Be careful, your money can evaporate just like that if you dont pay attention to risk managemen in forex trading. Remember that forex trading investments are classified as high risk investment. This means that forex trading is considered having unpredictable return depends on risk management and your trading pattern. One of the highest risk among other financial investment instruments.
Risk factors that you should know before start forex trading:
1. Have the possibility of losing 100% funds
2. The flow of funds is very fast
3. There is no forex trading method that can guarantee you gain profit. There are many good trading method, but no one can guarantee 100% profit
4. Forex trading is not a “quick rich scheme” that can make you rich quick without working hard. There is no success without hard work. Hard work is an integral part of those who experience financial success in life. Including those who succeed through forex trading.
It takes hard work to learn the analysis and market behavior so that we can guess the direction of price movement accurately. So you’ll also need extra mental power when doing trading that results something that you dont expect.
Ask successful traders that you know, whether they had experienced ups and downs in their forex trading. And the answer almost certainly is “yes.” Success is only for those who want to try and learn continuously improve themself.
Associated with trading risks that must be faced if we want to start investing in forex, it needs special tips to minimize, or even reverse our position that was minus a positive return and earn a profit. Here are some tips and risk management you can take:
1. Cut Loss
For example, say we’re opening our position on Open Buy GBPUSD at 1.8000 price. Open a Buy position means that we expect prices to rise above 1.8000. Our hope as the price moves up to 1.8100 so that we can obtain 100 points profit. But suddenly the situation turns out and the price moves against what we expect. It turned out that the price goes down continually from 1.8000 to 1.7980 and still showed a tendency to fall.
Well, rather than experiencing a further loss or ultimately experience a margin call, the better decision is to bear the loss even though we closed minus 20 points (1.8000 to 1.7980 = -20 points). This action is called the cut loss of closing wrong positions in order to prevent greater losses.
2. Switching
This action is similar to cut loss, but the difference is after we close the wrong position (loss), we open a new position with the same direction as the market price movement. In the same case with a cut loss above, then we close our position at 1.7980 and then we open a new position Sell as prices tend to decrease. Thus, if prices continue to fall, say reach 1.7900 then our overall experience loss 20 points but gain profit by 80 points (1.7980-1.7900 = 80) so that the total profit we still get 60 points.
Tips For You: # Do it only if the profit prediction exceeds the loss of switching the first position which will be closed. # If it turns out the price change was in accordance with the first prediction, then you will suffer a 2 times loss, the first position and second position as well.
3. Averaging
This method requires extra capital to maintain the position we open that was moving against the market price movement. Say it is the same case with the example above (Cut Loss), if we want to take averaging action then we open a new position but in this case is not like switching (closing a loss position and then open a new position in opposite direction to the closed position). In averaging we are not closing our position which has been opened (in this case Open Buy) and then we open new positions in the same direction.
Why is that? The reason is simple, we would expect the price has come down then the price will go up so that when we perform a second Buy action and expecting the price moves up and even surpass our first Buy position so that we gain a double profit.
The three risk management mentioned above is very simple and easy to do. So, how unfortunately we suffered a loss just because we do not know the things above. But whether by knowing these three risk management we certainly will never experienced loss? No, of course not.
If you look at the three risk management above relies on one thing: our ability to analyze price movements. Yes, that’s the core of forex trading. Risk management doesnt even become effective when we are not able to do the analysis correctly and accurately. So, knowing the analysis is imperative in starting an investment in forex trading.
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