Learning how to cope with risks in any business is mandatory for various reasons. Without proper risk management, the long-term success of any organization in this world wouldn’t be possible. In Forex Trading, there are many risks that one trader must be aware of to avoid unnecessary losses and emotional breakdowns.
Once a trader finds a quality Forex broker for his trading, it is essential to learn the potential risks and manage them. Nevertheless, to learn how to deal with risks, one has to understand what Risk is profound.
Let’s see the full definition of it, in the first place, shall we?
All the risks in Forex Trading
Risk in any business refers to the exposure of an organization or a firm with factors that will lead it to fail or lower its profits. Here are several examples of risks related to Forex:
- Market Risk – it is the most common Risk in trading. The market performs it always different than how you expect it to be
- Liquidity Risk – the type of Risk that you won’t be allowed to open and close trades when you desire
- Counterparty Risk – the Risk, your broker, will fail or default to return your funds. It’s also considered “the real risk”, for which it’s best to use national funding.
- Model Risk – Risk that your analysis or a trading model fails to accurately represent reality and lead you into a series of decisions and trades that might lead you to huge losses.
- The Risk of ruin – it’s the massive Risk of blowing up your account.
- Technological Risk – as the name suggests, it is a risk that anything related to IT, such as the internet and computer, will fail.
How can you manage the most common Risk in the best way?
Having a good Forex trading strategy should help you avoid all of these unnecessary risks. If we consider the fact that the Market Risk is the most common one, we will focus on managing this particular Risk in the best possible way.
Here are the five tips on how to manage Market Risk:
- Always keep in mind to trade with money you are comfortable losing.
- To fund your account, you should use notional capital.
- Understand your trading model statistics and probabilities on consecutive loss counts
- Use max drawdown cut-off and a position sizing ladder.
- Develop a solid, helpful Forex trading strategy that will provide you with the solution to all of these potential problems on the way
How to establish clear risk limits and build a risk profile?
Besides learning how to cope with all these potential risks, you need to be aware of one thing in particular. To establish clear risk limits and build a proper risk profile, you have to know what are the following steps:
- Using a national capital
- Assuming personal financial management
- Get to know your probabilities.
- Make the size of your positions accurately.
- Get yourself a robust trading management vehicle.
Remember, be persistent and consistent enough to learn all there is to know about these risks and avoid them daily. Practice makes perfect, but consistency makes you the real professional!