Saturday, January 4, 2014
The risks of trading in forex come in a number of different shapes and sizes, and only the individual trader can assess and control these risks. By understanding the types of risks posed to your capital and your account, you can start to build a better idea of how to manage these risks for more profitable trading.
Forex Market Risk
When dealing in any financial instrument, there is always the issue of market risk to contend with. Market risk is the risk that arises from trading in a financial market – i.e. the risk that the market could collapse (or rise against you) at any moment, eating in to your margin and trading capital. These are risks that can’t be completely removed (except for perfectly hedged positions), and as a result traders need to research and analyse markets before getting involved to give themselves a fighting chance.
Gauging market risk appropriately depends on the knowledge and research conducted by the trader, so if you don’t do your homework before trading various positions this will become a more serious burden than need be the case.
Gauging market risk appropriately depends on the knowledge and research conducted by the trader, so if you don’t do your homework before trading various positions this will become a more serious burden than need be the case.
Forex Leverage Risk
Another degree of risk involved in any forex trade is known as leverage risk. Leverage risk stems from the use of leverage to boost the size of any trade, and the greater the degree of leverage or the size of the transaction, the more of a concern this should be. Leverage effectively increases the rate at which profits and losses accrue, and as a result traders need to take measures to be sure they are trading in sensible position sizes for the specific market and their available capital. Slow and steady wins the race in forex – with such massive degrees of leverage available, there’s no need to get greedy in the transaction sizes you take on board, which might constitute a dangerous abuse of the leverage available to you.
Forex Risk Management
Forex risks are numerous and varied, but those that approach the markets with a firm idea of what these risks are and how they can be countered will ultimately fare better and tend to make more profitable trading calls. Risk should always be the first thing you think about in a transaction, even before considering profit potential, and it’s wise to gauge risk to reward on an objective footing before entering a position you might later live to regret.
