Forex trading is an entirely unique world. When it comes to Forex trading, the way this market behaves is quite different in comparison to other markets. The factors of speed, enormous size, and volatility are what set this trade apart. The changes happening to currency rates occur in the matter of hours, minutes, and even seconds. It’s uncontrollable and not ruled by any one person, event, or factor. The only feature that remains the same in this trade like any other business is the more you take risks, the more are the chances of gain (and loss).
Therefore, the one thing that retail home traders can do in Forex trading is having a risk management strategy. This is really important as you won’t have to live from hand to mouth in case the risk results in a loss. The following is a low down on why a risk management strategy is necessary.
Gives You Control over Losses
This is an important advantage that risk management offers to Forex traders. This provides you a way to gain control over your losses. You can either use a mental stop or a hard stop. A hard stop is that price level which when reached will lead to triggering an order for selling of underlying security. It is a fixed level. And a mental stop is the one not set at a fixed price. The trader can have certain values on mind at which he/she can easily exit depending on market conditions.
Once you have set your mind on a particular stop loss value, do not deviate from your direction by moving it. This will not help you in achieving your target. In fact, it may result in extra losses.
Guides You in Choosing the Right Lot Size
Risk management opens up your mind towards the fact that starting with a huge lot size will help you land nowhere. This is no magic wand to get you your desired destination in Forex Trading. In some circumstances, it might prove to be a better idea. But the experts recommend beginning with smaller. This varies from trader to trader. To determine your threshold, assume the worst case scenario and decide how much you can afford to lose. A risk management plan helps you in choosing a smaller lot size along with a backup plan to regain your status in the market.
Helps You in Keeping Track of Exposure
A risk management plan’s importance can also be understood from the fact that it helps you in analysing your exposure in the market. For instance, if you have taken too many small slots, it doesn’t increase your target rate but your loss rate is more at risk. Therefore, the best method is to get a small but firm place in the market.
ETX Capital also suggests the retail home traders to have a properly planned risk management strategy so that you can save yourself frequent losses in Forex Trading.