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Foreign Exchange Trading - How to Manage Risk

 


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Of course there is risk in any deal involving foreign exchange trading. Currencies are wildly volatile! They are affected by all sorts of factors, some of which are completely unpredictable. An extreme example is 9/11 - no one could have predicted that! But less cataclysmic events are happening all the time and affect currencies - weather events, election results, company failures or takeovers, even a bad set of figures.

As well as the volatile nature of currencies, there is also the leverage involved in foreign exchange trading. Most of the time this is a very good thing. It means that with a leverage of 1:200, a deposit of $100 can enable you to trade with $20,000! But of course this can sometimes work against you rather than for you. If you make a losing trade, you could lose by exactly the same ratio, if you haven't taken the proper precautions.

Because of this, there is one Golden Rule in Forex as with all types of trading: NEVER trade with money you can't afford to lose.

But as you become more experienced in foreign exchange trading, you learn ways of reducing risk and avoiding large or frequent losses. Of course you will have losing trades. But you must learn ways of risk management if you are going to be a successful Forex trader.

  • Make sure you understand the principles of technical and fundamental analysis. When the signals from both of these point in the same direction, you have the best chance of a successful trade.
  • Don't risk more than 2% of your margin account on any single trade. For example, if you have $400 in your margin account, 2% is $8, equal to an 8-pip move.
  • ALWAYS use stop-loss and take-profit orders. This is an absolutely fundamental rule. (A stop-loss order is placed below the current value of a currency pair if you are in a long trade - i. e. buying in expectation of a rise in value. You set the stop order in case it falls instead of rising. Conversely, the take-profit order is placed above the current market value of the pair. If the currency reaches that value, your order becomes an order to sell and this protects your profit. )
  • Be disciplined! And keep cool - don't be ruled by emotion, and DON'T get greedy. Never be tempted to stay with a long position that goes below your stop-loss order. You may have a “gut feeling" that it will come back up again, but gut feelings are something you just can't afford - at least, not until you are a VERY experienced trader.

Foreign exchange trading often looks difficult and technical. But the fact is, lots of people who barely got past third grade math manage to become very successful. How? By learning simple rules like these and sticking to them. Forex can be so incredibly exciting, rewarding and profitable, it would be a pity to have a negative experience. Follow these rules and you won't need to.

To learn more about how to manage risk in foreign exchange trading, come and visit http://www.bizwrite.co.uk/Forex/forexindex.html

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