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Forex Risk Management Principles

Risk is part and parcel of Forex trading and should be a primary consideration when one is trading Forex or actively pursuing the thought of getting into it. Preserving the value of currency flows, investments and loans but enabling international business to compete abroad is the essence of Forex risk management. It would be impossible to exorcise all the risks out of Forex trading but there are ways to minimize it. Surprisingly, most traders depend on hunches rather than ensuring a higher percentage of success by applying basic Forex risk management strategies, making it more of a gamble than a business.

There are instances when those engaged in Forex trading literally lost the shirts off their backs because of indiscriminate and absolutely irresponsible Forex trading. Surely, you don’t want this to happen to you so it would be wise to pay heed to the first commandment of Forex risk management. Only funds that are considered surplus should be placed at risk. Using funds for other necessities, riding on the hope that it will double, triple or quadruple in returns is a risk you are hardly able to afford and constitutes the absolute in poor risk management.

An informed decision always results from knowing what the risks involved are. It is therefore advised that as a Forex trader, you should know all the risks that the venture carries. This usually includes currency risks and political risks. Strategies to reverse the tides of these risks are demanding for transactions to be settled in hard currency, diversification and hedging. If you have a financial advisor, asking his opinion on matters of Forex risk management and weighing it against your financial capabilities and motives is a fine idea. Minimizing your risk means knowing how much you can afford to lose if it all comes down to it, which means setting limitations on your capital and the amount of money you can allow yourself to risk.

Though you may have a pretty good idea of how the tide will turn in terms of foreign exchange, it is nevertheless a speculative financial endeavor. If “nothing worth gaining comes cheap” can be applied to Forex trading, then it is relative to the fact that in Forex trading, increasing your chances for bigger profit means an equally big amount of risk. However, this may also mean bigger losses if the tide turns against you. Reducing your leverage means lesser profits but it also reduces risks and is the more responsible stand to take when one is speculating. Remember that you are not in any way obliged by anybody to use the maximum leverage available. Greed can be hard to ignore but handle it all the same because to leverage yourself at 100 or 200 times is the easiest way to lose everything in the blink of an eye if a quick fluctuation makes an appearance.

Another sensible rule to follow in Forex risk management is to know when to cut your losses. It’s almost a cliché in life as well as in Forex trading but you have to be able to immediately exit losing trades before they inflict damage that you’ll find hard to recover from. A stop loss order is the most common form of cutting risk in Forex trading. It contains instructions for exiting one’s position at a certain price point determined by the trader. If you are in the buying position, you’d put a stop loss if the price falls below the current market price. If you are selling, you’d want to place a stop loss order above the current market price.

Diversification is a Forex risk management strategy that has to be considered from time to time because it is the nature of currencies to fluctuate in a given period of time. One rule to consider when using diversification is never to confine your self in a single currency pair at any given time. This means neutralizing the risks of a currency value that shows signs of deterioration by carrying a competing currency that is gaining. Conversion of profits into foreign currency reserves, doing business with several currencies as well as coordinating cash flow with hedging tactics are ways to apply diversification in Forex trading.

Trends are generally well respected in Forex trading communities anywhere in the world; and are evidenced by most traders not daring to go against them. But how do you know if you are going against it or following its lead. Succeeding in Forex trading doesn’t mean depending on your hunches. A more scientific approach can be achieved by getting software that can help you analyze information that will tell you where it all leads to. Often, success depends on perfect timing and analytical tools that are not affected by any biases that one has. In a way, software that can help you come up with an informed decision about Forex trading trends provides you with a clearer view as well as eventually give you a better understanding why this is so. However useful though, one needs to expect that there is no way to ensure that you’re always going to win. No one device, strategy, aid or tactic can ensure 100% success in foreign exchange trading but it pays to get all the help you can get.

The internet offers a lot of software that you can use for Forex risk management. The best way to approach a possible purchase is to take advantage of the trial period that most of these software developers offer. Use them to determine how accurate they are in terms of predicting trends using trial forex accounts in real time. This way, you’ll be able to test them without any cost to you but will also allow you to determine which works best for your needs.

The best way to learn may be through personal experience but in Forex trading, it can be too much to handle. The next best thing is always to be open in learning new strategies and tactics to manage Forex risk. Learn from your failures and successes but also learn from the mistakes and triumphs of others.

Forex risk management requires one to be well informed about trade movements, strategies and getting all the help you can to come up with the best decisions. In all these, learning and educating one’s self is always a condition. In this, even a successful Forex trader never gets contented with his victories. There is always something new to learn, some mistakes to ponder on and some strategies to fine tune if one wants to really be successful in Forex trading and risk management.