Risk management in the forex marketadmin1 - October 7, 2021
“Risk management in the forex market” as a term is the expectation of negative risks in the future based on current factors or data, whether strong or not. As for financial risks, they express the possibility of losing money as a result of a financial transaction with a serious impact that leads to more losses. The type of risk depends on the financial policy of the institution if it is an entity or the trader if it is an individual and to what extent things refer to the potential risks and the strength of these risks.
The importance of knowing financial risks?
The importance of financial risks is that any person or institution’s desire to trade or invest must be aware of the different types of risks that exist in the financial markets in general, and in particular in the forex market, which are, for example:
Liquidity risk: This type occurs when transactions are unable to be executed, due to lack of liquidity in the market due to insufficient buyers of what is offered for sale, or due to insufficiency of sellers in exchange for increased demand for purchase.
Market risk and volatility: It is the risks associated with price movements in the market and various financial instruments, such as stock price movements, interest, currency and basic commodities such as oil or price volatility.
What you need to know about risk management in the forex market
Potential financial risks should be a factor that must be considered when deciding whether to invest a financial asset. Is the available cash flow sufficient or not and is it consistent with the strategy used? These are very important factors in general and in particular in forex. The latter is just one of the many financial risk ratios that can help investors and traders avoid potential losses or further losses without coping.
The main principles of risk management
You cannot risk your money in an area in which you do not understand anything. This is the first important rule, and you cannot ignore this rule, as it is the basis of success. Unfortunately, it is often ignored by beginners with little experience, and only the high profits that characterize forex trading are drawn to them without considering the risks that can happen.
Investing with the amount that you can completely lose, meaning that you must be careful and do not risk all your money without diversifying the risk between high, medium and low risk, and above all, you have a percentage of loss that you have to accept because there is no risk-free market and there is no final certainty or permanent profit and your conviction in this rule You will save yourself a lot of psychological pressure that confuses your decisions and limits your success in managing your feelings.
You must have a study of trading, which is a science that studies the behavior of traders during crises and works to neutralize and spare psychological feelings during trading times so that they do not affect decisions negatively as a result of market volatility. Manage your feelings before you manage the risks.
The difference between money management and risk management
Money management in forex involves the process of managing accounts in a rational and unemotional way with the aim of reaching the maximum profit. As for risk management, it is the preservation of financial gains while anticipating the worst cases in order to avoid expected losses and find alternatives and scenarios to deal with the crisis to get the best possible result.
1. The total risk on the account, meaning that the risk criteria are acceptable as a percentage of the risk of the capital ratio.
2. Determine the risk for each trade. If your risk ratio to the total capital is 10%, it is divided by each trade.
3. The total risk on the average monthly trades, meaning if your monthly trades were 50 deals and your total limitation of risk was 10% and the working capital was $1,000, then the total risk ratio is $ 100 divided by the total monthly trades of the trader, so the risk ratio for each trade is $2, which is acceptable Very well, this is just an example
4. The maximum loss that you can incur during one day, and in this case you should completely stop trading during this day and usually three times the risk per trade.
5. Using the volume of contracts for purchase based on the risk ratios and market factors. The higher the market factors and the percentage of profit opportunities, the lower the risk ratio, and therefore the contract size is increased based on this equation.
6. Evaluate the performance of stores based on a set of statistics and factors. Such as the average monthly profit based on the result of dividing the winning trades by the losing trades – the level of liquidity in the account in relation to the capital – the number of profitable trades compared to the losing trades – the maximum drawdown – determining the best deals to determine the level of success or failure of the strategies used in trading with the aim of development.
All of these things should be under the eyes of a trader in the market or before trading, and do not forget that there are statistics that say that more than 90% of forex traders lose, but the loss always has reasons as well as success and profit have reasons, so you must take the reasons for success and avoid the causes of failure.
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