Understanding Forex Risk Management (Trading Depends On It)
Forex Key Takeaways
The forex market is among the most active and liquid in the world, with trillions of dollars changing hands between different currencies.
Still, there are many risks that a trader must be aware of and how to minimize or mitigate those risks.
Because forex trading operates with a relatively high degree of leverage, the potential risks are magnified compared to other markets.
This Is Now
Speculating as a trader is not gambling. The difference between gambling and speculating is risk management. In other words, with speculating, you have some kind of control over your risk, whereas with gambling you don't. Even a card game such as Poker can be played with either the mindset of a gambler or with the mindset of a speculator, usually with totally different outcomes.
Know The Odds
So, the first rule in risk management is to calculate the odds of your trade being successful. To do that, you need to grasp both fundamental and technical analysis. You will need to understand the dynamics of the market in which you are trading, and also know where the likely psychological price trigger points are, which a price chart can help you decide. Once a decision is made to take the trade then the next most important factor is in how you control or manage the risk. Remember, if you can measure the risk, you can, for the most part, manage it.
Example On 4 hour attached chart:
$10,000 account, risking 2% per trade or $200 & your trades are 1:1 (risk/reward) & 70% win rate. So, the first rule in risk management is to calculate the odds of your trade being successful. To do that, you need to grasp both fundamental and technical analysis. You will need to understand the dynamics of the market in which you are trading, and also know where the likely psychological price trigger points are, which a price chart can help you decide. Once a decision is made to take the trade then the next most important factor is in how you control or manage the risk. Remember, if you can measure the risk, you can, for the most part, manage it. HOW much money would your account have at 100 trades? . If you can not figure this out- then you are NOT ready to trade Forex for real- doing simple math goes hand in hand with success in Forex for the long run.
The forex market is among the most active and liquid in the world, with trillions of dollars changing hands between different currencies.
Still, there are many risks that a trader must be aware of and how to minimize or mitigate those risks.
Because forex trading operates with a relatively high degree of leverage, the potential risks are magnified compared to other markets.
This Is Now
Speculating as a trader is not gambling. The difference between gambling and speculating is risk management. In other words, with speculating, you have some kind of control over your risk, whereas with gambling you don't. Even a card game such as Poker can be played with either the mindset of a gambler or with the mindset of a speculator, usually with totally different outcomes.
Know The Odds
So, the first rule in risk management is to calculate the odds of your trade being successful. To do that, you need to grasp both fundamental and technical analysis. You will need to understand the dynamics of the market in which you are trading, and also know where the likely psychological price trigger points are, which a price chart can help you decide. Once a decision is made to take the trade then the next most important factor is in how you control or manage the risk. Remember, if you can measure the risk, you can, for the most part, manage it.
Example On 4 hour attached chart:
$10,000 account, risking 2% per trade or $200 & your trades are 1:1 (risk/reward) & 70% win rate. So, the first rule in risk management is to calculate the odds of your trade being successful. To do that, you need to grasp both fundamental and technical analysis. You will need to understand the dynamics of the market in which you are trading, and also know where the likely psychological price trigger points are, which a price chart can help you decide. Once a decision is made to take the trade then the next most important factor is in how you control or manage the risk. Remember, if you can measure the risk, you can, for the most part, manage it. HOW much money would your account have at 100 trades? . If you can not figure this out- then you are NOT ready to trade Forex for real- doing simple math goes hand in hand with success in Forex for the long run.