Due to the era of globalization, many traders prefer to exchange currencies over the internet and cash in a high profit in a small time frame. Though FX trading is considered as a lucrative prospect, one should also consider various risk management techniques which are essential in the process. Thus, if you are a novice in the field of currency trading then it is essential to go through various forex forums online which will give you an idea about how to manage risk in a proper manner.
Various techniques used in risk management
The currency correlation
This is considered as a primary risk management strategy with which you are required to make yourself aware of various currencies which are used as a trading pair. It is very essential to look at whether the currencies you are trading are positively or negatively co-related to each other. A positive co-relation will lead the currencies to go in the same direction.
During currency co-relation, you are expected to limit the use of base currency in an opening position. If you use similar base currency then with its fluctuation your portfolio will get affected. It is also mandatory to keep an eye on commodity currencies as the export of a country is basically dependent on these currencies.
Risk and reward ratio
In the field of FX trading, it is very essential to prevent making an emotional decision while currency exchange. You are expected to place the RR ratio around 1:3, which will make you save your capital and provide genuine revenue. This ratio is also very essential to place orders to take-profit as well as a stop-loss. Moreover, through this ratio, you can also curb the down-side risk which is considered as a turning point in currency trading.
The proper money investment
For proper risk management, it is very essential to decide in advance the amount of money you are planning to invest in the FX trading. This pro-active step is taken by most of the professional players as it prevents them from making an emotional judgment. You are also advised to create a separate account for trading purpose thus you will not overindulge in a forex market. To curb the chances of loss, you are also advised to know the concept of volatility. Higher the volatility rate, higher is the investment in FX trading, thus you should learn to read volatility through candle charts.
Keep the risk ratio consistent
Even if you are making a lot of profits in the FX market, it is recommended that you should keep the ratio of risk consistent. When you deal in high investment and you increase the risk ratio then it will make you more susceptible to greater loss. Due to the high-risk ratio, you can also turn bankrupt.
Since the FX market basically depends on economies of countries thus you can even face great loss after dozens of winning streaks. One should also make a trading plan in advance and test the plan on a demo account before real life trading. Furthermore, a trader should also keep a monthly overview of currency trading which will save you from great losses.