risk management

Trading Glossary: Risks and Risk Management Explained

The main step for investors to learn is risk management. However, it is important to know first what are Risks? Risks in trading are the potential threats that may cause you to lose money. Trading strategies mainly focus on compromising the potential risks of trade against its potential return. If the trade has great risk, then the potential profit should be much greater to make that risk worthy. 

Risk management techniques help cut down trading losses. Additionally, it can be a good way for traders to protect themselves from losing all of the money in their accounts. Losses occur when traders take risks. But when traders consider how to manage risk, they have a better chance of achieving success in the market. Risk management is one of the most important prerequisites to successful forex trading, yet it is often overlooked in the trading process.

Types of Risks 

In trading, there are two main risk categories. The first one is a Market risk, which is also known as the Systematic risk. This type of risk can result in losses due to adverse price movements. Market risk tends to affect the entire market, and usually cannot be avoided even through portfolio diversification. The other type will be the Liquidity risk. That risk arises when an asset is not traded enough in the market, causing low or tight liquidity. It can also happen when companies and individuals fail to meet their short-term financial obligations. 

Risk Management Definition 

Risk management is the process of identifying potential risks to your investment in advance, analyzing them, and taking precautionary steps to avoid their impact. In the world of investment, risks are always there. Hence, risk management is inescapable and should always be prioritized when it comes to evaluating an investment’s return. Inadequate risk management can imply devastating outcomes, whether you’re an entity or an individual. 

Poor risk management can also result in severe consequences for economies. A great example of this is the subprime meltdown back in 2007 that led to a financial crisis eventually. It was triggered by bad risk management decisions when lenders extended mortgages to individuals with poor credit, investment firms that bought and resold these mortgages, and the high-volume trading in the risky mortgage-backed securities. 

How to Analyze Risks?

First, begin with identifying existing and potential risks to your trade. Then assess the risks and their potential impact. Think of an appropriate response to face these risks, think of what can be done to avoid the risks, and how to handle them if they occur.

Risk Management From The Editor

Tips for Risk Management in Forex Trading

In order to minimize your exposure to risks while trading in the forex market, you need to educate yourself as much as possible. Be sure that no matter how experienced you are with the Forex market, there will always be a new lesson to be learned. Keep educating yourself and learning from mistakes. Using a stop loss is your top tool to control your losses. It is very useful in protecting your trades from unexpected market movements by setting a predefined price at which your trade will close automatically. Setting a stop loss depends on how much loss you can afford, so it has to be chosen carefully after a deep price analysis.

Another risk management practice is securing profits. Is this possible? Yes, it is in forex trading. You can lock your profits by two methods; the first is using the take profit option so the trade closes automatically after hitting the targeted price. The other one is moving your stop loss beyond entry-level; this also works for the same purpose as you can secure your profits in case of market reversals.

Never risk more than you can afford, that’s a fundamental rule in forex trading risk management. The forex market is highly unpredictable, so by risking more than you can afford you make yourself very vulnerable to market volatility.

In summary, Fluctuation is the nature of forex markets. So, you need to develop a trading plan, prepare for the worst, and have realistic profit expectations in order to manage the risks and their potential impact on your investment. 

Learn Forex Trading

In financial markets, it is important to learn forex strategies and trading basics. One of the key steps skills to learn is knowing the basics of technical analysis and fundamental analysis. These skills are important to help in understanding the market movements and setting the strategy for your investment. The main benefit of learning forex basics is to determine the risk management approach and setting the right trading strategy.

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