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Why Trade Forex | Advantages of Forex Trading | IFC Markets

Risk management as a basis of trading

Proper management of risks is the main principle for successful trading in the Forex market, but most often traders ignore it and it leads to the loss of the whole capital. Basically, newbies do not take into account the risk management, and that is why, wanting to take everything form the market at once, 90% of them quit the market by leaving all their money there.

In trading, the management of risks implies the use of skills, which minimize the possible losses and increase the profit. Risk management is implemented with the help of trading strategies and methods of analysis of the market, which allow, with a certain probability, to forecast the occurrence of unfavorable events and to take measures to prevent them on time.

Methods of managing risks

Yet, on the stage of the development and testing of a trading strategy, the trader should limit his risks by establishing rules of money management.

• Determine the acceptable level of risk

No matter how attractive the transactions are, the maximum risk of the loss of funds should not exceed 5-6 % of trader’s total balance. At the same time, each transaction should not be more than 2% of your deposit.

• Choose an optimum leverage

Keep in mind that leverage may work not only in favor of a trader, but also against him. Its size should not exceed 1:100, no matter how attractive the suggestions regarding the usage of high leverage are. The choice of 1:100 is moderately risky, but it enables to increase the deposit significantly. But this size of leverage is considered to be risky, if the volatility of the price of a traded instrument is high.

• Use stop-loss and take-profit

Each transaction should be protected by placing a stop-loss and a take-profit. Any unexpected news or event may reverse the trend, and without managing to react, you will lose all the money.

• Diversify the risks

Due to the simultaneous work with multiple assets, the level of risk decreases, as, by distributing the portfolio between several instruments, which are independent from each other, you compensate the loss of some instruments by the profit of the other ones. This kind of approach may slightly reduce the profitability of an investment, but, at the same time, it will prevent you from losing all the money, in case the market moves against one of the instruments you have invested all your money in. The effectiveness of the diversification is achieved at the expense of choosing weakly correlated assets. This indicates that their prices should not move in one direction simultaneously.

• Control the emotions

An important part of risk-management is the composure and the ability of controlling your emotions. In any unstable situation, which occurs in the market, it is necessary to stick to your strategy and not to succumb to passion. Even when opening a position, it is a must to determine beforehand under which conditions it will be closed.

However, the most important rule of stock trading is to open an account with a reasonable deposit. By starting with $100 or $200, do not expect to earn big money. In the pursuit of success, almost all the newbies leave their money in the market. Coordinate the amount of your deposit and the volumes of your trading transactions.

Why it is necessary to be financially literate

Literate management of your funds is the beginning of the road to financial independence. In fact, the ability to earn is not enough for achieving real welfare, it is much more important to be able to manage money properly. Financial literacy is the ability to keep a record of your earnings and expenses, accumulate savings, orient yourself in the world of finance and be able to choose the right financial services, know when and how to protect your rights as a consumer of financial services. Financially literate person, who can compare his earnings and expenses and who can invest his savings for the further increase of profits, will never face any financial problems.

Here are the simplest rules and anyone, who wants to make profit besides his salary, should follow them:

• Invest the 10% of your monthly income;
• Learn about the financial instruments you are going to invest funds in;
• Study the information about the organization in which or through which you are going to invest funds;
• Compare financial products and services offered by various companies;
• Listen and analyze the economic news;
• anage your risks, do not yield to emotions and temptation.

If you, by having accumulated funds, decide to take up investing actively and generate high profits, note, that you will have to spend much time on studying the market. Active investment involves direct participation of the investor, who deals with all the risks, which are very high, and only in case of having sufficient skills and experience, the risks can be reduced.

In case of passive investment, you can simply give your funds to a professional manager and make a small but less risky profit. But in this case the absence of financial literacy can cause you to come across swindlers and non-professionals.

Even if you decide to take the easy way out and open an account in the bank or keep your money in currency, you will need to be financially literate in order not to lose your savings. Study and evaluate:

• Whether bank interest rates on deposits cover the level of inflation in the country;
• Whether the economy of the country and its national currency in which you are going to keep your savings is stable enough.

For most people the absence of financial literacy leads to the fact that by not having taken into consideration their capabilities, people get caught in a vicious circle called “credit” and they cannot get out of it for many years.

Financial literacy will allow you not to lose your funds and even multiply them.

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