Forex is involved with the currency market based on currency pairs. For example, when we buy the currency pair of EUR/USD as a financial instrument, we hope that the pricing value of the Euro will increase soon, keeping a relationship with the U.S dollar. Sometimes an investor can fail to guess the possible its, and the trade can move against him.
Newbies can reduce the number of losses by trading on less liquid and less popular currency pairs. Without managing the margin of the property carefully, beginners may face unstable transactions, which may reduce the profit margin to a greater extent. There are so many risk factors that are dealt with in the FX market, and here we will discuss the ways to manage them.
List of the risk factors:
1. Exchange rate risk
It is caused by the divergence in the value of the currencies and is mainly based on the volatile shifts of the supply and demand worldwide. It depends on the market’s perception, as FX trading is not regulated that much because of its off-exchange feature. The market takes the move because of the fundamental and technical change, and without the implementation of the popular methodology of such management, it can seem unavoidable. Forex trading might seem easy but you must know the proper way to manage the risk. Unless you master this technique, you will always lose money in this profession.
2. Position limit
At a single time, how much amount of currency is allowed to carry by a trader is regarded as the position limit. In the position limit, a businessman should determine how much that he can take to conduct a certain business. For example, if he has a trading account of $10000, then he should take it of $100 based on per trade, which will 1% of the overall investment. If he set his this limit 0.5%, then he can take this of $50 in every trade.
3. The loss limits
Using stop-loss order, the loss limit is set by the expert Forex traders to minimize the loss by stopping it, setting a stop-loss order point. Without setting up the stop-loss order point, the account can end up keeping the account balance zero. Management of it is very crucial as businessmen can lose all his money in a sudden bearish market without having this automated trade closing system.
4. The risk to reward ratio
Its rewards ratio is considered one of the revolutionary methods to gauge the possible it before jumping into trading activity. Experts use the benefits of it to reward ratio calculation so that they can minimize their amount of loss in advance. An ideal risk to reward ratio is 1:3, which means if the profit is $3 in the business, then they can only bear $1 of loss and not more than that.
5. Interest rate risk
Due to the fluctuations in the spreads, in profit and loss, it is generated. To minimize the interest it, advanced traders set the limit on the total size of the mismatches and separate the mismatch based on the dates of maturity up to the past six months. All the transactions are maintained using the computerized systems to calculate the losses and gains based on the dates of delivery.
6. Leverage Risk
Low margin deposits can increase the leverage it because taking the leverage facility from the broker can create the same amount of loss during a downtrend. A relatively tiny pricing movement can be the cause of the substantial loss and for the deduction of the brokerage commission.
On the basis of minute observation, now, it is transparent to us that no trading platform is free from risk, and FX is not an exception. Maintaining a secured risk management system can help the beginners to reduce the number of losses by increasing the earing for buying and selling each financial instrument.