The Assessment & Management of Forex Risk
by John Arnold
The Forex brokers, signal providers and trading systems use a very convenient system to lure investments. They promise quick cash or profits in the form of hype, boasts and ‘guarantees’. They even come up with a ‘track record’ which is usually dubious at best.
These entities make the assessment and management of Forex risk sound like child’s play. Just to be clear, this might happen to be true in a few cases through sheer luck or an educated guess. But it is simply not that easy in most cases.
Individuals choosing to tackle the Forex market should do so only with a clear head. Regardless of whether you are a beginner or an expert, assessment and management of Forex risk should be at the forefront of your thought process.
Understanding Your Limitations
The key is to understand yourself. Take a good look at your financial situation and note how much you are worth as well as how much you can afford to risk or lose. Every Forex trader believes that she/he will only make a profit from trading in the market. But the reality is that everyone is bound to suffer a period of difficulty from time to time. This is inevitable.
So the important thing is for you to be resilient. Can you make it through one of your own inevitable slumps? Are you strong enough to hold on until lady luck resumes smiling at you?
Some traders try to be clever by doubling down or playing catch-up. In a Forex market, moves like that will only end up hurting traders. In fact, they end up making things even worse for themselves. You can end up being on margin call in the blink of an eye. No one wants be in such a position. The first rule of good risk management is to have rigid rules or limitations on how much a trader is willing to risk or lose on a particular day or trade.
All financial markets are devoid of emotions. But Forex traders usually end up spoiling the party. As soon as you become emotional, whether it happiness over a profit or especially sadness over a loss, you increase the likelihood of making the wrong choice further down the line. Any sort of emotion runs against the nature of the market.
The foundation of Forex risk management begins by training yourself to lock up your emotions in a secure box while you are trading. A good trader can switch between trades without one effecting the other.
Playing The Odds
When you are still learning the ropes as a Forex trader, always check to see if the pairs you are trading have movement and liquidity. You have to be well informed of your exit strategies for any trade. There are numerous variables for you to worry about at any given point. Hence, don’t create any unnecessary risks for yourself and keep your trading safe. The idea is to manage risks, not taking risks.
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