May 22 2023

Is $100 Enough for Trading Forex?
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By Stjepan Kalinic , Updated on: Apr 07 2023.
Forex risk management is a process of identifying, assessing, and controlling the threats that arise from foreign exchange speculation. It helps mitigate and minimize the material and non-material downside of forex trading. While the material downside is a capital loss, non-material downsides like stress and other psychological factors are less discussed.
“Loss“ is a short yet menacing word. Eric Weiner calls it “a Napoleon among the nouns.” This is why we don't experience a loss — we suffer a loss. It comes onto us and leaves us anywhere between concerned and ruined.
Those who don't know where they're going are said to be lost.
On financial markets, during the institutional collapses like with Long Term Capital Management in the 1990s or Archegos Capital in 2021, we can point out the moment when “all was lost. “
Traders don't like losses, yet they are an inevitable part of the game. In this article, we'll discuss the risks of trading forex and how to manage them.
Forex risk management allows you to create rules and guidelines that will minimize the market risk. This risk is inevitable for any trader as long as they are in the trade.
However, some practices can make this risk manageable. It is not only about reducing monetary loss but also mental stress.
While you might run into traders who claim success without a risk management strategy in place, this is an example of survivorship bias.
Survivorship bias fallacy; Source: XKCD
Survivorship bias is a logical error of focusing on those who made it through the selection process while overlooking those who didn't. In this case, you'd need to consider all the traders who didn't manage their risk and consequentially blew their accounts to find the percentage of those who “survived.“
Broker | EUR/USD Spread |
---|---|
Dynamic - From 0 to 1.2 Pips | |
Dynamic - From 0 to 0.6 Pips | |
Dynamic - From 0 to 0.77 Pips |
There are many risks that forex traders need to keep on their minds all the time. Unlike individual stocks, forex markets trade around the clock and fall under a much wider influence. Here are some prominent risks to consider when exposing yourself to the currency markets:
Here are some methods of dealing with risk in forex trading:
No matter how good the strategy or the trader is, losing money will be an inevitable part of trading. While it is not possible to eliminate it, using risk management techniques allows to keep the losses in check and weather the storm.
These techniques will help a good trader survive any short-term turmoil, knowing that their luck will inevitably turn. For those risk-savvy traders, time is the best ally as it multiplies their wealth. And for the others, it is an adversary.
There are many reasons why a majority of traders fail. Most of these come down in 3 categories: strategy, tools, and mindset. While strategy concerns the approach that should fit their personality, tools deal with technical aspects of trading. Yet, in our opinion, mindset is the single most important thing to master, as traders with unrealistic expectations who lack discipline will inevitably fail.
To calculate risk/reward in forex, you have to divide the distance to take profit (minus the spread) with the distance to stop loss. For example, if your take profit is 20 pips, your spread is 2 pips, and your stop-loss is 9 pips, this would give you a risk/reward of 1:2. Meaning you’d have to win only one in 3 trades to break even — everything above that would be profit.
May 22 2023
Learn to trade forex, stocks and crypto with our premium trading guides. Compare brokers, review them and do so much more!
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