Forex risk management is essential! But, how risky is any forex venture? Is this yet another scam? What can a trader to do manage risk and diversify it? How to assess alternatives and chase the right one?
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In order to be a proper trader in this type of market, you need to learn how to cope with all the risks that come with forex. You need to be aware of everything, because you should remember the golden rule from successful planning. The battle is won by a person who has a backup plan. So, before you can diversify and assess all alternatives, try to understand the dangers of being a forex trader first.
Forex Risk Management
Sure, forex offers a plethora of new possibilities and untapped potential, but there is a price to pay for convenience. Losing all your money in a single click, stupid investments, scams and all sorts of dangers that lurk in the darkest corners of the internet await for their newest victim. It could be you, unless you learn some forex risk management skills, and fast.
It is totally understandable that most traders would more than appreciate some kind of mentorship in the beginning of their trading career. Sure, they could try things on their own, but they do so at their own peril. As far as forex risk management goes, by far the safest way to traverse these obstacles is to find someone you can trust, and have them guide you through the steps. Just make sure they know what they are doing, or it won’t be just them that they’ll sink. Unfortunately, easier said than done.
The thing about forex is that almost anyone can make a small fortune acting like the middleman between all sorts of players out there. However, this is a risky endeavor, and traders are required to vouch for their every move with their own assets and property. This is not like running a business where you can declare bankruptcy and get away scot clean. If you cannot afford to cover the cost of the trade, cyou will not be able to make the trade. In other words, you may end up penniless, but everyone else in the food chain will get their comeuppance.
Of course, making ill-advised or not so wise calls is always a risk. And a forex risk that cannot be so easily managed! Jump the gun and you might get shot. Wait too long and the window of opportunity will go away. Other than that, you need to get instinct-based decisions out of your head as soon as possible.
Trading randomly and aimlessly is like throwing your money onto a crowded street and expecting the passers-by to return the favor, with interest no less. Obviously, it’s not going to happen. Even with some lucky guesses, this is a big waste of money. To be able to remain cool and composed under pressure is the mark of a great forex trader and master of forex risk management.
There are plenty of various scams out there, too. Some of them offer fake or overpriced lessons, while other promise to make you a millionaire with their wondrous trading software. A smart person would wonder how come they are still here, talking to them when they have this alchemical device in their possession that turns stuff to gold, and BS into money. Let it be clear, nobody here is saying that automated trading software suck. No! It is just that it is meant to be an auxiliary device, helping you with forex risk management, rather than making decisions in your stead.
Is Forex a Big, Fat Scam?
Having said all this, it could come as a surprise that people actually engage in forex-related activities to begin with. It all seems like a scam at this point, does it not? But, for all its downsides, forex still beats the snot out of most other ventures out there. Plus, with all this technology, you could still make a lot of money, if you play your cards right – this part is true nonetheless.
In fact, some people do actually make a living this way. They trade huge sums of money and use the liquidity and leverage to their advantage. Thanks to its size and the sheer volume of trade, on forex markets even large trades do not affect the exchange rates by themselves. The leverage can get you into a lot of trouble, but it can also multiply your gains sever hundred times. Besides, what other product can you sell virtually anywhere in the world, at any hour of any day? It absolutely can be done, and it could be you making all those huge deals, making all your dreams come true. It just takes some calculated forex risk management.
What Can You Do?
So, how do you manage forex risks? Well, there are several things you can do to protect yourself and your property from the undesirable effects. Keep in mind that some of them are unavoidable, such as occasional losses. Losses will happen, but it is important to recover as fast as possible and get on with your trading, and your life. A very effective way to ensure you are in a position to do this is to limit your exposure.
Basic forex risk management wisdom stipulates that risking more than 1% of your entire capital on a single trade is ill-advised, and anything over 10% is borderline suicidal. You see, even the best traders have losing streaks. Such a series could last 5-10 consecutive trades, or even longer. If you follow the 1% rule, it would take 100 consecutive losses to put you out of business. Or just 10 if you risked too much! One downside of this method of forex risk management is that profits are also limited more than they necessarily have to be. A lot of traders get greedy, impatient and ultimately – broke.
Also, avoiding shady deals and unregulated brokers will reduce the risk of being robbed blind. In this day and age, one does not need a gun and a mask to rob somebody out of their earthly possessions. A computer and some technical know-how is all it takes. However, legitimate, regulated brokers have to follow rules and just by having an official agency vouch for them gives you somebody you can sue if the unthinkable happens. Otherwise, even if a fraud gets caught, which hardly ever happens, the money will be long gone by then. So the only real way of forex risk management is to have a failsafe plan, and it involves a regulatory body and some legal assistance.
You need to remember that out there, you are not only battling the market and the other traders, you are also battling yourself and your inherent flaws. Sure, it’s kind of a cliché, but these are true words rarely spoken. Your fears that hold you back, your ambition that is driving you to your doom, your emotional attachment and desire to see how things turn out… To be able to control yourself and your emotions is to conquer the world, or so the saying goes.
In real life, most traders just find a broker that allows them to automatically copy the trades from a trader who actually knows what he is doing, but this is also a risk in itself. By doing this, they relinquish control over their finances but are still liable for any losses incurred on their behalf. The only defense is to program all the parameters right and hope for the best. And keep tabs on how your account is doing, limit your exposure and do whatever it takes to master forex risk management.
In fact, the only other way to make it in this business is to educate yourself on all the aspects of forex markets. There are several ways to do that. Most brokers offer an extensive media library covering all sort of forex-related stuff. They also offer additional services, such as webinars, consultations, expert analysis and even tutelage – the real deal this time – for a price, of course. And let us not forget the demo account, which is about as close to the real thing as a trader can get, without incurring any risk or penalties. The road to forex risk management mastery begins here.
Making calculated losses is what it means to be an adult, as I tried to explain at the beginning. Stuff just happens every now and again. Forex traders go out there and trade, because their forex risk management skills have taught them not to trade more than they can afford to lose, and match risks to rewards. Forex is no safer than anything else – or more dangerous, for that matter. It all comes down to forex risk management.