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Forex Risk Management

Learn Forex Risk Management & Deal with Forex Loss

The possibility of losses is the downside the forex market has. This downside has an upside to it. It’s the fact that you can’t lose much. You can make profits in the forex market even when you lose half the time but how much you lose can be controlled if you carefully apply the principles of forex money management.

It is important that you understand that like every other market, sooner or later, everyone loses so you’ll lose sometimes. You should be prepared to make loses before you begin any form of trading since there are no enchanted systems or magic software’s that will be correct always, irrespective of what the books say, and nobody’s perfect enough to call every trade perfectly.

The good thing is it’s only the price of the purchased lots you get to lose. The average purchase price of one lot in a mini account, which varies from one broker to another, is U.S. $100. That’s the most you can lose per trade. Should the trade go south with the market moving against you, when the loss gets to $100 your broker or market maker will close it, even when you did not set any stop-loss at all. Their goal is to ensure their investments are protected, but that also protects the equity in your account and you. This is the reason you don’t get a margin call, in the forex market, from your broker, to cover a questionable position.

Allowing losing trades till you are closed out by your broker isn’t what you want. You would want to make sure the money you lose is limited. You can get this done properly by appropriately setting a stop and limit order and thereby control the extent to which you follow a losing order. When the market gets to the bail-out point you set, your order is automatically closed.

Whenever the market is range-bound, pay attention to the support and resistance points on the charts. Do not set your stop far away that you lose more than you’re prepared to risk, but set it far away from the price of purchase that the normal market jitters don’t trigger it.

Bear in mind that should the market break out of a range, in a bull market when the prices are rising, the previous high price most often become the new low price whereas in a bear market when the prices take a drop, the previous low point may likely become the new high price. It’s a wise move to set your stop at these points.

You both control the amount you either lose or earn when you set your limit at twice as far from the entry point as the stop. When trade goes your way, you earn more than twice whatever amount you would have lost when it doesn’t. Using proper money management techniques, if you were only right half the time, you’ll still make a profit in trading forex.