The conversion of one currency to another is known as Forex trading, also known as FX trading or foreign exchange. It is known as one of the most traded markets worldwide and the most liquid of all financial markets. Though this market presents a scope of profit opportunities, this also comes with added risk. Therefore if one wants to master oneself in Forex trading, one must be an expert in risk management strategies. They should learn and manage the risks associated with the trading. 

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What is Forex Risk Management?

 

Forex risk management empowers you to execute a set of rules to ensure that any negative impact of a forex trade is manageable. It is better to have a risk management plan in place before actually starting trading in Forex as it helps to keep a person cautious. 

 

What are the risks of Forex Trading?

 

1. Liquidity risk: It is the type of risk where you can’t buy or sell your assets to quickly avoid loss. Though it has a huge reputation as being the most liquid market, there can be lots of illiquidity depending on the government policies around foreign exchange and currency. 

 

1. Leverage risk: It means the risk of maximized losses when trading on margin. It is very easy to forget the amount of capital you are putting at risk if the initial outlay is smaller than the value of Forex trade. 

 

1. Currency risk: The risk that comes with the fluctuation of currency values is called currency risk, making it less or more expensive to buy foreign assets.

 

1. Interest rate risk: The risk that occurs due to the sudden increase or decrease of interest rate affecting volatility is called interest rate risk. Forex prices are hugely affected if interest rates change because the investment across an economy will increase or decrease depending on the change in interest rate. 

 

How to manage risk in Forex Trading:

 

1. Understand the market properly: Understanding the market is the first and foremost step before starting trading in Forex. In a forex pair quotation, the first currency that appears is called the base currency and the second currency is known as the quote currency. The prices that are always displayed in the chart are quote currency. It presents the amount of quote currency you need to spend to buy a unit of the base currency. 

There are three types of Forex markets available, which are:

 

Spot market: The physical market where the currency exchange takes place is called the spot market. 

 

Forward market: At a specific price a contract is agreed upon to buy or sell an amount of currency in the future or within a range of future dates.

 

Futures market: It is the same as the forward market but this contract is legally binding.

 

1. Build a good trading plan: An effective and well-researched plan can make your Forex trading easier. It also helps you to maintain discipline in this large volatile market. A trader needs to keep the trading plan personal. Copying someone else’s plan will result in mismatched goals and significant loss in trading. Building a good plan also indicates having a separate amount of time and money prepared to get you going. Another tool traders can use is a trading diary for keeping a record of every track when they start trading. 

 

1. Get a grasp on leverage: You will be trading on leverage once you start to speculate on the forex price movements with CFDs. Having its benefits, there are also many significant downsides, for example, the possibility of magnified losses. Having a good knowledge and grasp of the use of leverage will help you avoid losses and earn loads of profit in the market. 

 

1. Manage your emotions: It can often create chaos or havoc on your emotions since the market is volatile. Greed, temptation, fear, and anxiety might cloud your judgment during trading. Hence it is very important to manage your emotions and have a neutral point of view while trading. It could harm your trades if your feelings come in the way of decision-making. 

 

1. Start with a demo account: It is better to be safe than sorry in any case. Creating a demo account helps a trader gain real experience as closely as possible without losing any real money and practice as much as possible. There are many platforms of Forex available for starting with a demo account before entering the real trading world. 

 

1. Set a ratio of risk-reward: A trader must ensure that the capital he risks should be worthwhile in every trade. Even if you lose in some trades, it is better to make money in the long run. By comparing the money he is risking on a Forex trade to the potential gain, he can find the ratio easily. Every trader should include this factor in their trading plan. 

 

1. Keep an eye on news and events: Many factors can cause the market to fluctuate. Therefore, every trader must be aware of what is happening around the world. They must keep an eye on political news, market sentiment, central banks, and announcements. 

 

In a nutshell, if you can manage all these risks before starting trading, you can easily become an expert in the Forex market, having greater control over losses and profits, or even become a Forex God! Follow these strategies and become a safe trader.