Predetermining Your Risk In Foreign Exchange

foreign exchange

Prior to entering foreign exchange a trade, you have to know your risk levels.  This gives you the chance to control your potential losses and prevents you from becoming emotional whilst you are trading.  The foreign exchange market is an exciting, adrenaline-filled market, but it is a difficult career area to enter.

You may think that with so many traders in the market, you are bound to be successful.  However, there are more unsuccessful than successful traders out there.  This is not always due to the methods they use, but their main problem is that they become emotional whilst trading.  They allow their losses to run for too long or they opt to close their positions too early.

To avoid doing this, you have to predetermine your risk level.  This has to be done before you enter your trades as you will be entering your position with a clear mind and your decisions will be based on your analysis.  Once you place a trade, you should stick with it.  You should determine the worst scenario for your position and place a stop based on your analysis.  Once you have entered a trade, you should make a concerted effort not to base your concerns on emotions.

Trade Rewards

The profit you make is the unknown in this market.  If your currency moves, it may be big or small.  This is the time when your money management skills will come to the fore and the fact that you should not let a winning trade become a losing trade.  If this is the case, you can start trading in multiple lots.  If you are using a mini account, you will be able to achieve this quite easily.  You will have the opportunity to lock in your profits on your first position and move your stop to a point of breakeven on your second position.  This will make sure that you trading with house money and ride all the way to profits on your second position.

The Risk of Signals

All the trades you enter, irrespective of your confidence about the outcome, are a mere guess of the price movements.  There is no certainty in the foreign exchange market.  The numbers of factors that can affect currency movements are too vast.  Sometimes fundamental factors cause shifts in the market and other times certain factors that you cannot account for play a determining role in the shift, such as exchange rate fixing, option barriers, and central bank purchasing.  You should prepare for any uncertain factors by placing your stop early.  As you receive forex signals, you should act on them, if necessary.

The Foreign Exchange Trend is Your Friend

This financial market is known as a trending one.  The trends could last for days, weeks or sometimes it lasts for months.  It is for this reason that most software programmes used in this market focus on trends.  They assume that trend movements that you catch will offset the whipsaw losses that you may have experience in range-trades.  Range trading is profitable, but most traders are aware that most of the profitable trades are done with the trend.  If you are caught up in a range-bound trade, you should consider banking the profits you have made on your first trade, place a stop at your breakeven point on your second trade, and you will still show profits.  If the market is in a trend, you may want to hang onto your second trade and allow it to go into profit.



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