When traders think about risk management, they might often imagine it to be a very detailed and multifaceted process. This is the wrong perception though since money control and risk management are pretty straightforward. In fact, anyone with the ability to count their assets can be able to come up with a formidable risk control plan in forex.
Controlling where your money goes and how it is used starts with first knowing how much money you have. From there, the exact measures that you put in place are determined by a simple risk assessment test. Risk control in forex can be effectively accomplished in 3 simple steps which are expounded in the following points.
1. Establish your risk tolerance levels
As a general rule when you are trading forex, there are a few key things that you should never do. These are:
- Risking more money than you can afford.
- Using too much leverage.
- Trading without set limits.
All of these three are simply covered in the same topic of risk tolerance. In the forex market, you must know how much you are willing to risk. You must also have a clear perspective of what will happen if you end up losing your money in case a trade goes wrong. Most traders actually get into the market knowing that they should not invest huge sums of cash especially if they are new to the business or if they are not sure of the market status. A lot of them, however, do not simply know the specifics of where their limits should be.
There is a general rule in business that states that investments should not exceed 2% and should ideally be around 1% of total assets. Most traders follow this rule keenly but they fail to investigate other issues that might be specific to their trade. You should always try to see the market according to your situation. By analyzing your market approach, your assets, and your goals, you can definitely come up with a more effective strategy that builds on top of the general rules.
2. Have a clear plan that regulates your trading activity
The only way to beat the unforgiving forex market is to have a plan that has been thoroughly polished. You should look at every angle of the trade and create proper entry and exit strategies. Just like any effective plan, the strategies must be backed by proper tools, timelines, and information. You need to get a full Indicator Package, for instance, so that you do not miss any important signals. In addition, your plan must have clear timeliness that detail when your day starts, when you stop trading or when you change your plans. It is only by doing this that you can be sure of succeeding in forex.
Additionally, you should realize that plans are created so that they can guide you through any process. If you manage to create your trading plans, make sure that you follow through on each one of them. You can never break your plans in forex trading. The market is one of the most volatile and you need to be consistent in order to bring harmony into the trade.
3. Know that there is a limit to your patience
Lastly, you need to know that you can only keep losing for too long until you are completely broke. While it is important to be patient with the forex market, you cannot allow yourself to keep trading until you make insurmountable losses. The secret to succeeding in forex trading is to ensure that you are always two steps ahead of the market.
The forex market is indeed risky and you might need to keep off the market for a week or a month when you just can’t manage to gain anything out of it. You could view this as some sort of vacation which will allow you to rest, re-strategize and come back in the market when you are more prepared.
Failing to put risk control measures around your trade in forex can destroy any chances you might have of succeeding. The forex market is quite unpredictable and risk management is among the core issues that traders must preoccupy themselves with. The great thing about risk control, however, is that it is not a recurrent thing. In most cases, the measures that you first put into place act as the foundation on which everything else is built upon. If you can manage to establish a risk control program when you are starting in the business, you might actually find yourself never needing to do the process again.