Risk management on forex markets offer many advantages to entrepreneurs, they are not without their share of risks: the degree of leverage is often very high, which in turn means that huge gains can quickly turn into crippling losses – effectively devastating your account in a couple of minutes. Furthermore, because of the rush some people experience due to the rewarding nature of forex gains, certain critics have (mistakenly) compared this experience to that of gambling. There is a huge difference between forex trading and gambling. In fact, risk management makes all the difference. When trading, you control the risk and your odds; when gambling, the risk controls you.
There are many strategies and methods for risk management in forex and other markets, but three most common ones are: Martingale, anti-Martingale, and speculative method. The Martingale system relies on the fact it is mathematically impossible to lose every single time. So, if you double the investment every time you lose money, when you (eventually) win you will not only recover all previous losses but also come out on top. Of course, this is only true as long as you are financially capable of doubling the investments; otherwise, you will go broke before you know it. The anti-Martingale system is when you half your positions after each loss and double them after each gain. This way enables capitalizing on any winning streaks while effectively limiting losses. Speculation method dictates that risks are made only if the potential gains are large enough to warrant them. Basically, you assess the situation and ask yourself: is it worth the risk? If the answer is anything other than “yes”, you leave it be.
Risk Management Tips
There are also some useful tips on how to manage your risks in forex markets. First and foremost, assess the odds. Make sure your technical and fundamental analysis are thorough and reliable, and set the top and bottom points (for profit and loss) where you back out no matter what. If you cannot take the loss, don’t risk it. Also, make sure market liquidity is adequate so you can make your trade easily at any point. An opportunity is useless if you cannot seize it. Fortunately, in forex markets this is almost never an issue due to trading volume.
Always remember, putting all your eggs in one basket is a bad idea. Never risk all your money. In fact, try to limit your losses to about 2% of your capital per trade. Anything more is just asking for trouble. This way, you would have to lose 50 consecutive times before you go bankrupt – an unlikely scenario in any case. It also helps if you use someone else’s money (brokers, bank’s etc.) whenever possible. It’s called leverage and it’s there for a reason.
With any luck, these tips can make you turn the tides on your forex trading and really manage those risks. Making money has never been easier, you just have to get out there and do it.