Risk Management in the Forex

As with the claims of many financial pundits, the foreign exchange market, otherwise known as the forex, has a lot of major differences with other financial markets. The forex market’s lightning-fast pace, its humongous size and its volatility make it very much distinctive from other financial markets in existence.

This same attributes combined with the fact that with no sole entity, may it be an individual, a corporation or even an event, can dominantly influence the foreign exchange market has made the forex notorious for being very uncontrollable and surprising.

These make the case for traders to learn effective risk management strategies which can help traders minimize losses and maximize gains in the face of uncertainty in the currency exchange market.

Here are the basics of risk management which can give traders some background about risk management and help them start off the learning process concerning the principle.

Capping Losses

As mentioned earlier, risk management aims to minimize the losses and maximize the gains of a trader. As such, avoiding losses must be foremost to the trading tactic of any trader which can be done efficiently through setting a stop/loss orders before every trading session.

Stop/loss orders are just that; they stop the trading whenever losses are showing to be more frequent than they normally are, thereby minimizing losses by capping them before they deal further financial damage.

Setting Profit Targets

If stop/loss orders stop the trading session in the event that losses are on a rampage, take profit orders are designed to stop the trading session when profit targets are attained. As with the risk management objective of minimizing losses and maximizing gains, take profit orders accomplish the ‘maximizing gains’ part as much as stop/loss orders accomplish the part of ‘minimizing losses’.

Placing the Stop/Loss and Take Profit Orders Properly

Placing stop/loss and take profit orders in the correct order is as important as having them in the first place as setting them incorrectly will render them ineffective resulting in these forex risk management tactics all for naught.

Most forex experts advise traders to place stop/loss orders closer to the opening price than the take profit orders although this order can also be suited to the trader’s aversion to risk in the foreign exchange.

As with most financial endeavors, trading in the forex is replete with risks which could easily end the career of any trader who is ill-prepared to face them. As such, every trader should learn to cope with these risks by being familiar with risk management tactics such as take profit and stop/loss orders which greatly help in minimizing losses and maximizing gains in the foreign exchange market.