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Risk-management on Forex

Author: Patrick Dresdner
Patrick Dresdner
All publications of the author

Like any other business, trading in Forex market is exposed to risks. Even the most experienced trader, is not able to avoid situations when performance indicators are working against him. We already know that in order to work in Forex market, there are a variety of trading strategies and programs which are designed not only to help the trader in his work, but also to insure him from unnecessary risks. For example, trading advisors, stop-loss signals  and so on. Experienced Forex brokers always take into account all aspects in their work and all trading tools. It allows them to insure the work under any circumstances.

The risk manager, or in other words, the system of proper money management is an important attribute in the field of currency trading and should be a part of every trading strategy. If the trader does not have the skills and is not familiar with the concept of wealth management, he will be bankruprt canditate for sure. If we talk about money management system as a working tool we say that risk management allows the trader to reduce the risks associated with each output on the market effectively (for each transaction). It is an effective money management which allows you not only to be safe from collapse, but also to increase  capital. When choosing the trader, it is a good idea to study the information in the article «Forex broker comparison» and do not forget to take into account the index mark whether the future employee knows a system of risk management and whether he applies it in his practice.

Rules for working with Risk Manager

Working rules on risk management system includes the following principles:

  • invest no more than 50% of the total capital;
  • in one position can be inversted from 7 to 15% of total deposit, but not more;
  • risk rate for the transaction is 5% from the total of the capital;
  • open a position for a group of instruments in the amount of margin deposits less than 20-25% of the capital;
  • comply with the diversification levels;
  • set Stop Loss strictly and do not change its position;
  • determine profit in advance;
  • open from 2-5 positions at the same time on a single trading strategy.

Invest not more than half of the total capital

In this case, it is worth remembering that 50% in Forex Market field is Murphy's figure. That is the maximum allowable portion of capital, which can be at risk. In general, the trading market experts generally advise reducing this figure to 25-30%. A quarter or a third of the capital, even if the transaction is failed, it is not enough to go bankrupt. Deposit balance always has to be in the stock of trader in case of negative circumstances. Only if there is a stock trader, even in a difficult situation can stay afloat and continue to play on the stock exchange like NYSE and to enter the market. Only following this rule Forex trader can rely on best banks offering Forex trading.

In one position can be invested from 7 to 15% of the deposit, but not more

Always remember that the biggest risk may bring a big profit and instant loss, that is draining all the deposit. So, in other words, investing in one position all of your capital or even half (the same Murphy's figure, 50%) the trader has only one opportunity to enter the market and if this feature would be unfavorable, the trader simply lose half of the capital.

Risk rate for the transaction is 5% of the total capital

Speaking usual definitions, the tolerable risk is just one-fifth of the total capital. That is, if the risk percentage is higher, it is unreasonable risk. If you do not know what criteria to use to choose your broker, read the information in the section «How to choose a Forex Broker?».

Open position for one group of instruments in the amount of margin less than 20-25% of the capital

So, in simple words, one group of instruments, involves working in one line, that is, the use of a clear strategy. But experience shows that work on one strategy is not always justified, because the market is changing rapidly within. Therefore, if you use the same trading strategy for all 100 or 50% of the affordable amount, it is possible to obtain a substantial loss of the deposit. It is affordable to use only one trading strategy for a quarter of the deposit. That is 50% of allowable risk you need to use at least two trading strategies are completely different for used tools. «Choosing a Forex Broker» offers you to get acquainted with the provisions that will help you select the ideal Forex broker.

Set Stop Loss strictly and do not change its position

In this case, it is necessary to take into account the psychological aspect of the trader's preparation. It happens, that the trader does not comply with set stop loss. Moves the indicators depending on the situation and exposes himself to undue risk. So that only strict compliance indicators Stop Loss can guarantee protection against risk. This is the most important component of a normal safe operation in the foreign exchange market.

To make it easier to understand the scheme should be considered in an example. For example, a trader has a deposit in the amount of $ 3,000. And he decides to open a position for a couple of euro-dollar. He is ready to make an investment in the amount of a tenth of the entire deposit, but the risk that the trader admits, is only 3% of the deposit amount.

Taking it into consideration stop-loss is set for - 3%, that is, from the sum of $ 3000, this amount will be only $ 90. And now, if the situation does not favor the trader his losses will be only $ 90 when the indicator reaches this mark, bid will be automatically finished. If you need to set the value of the stop-loss it is very important to make the calculation, taking into account all the technical factors.

Determine profit in advance

Despite the fact that in the world we have a general rule, do not divide the bearskin before the bear was shot. But in this case it is important to determine in advance the future profits for some open positions in a given transaction. It is important to take into account the profit to loss ratio. In general, the conventional index in this case is three to one. Sometimes it is guided by the rules of risk management and do not make entry into the market. In other words if a trader invests $100 his potential income should not be less than 300 bucks. It is important income to be like this. If the forecast does not give a guarantee that it is better not to make the entrance to the market, as this operation does not justify itself. Section «Best Forex ECN Brokers» offer you the ideal criteria for forex trader selecting.

Open not one, but several working positions

The whole point here is that the opening of only one long position is the risk, as there is no guarantee that the position will bring income. Therefore, when a trader simultaneously opens several positions on the same trading instrument he always distinguishes two types of products, market positions and trend positions. The first group defines the goal - short-term trades. The second is long-term trading. Short-term trading is strictly limited to close orders, stop loss. These orders stopped trading at the moment when it reaches Stop Loss level, it prevents the huge loss of trader. In case of long-term bids, positions, exhibited more distantly stop loss. They make it possible not only to maintain its position even in the case of small fluctuations, but also give the trader the opportunity to receive maximum profit with minimal risk. Traders can also engage in hedging to reduce the amount of loss they may suffer and diversify their portfolio by including binary options, futures, ETFs and other financial instruments.

Taking into account all abovesaid, the following conclusions can be made - risk management is particularly important when working in Forex market. This single trading tool allows to trade as efficiently as possible and at the same time to minimize the risks.

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