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How to keep your risks to a minimum in forex trade ?

Risk Management is basically an approach to manage uncertainty which might be linked to a threat through a series of human activities like risk strategies, management, its management and even migration of risk.

The strategies basically consist of transference of risk to a different party, avoiding it, bringing down the ill effects of risks, and receiving the consequences and results of a given risk. Some of the traditional risk managements are highlighted on the risks arising from legal or physical causes (eg: accidents, lawsuits, natural disasters, fires etc.). On the other hand Financial Risk Management focuses upon the risks that can easily be managed with the help of traded financial instruments.

The basic objective of Risk Management is the lower the no. of various risks linked to a domain selected beforehand and bring them to such a level that may be accepted by the society. It may also refer to the various threats caused by technology, humans, environment, politics and organizations. On the obverse side it includes all the basic means available to humans or rather for a entity of risk management (organization, staff, person).

The video below gives an excellent step by step risk management execution for a forex newbie using real time screenshots:

In case of ideal Risk Management, a process based on prioritization is followed in which the risks with maximum probability are dealt first then the ones with the second highest probability and the process continues in the same manner. The process is very difficult in actuality. Sometimes its difficult to handle and strike the right balance between a risk with high probability but low loss and another with low probability and high loss.

In Intangible Risk Management there might be a risk with almost 100% probability but even then it is not accepted by the company because there is lack in the ability of identification. Eg: when insufficient information is used for a particular solution, the ‘knowledge’ risk materializes. Risks related to Relationship also start appearing when the collaboration does not prove to be effective. The issues relating to process-engagement risk may also arise when the applied operational procedures are ineffective. Such risks are instrumental in reducing the productivity of workers, profitability, reputation, quality, service and brand value. Intangible Risk Management permits risk management to make instant value from the reduction and identification of risks that directly reduce productivity.

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The Ideal Psychology of Forex Trading

Ø Have a Disciplined Plan:

The fault in the thinking of the traders is that they take shopping more seriously than trading. On an average the shopper would not spend more than $400 without collecting all the relevant information of that product that he is going to purchase. However the average trader makes the trade is such a manner that it may cost him the same amount. Also the plan must have stopping and limiting levels for the trade and your analysis should cover both the expected downside and the expected upside.

Ø Minimize your losses and maximize the profits:

The concept sounds very easy to follow but it very difficult to implement. At some point or the other the traders get deviated from the plan and take their profits much before what they had targeted it to be. This is because they no dot get a comfortable feeling when they are in a profitable position. But these are the people who eventually sit in the losing position and allow the market by letting the market to move a hundred points against them hoping that it’ll come back. Therefore its the job of the stops/stop losses to make sure that you don’t end up losing more than a fixed amount.

Ø Do not be very friendly with your trades:

The reason behind the fact that trading should be done with a well laid plan is that most of the objective analysis is usually done before the execution of the trade. Once the trader gets the hang of it, he analysis the market differently hoping that it will move in a particular desired direction rather than looking objectively upon the various changing factors which might prove just the opposite to your original analysis.

Ø Do not bet the farm:

The key point is never to over trade. Most common mistake that the traders make is that they leverage their account higher than what is required by trading larger sizes than what their account should actually trade. Leverage is basically a sword with a double edge. It may happen that one lot say 100,000 units of currency might require a minimal margin deposit of $1000 but that can never ensure that a trader who has $5000 is his account will easily trade five lots. A lot of $100,000 should be considered as an investment and not as a $1000 margin. The golden rule is: as far as possible try not to use more than ten percent of your account at any particular time.

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Making Money Online from Forex

Like share trading, forex trading is also an avenue to make money by investing money and keep it rotating between different scripts according to market speculations. Making money online through forex trading is not that easy. 70 out of 100 small investors loose their money and other 30 enjoys the same by taking over from those 70s. So what is the main difference between those 70 and 30? Its just that they have understood the system of the foreign trading well, that how the market moves, when to come out of it and when to stay.

If one really want to make money then before real trading market follow up is very necessary. One should understand the various factors which affects the foreign exchange market. Based on data released and available online the market moment should be assessed properly. Once the gut feeling comes one should go ahead and acquire the currency units he or she thinks is good. Market keeps on going up and down but emotions should be kept under check. When you lose, accept it and always remember the reason why you entered into the trade. Find out what went wrong, correct it and go ahead without any emotional outburst.

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AN INTRODUCTION TO FOREIGN EXCHANGE TRADING

Forex as you may have understood from the title is derived from and stands for Foreign Exchange. What is foreign exchange you ask? Foreign exchange refers to the trade of foreign currency. Yes, like stocks and other commodities, foreign currency is also traded. Not only that, the forex market is the largest in the world, and has a daily turnover of close to a trillion and a half US dollars!

Unlike stock exchanges, forex is not traded on any exchange. It is traded through financial institutions like banks, brokers, and private dealers and individuals. Trade execution takes place mostly through telephones, and increasingly, the internet. Also, the required investment/deposit was a huge sum earlier. But now, due to the net revolution and the smaller capital required, forex trading has percolated to the individual level.

When we speak of the forex market, one needs to be aware that most of the trades don’t really happen.

Confused? Let me clarify. When an institution or an individual purchase currency, they often don’t actually take delivery; they are merely speculating on how that particular currency performs. This means they buy based on information they receive from different sources regarding the tentative change in currency value.

And if they’re lucky, and the currency performs according as their sources had predicted, they sell it back, at a higher rate, thereby making a profit. How much they make obviously depends on the initial purchase and the subsequent increment in value. Simple “short-term” trading, which makes up about 70-90% of the trade. The rest of course is actual sale and purchase.

The five major currencies traded are the US Dollar (USD), the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF). The symbols in brackets indicate the symbols used to represent these currencies during trade. The most traded currency is the US Dollar, and most currencies are traded against the dollar only. The rate at which a currency is traded is called the exchange rate.

How this rate is determined, and how it fluctuates is a concept that involves many factors. For now, this should be enough. We’ll learn about market mechanics ahead.

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