Forex risk management is the identification, evaluation, and analysis of possible financial trading risk or uncertainty when making an investment decision followed by the coordinated application of resourceful tools to minimize, monitor and control identified risk. Risk management takes place when a trader or an investor analyzes the possibilities for a loss occurrence in an investment and then take effective actions in accordance to his/her investment goal and risk tolerance.
FOREX RISK MANAGEMENT TOOLS
STOP LOSS ORDER
A stop loss order is an effective risk management tool used by forex traders. Here, traders place an order with their brokerage company to sell or buy a financial asset, instrument or a security when it reaches a certain price. This risk management tool is developed to limit the number of losses a trader encounters on a trade position. The order protects both short and long-term trade positions, lock in profits, takes away risky emotions out of every trade, and promotes ease of trading at all times.
Position sizing is another risk management tool which is seen as the number of units invested in a security, financial asset or trading instrument by a forex trader. It is the amount of funds or money a trader is going to trade a particular security. Forex traders use this feature to control risk by determining how many units of a security they can buy. Before venturing into position sizing, a trader should be able to determine his/her trading account risk, determine trade risk, and determine effective position size of all trades.
This is a risk management technique that attempts to capture profits in a security, instrument or financial asset in the period of an overnight hold to several weeks. In swing trading, forex traders make use of effective technical indicators to search for securities that have short-term price momentum. They do this by using the fundamental and intrinsic value of the securities and also analyzes the security’s price tread and patterns. Swing traders search for securities which have a high potential to fluctuate in a short time period and by holding a trade position overnight on a long or short basis they make profits and minimize the possibility of losses.
FOREX LOT SIZE CALCULATOR
A forex lot size calculator is a prominent tool that gives a high percentage of control over investment risks. This tool gives forex traders the ability to calculate the exact position size of any trade in units and lots. A forex lot size tool functions with all currencies. It provides a medium where traders can calculate the maximum amount of money they can risk and in turn, save them from losing money they don’t want to loss in the first place.
THE ONE PERCENT RISK MANAGEMENT RULE
In forex trading, there is a certain percentage of risk associated with every trade in the market. A forex traders ability to manage the risk involved in what determines the final output whether a success or failure. When associating risk management with the 1 percent rule, it simply means that a trader must at no cost risk more than one percent of his/her account value on a single trade. This rule help traders and investors to avoid a total loss of capital and money when trading forex in the market. It means that every trade venture, a maximum of a risk cost of only one percent is the total change allowed. This feature saves money, promotes profits and minimizes losses. The one percent rule is practically known as the most effective risk management tool in the forex market in today’s transactions. This entails that, during the period of an unfavorable trade when a downside is encountered on a specific trade position, a forex trader will only lose one percent of the entire trade he placed be it in a scenario of 20, 30, 40, 50, 60 0r 70 straight losses, only one percent will be lost.
In forex trading and risk management, the one percent rule can be used together with other risk management tools to better assure the elimination of drawdowns in forex trading. When trading a position, the one percent rule can be used with a stop loss, position sizing, swing trade, take profit, lot size calculators, and trailing stop orders to perfect risk management. When used together, forex traders are more confident in achieving a higher percentage of successful trades at all trading sections in the forex market.
In conclusion, following the one percent rule is an adequate risk management option as well. The one percent rule portrays that a forex trader or investor must never risk more than 1% of his trading account value on a trade. This rule keeps capital loss to in a low degree and helps protect a traders fund from declining significantly in unfavorable trade events.