Forex and the CFD (Contracts for Difference) is a trading, which is leveraging and is able to multiply the profit and the loss. More large the profit, greater is the risk. Before starting of any trade forex and CFD you will have to understand the acceptance of the risk and the prerequisite which is needed for leveraging trading. There are many Forex trading risks and there are many ways for reducing it. In this article, you will find the basics of how to minimize the losses using the strategies for the Forex risk management.
You will need to remember that the main aim is to share the knowledge and it is not advisable for taking any actions. There are some recommendations, which is needed before starting the trading into Forex and the CFDs. Read the guide properly for learning more on Forex trading and the risk management. Try to open the free and easy to use demo account so that you can learn by doing yourself and without any risk. Read all the FAQs properly before starting the trading with a real account.
What Risk Management actually is?
General Trading Risks
All the profit opportunities are always connected to comparable risks. Forex risk management can be seen as a briefcase, which is containing various instruments that can be used for helping and keeping track on the trading losses low and the potential gain high.
Most Forex trading risk management is based on the four principles, which include as below:
- Reorganization of the Forex risks
- Analyzing and Evaluating those risks
- Finding the solutions for reducing the risks
- Consistently managing and applying the solutions
Main and primary focus of the market is to assess the new and the seasoned traders. The right market position is very important for this. The experienced traders are equally giving importance to the risk management.
Leveraging the effect
The main reason for choosing the Forex and CFD is having access to the leveraging. Leveraging is offering the reduced margin requirements when it is compared with full investment.You have to put less and you will get much more.
Admiral Markets of UK are offering the Forex trading which is leveraging in the range between 25 and 500 to one. For example, if you are leveraging 100 to one then you will able to move 10,000 USD easily and that too with having a margin of 100 USD.
More leverage will give you faster gain in profit and loss. When you are over leveraging then there is a possibility that you can lose. It is meaning that you are choosing a high risk, which you are not able to manage anymore. Trading with the smaller investments is a very attractive option and it will help in avoiding the over-leveraging. It will also reduce the potential profit. You must be careful in selecting the leverage which is based on your account volume.
Learn to trade with the Admiral Markets demo account without taking any risks
Assessment of Inaccurate market
Forex and CFD trading is subjective to the market movements and every order is starting with the slight negative. The reason for this is the spread is being deducted in the opening of the order. When you keep these points in mind, it is a little wondering what the market assessment would not always be right and there is the possibility of losing the profit. At the final level, you can set the stop loss mechanism so that the loss can be controlled when you are prepared for accepting the loss. Also, keep in mind that when you set up the stop loss very narrowly then it will also lead you in the closing of your order on the minimal market movement.
You have to always remember that not every trade would be profitable.
Rapid Market Movements
The market is always getting influenced by the news, trends, opinions and the political decisions in every millisecond. Example of it is as below:
- When an influential central bank certainly announcing about the major interest rate decision then there would be a huge gap in the trade chart within the seconds.
- When a professional market player employs the large funds then intentionally he is causing the significant shift in the particular market.
When you are actively paying attention in the market then also it is not possible to know every change before it could happen. Our main point is that you should set up the stop mechanism for making stop loss, which will also help in closing the trading order for you. But remember that the stop loss would not be helpful to you in avoiding the complete loss. It will indicate you when the
Action needs to be taken for reducing it.
These are the significant leaps in the price which are shown on the trade chart. These gaps are occurring mostly when the markets are closed but the open market also is reacting to the unexpected economic news. The trading orders are closing very far because of the desired threshold. This is important because the automated mechanisms are having the stop loss and are only able to close the orders when the next available quote after the jump. The chart of EUR/USD is shown below:
- You can see the unusual large gaps after the weekend in July 2015
- You can see that there are no market gap, which is making it impossible for the stop loss to trigger before the next attainable market price
In Forex trading terms, the illustrated gap in the chart is representing the negative slippage. This gap of this size would also work in the opposite direction, which could cause the positive slippage in which you will get the more positive slippage and you will also get more profit then the profit, which you desire of, produced.
Tools for Risk Management
Stop Loss for knowing your limit
Quotes can be moved very rapidly when the market is nervous and volatile. In this situation, the smart place stop loss would be running much faster than the human trader would.
Categories: Stock Market