Risk Management In The Forex Market

Since each transaction you make in the Forex market has a certain degree of risk, the knowledge and usage of general principles of risk management in the Forex market will reduce your potential losses. Some common aspects of risk control are listed below and can be used by everyone who is trading Forex in Singapore or thinks about it.

Rule 1: Make a preliminary analysis of the market

Making an analysis of the market before placing an order is a duty of each Forex trader and can not be neglected. For every buyer there is a well-informed seller and every seller has a well-informed buyer. Everyone is trying to maximize their profits in the Forex market. Before you expose your money to risk, you should have a thorough, well thought reason and idea why you want to buy something that someone else wants to sell. Above all, Forex trading is a game of “capital making”. Ask yourself, what I know that a seller does not know (or a buyer)? Be careful and draw some degree of respect for a person who is on the other side of the game. You must clearly realize what a financial risk may encounter at any time. Part of your homework involves assessment of the potential loss in case if the market starts moving against you by 5%, 10% or 20%. Performing a preliminary analysis of the Forex market will also help you calculate the worst possible result and potential exposure to risk.

Rule 2: Create a trading plan and stick to it

Every Forex Singapore trader should create his own trading approach. Your trading model can be based on fundamental factors, technical indicators or a combination of both. The trading approach you are using should be widely tested and revised until it shows the desired and long-term positive results. Before you invest, make sure that your Forex trading technique is smart and profitable.

An important part of your trading plan is to set limits on the certain amount of money you can lose. If you reach this limit, exit the game. Stick to your trading plan and avoid impulsive trades. If you do not follow your plan, then you don’t have it.

Trading plan helps you identify and evaluate key factors that affect your Forex trading, and may be an important learning tool for future trades. Having a smart trading plan, will make you feel confident in your Forex trading. Also, it is unlikely that while having a particular trading plan, you will make impulsive trading orders. But do not follow your trading plan blindly. If you do not understand what moves the Forex market, or you are emotionally disturbed, close all positions and make a break. By creating your own Forex trading strategy, do not listen to your Singapore Forex broker and don’t make trading decisions based on the market tips and rumors. Your money will be at risk. Before you sell or buy, do the preliminary analysis of the market and think through your next trades.

Rule 3: Diversify your risks

Your Forex trading risks can be reduced through diversification. Do not bet on all your money in one transaction. Diversify the amount of risk by using maximum of 1% – 5% of your capital in one trading position. Consider diversifying in different markets, currency pairs and different trading systems.

To be effective, risk diversification must include trading instruments that are not highly correlated with each other (that are not moving in the same direction at the same time). Carefully monitor the relationship between all your trading positions, rebalance and adjust your portfolio if needed.

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