the EURUSD currency pair, only for it to fall, you will lose money.
Leverage Risk: Many traders use leverage to open trades that are much larger than the size of the deposit in their trading account. In some cases, this can lead to losing more money than was initially deposited in the account.
Interest Rate Risk: An economy's interest rate can have an impact on the value of that economy's currency, which means traders can be at risk of unexpected interest rate changes.
Liquidity Risk: Some currencies and trading instruments are more liquid than others. If a currency pair has high liquidity, this means that there is more supply and demand for them and, therefore, trades can be executed very quickly. For currencies where there is less demand, there might be a delay between you opening or closing a trade in your trading platform and that trade actually being executed. This could mean that the trade is not executed at the expected price, and you make a smaller profit, or even a loss, as a result.
Risk of Ruin: This is the risk of you running out of capital to execute trades. Just imagine that you have a long-term strategy for how you think a security's value will change, but it moves in the opposite direction. You need enough capital on your account to withstand that move until the security moves in the direction you want. If you don't have enough capital, your trade could be closed out automatically and you lose everything you've invested in that trade, even if the security later moves in the direction you expected.
You should now be fully aware that several risks come with Forex trading and trading with other instruments! For this reason, as you will no doubt appreciate, the topic of managing your risk when trading Forex is very important. We have put together a list of our top ten tips to help you do this effectively so you don't need to go searching for trading risk management books.
The Forex market is one of the biggest financial markets on the planet, with transactions totalling more than 5.1 trillion USD every day! With all this money involved, banks, financial establishments and individual traders have the potential to make both huge profits and equally huge losses. While banks lending money to borrowers must practice credit risk management, to ensure they make a return on their investment, traders must do the same with their investments.
Forex trading risk is simply the potential risk of loss that may occur when trading. It's important to point out that the rules for risk management in Forex that I provide in this article are not exclusive to Forex trading. Whether you are interested in risk management with energy trading, futures, commodity or stock trading, the basics of risk management are very similar when trading with each instrument.
These risks might include:
Market Risk: This is the risk that the market will perform differently to how you expect and is the most common risk in trading. For example, if you believe the US dollar is going to increase against the Euro and you, therefore, decide to buy the EURUSD currency pair, only for it to fall, you will lose money.
Leverage Risk: Many traders use leverage to open trades that are much larger than the size of the deposit in their trading account. In some cases, this can lead to losing more money than was initially deposited in the account.
Interest Rate Risk: An economy's interest rate can have an impact on the value of that economy's currency, which means traders can be at risk of unexpected interest rate changes.
Liquidity Risk: Some currencies and trading instruments are more liquid than others. If a currency pair has high liquidity, this means that there is more supply and demand for them and, therefore, trades can be executed very quickly. For currencies where there is less demand, there might be a delay between you opening or closing a trade in your trading platform and that trade actually being executed. This could mean that the trade is not executed at the expected price, and you make a smaller profit, or even a loss, as a result.
Risk of Ruin: This is the risk of you running out of capital to execute trades. Just imagine that you have a long-term strategy for how you think a security's value will change, but it moves in the opposite direction. You need enough capital on your account to withstand that move until the security moves in the direction you want. If you don't have enough capital, your trade could be closed out automatically and you lose everything you've invested in that trade, even if the security later moves in the direction you expected.
You should now be fully aware that several risks come with Forex trading and trading with other instruments! For this reason, as you will no doubt appreciate, the topic of managing your risk when trading Forex is very important. We have put together a list of our top ten tips to help you do this effectively so you don't need to go searching for trading risk management books.
