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.