Forex Risk Management
Foreign exchange risk describes the risk that an investment's value may change due to changes in the value of two different currencies. It is also known as currency risk, FX risk and exchange-rate risk.Contingent exposure refers to the risk that firms face when they bid on projects in foreign currencies.
In forex trading,risk management is very important for your success.You can be a very talented trader but without proper risk management,there is no where you are heading to.It will be like you are gambling since you will not be looking at your long term investment but instead at the jackpot.It will be like you are trying a lurk to win a big jackpot in a casino by placing your huge stake.Even in casino,it is statistically controlled.That is why when one person wins huge amount of money,the casino will still have made money from many people who will have lost.That is statistic because the casino favored that one person and unfavored many.This also applies to trading in such a way that the market favors few people and unfavors many.That is why risk management is very important when it comes to trading so that in case the market fails to favor you,you will not be able to lose a lot.Some traders may prefer to use stop loss or take profit way of trading in order to minimize their loss and maximize their profit while others may prefer to open a hedge position in order to minimize their loss as much as they can .Other traders may prefer to risk a certain percentage of their investment.For example,some may choose to risk 1% of their investment so that when the market goes against them,they only lose 1% of what is in their trading account.For example;if a trader has a $10,000 in their trading account and risk 1% of it,when the market goes against them,they will lose only $100 which they can recover in the near future.Other traders may prefer to risk lot size or unit size based on what is in their account.For example;some traders may risk to open a position of 0.01 lot if they have a $10 account while others may prefer to open a position of 0.01 lot if they have a $100 account.Different traders think differently.As an independent trader,it is up to you to choose which trading risk management suits you the best.If you want to choose to trade with 0.01 lot with a $10 account,then here is how your risk management will look like;
From the table above we can conclude that with a $10 account,the risk management for the trader will be to open a position of 0.01 lot while with an account size of $100;$1000 and $10,000 then the risk management will be to open a position of 0.1,1 and 10 lots respectively such that if the market goes against the trader then in order for the trader to completely lose the account,then the market should go against the trader by 100 pips.This is possible in some circumstances because there are some days of trading in which the market goes against the trader by more than 100 pips .To most traders,i do not encourage the usage of this risk management.The best risk management to choose is that one of 0.01lot in an account size of $100.Here is how the risk management will look like;
From the table above we can conclude that with a $100 account,the risk management for the trader will be to open a position of 0.01lot while with an account size of $1000;$10000 and $100,000 then the risk management will be to open a position of 0.1,1 and 10 lots respectively such that if the market goes against the trader then in order for the trader to completely lose the account,then the market should go against the trader by 1000 pips.This is very impossible in most cases because in most days of trading the highest pips that the market can move against the trader is by 100 pips. Trading with this risk management will enable many traders to be able to survive in the long run.I recommend this risk management strategy since in my company,i also use it to open positions and it is working well
In forex trading,risk management is very important for your success.You can be a very talented trader but without proper risk management,there is no where you are heading to.It will be like you are gambling since you will not be looking at your long term investment but instead at the jackpot.It will be like you are trying a lurk to win a big jackpot in a casino by placing your huge stake.Even in casino,it is statistically controlled.That is why when one person wins huge amount of money,the casino will still have made money from many people who will have lost.That is statistic because the casino favored that one person and unfavored many.This also applies to trading in such a way that the market favors few people and unfavors many.That is why risk management is very important when it comes to trading so that in case the market fails to favor you,you will not be able to lose a lot.Some traders may prefer to use stop loss or take profit way of trading in order to minimize their loss and maximize their profit while others may prefer to open a hedge position in order to minimize their loss as much as they can .Other traders may prefer to risk a certain percentage of their investment.For example,some may choose to risk 1% of their investment so that when the market goes against them,they only lose 1% of what is in their trading account.For example;if a trader has a $10,000 in their trading account and risk 1% of it,when the market goes against them,they will lose only $100 which they can recover in the near future.Other traders may prefer to risk lot size or unit size based on what is in their account.For example;some traders may risk to open a position of 0.01 lot if they have a $10 account while others may prefer to open a position of 0.01 lot if they have a $100 account.Different traders think differently.As an independent trader,it is up to you to choose which trading risk management suits you the best.If you want to choose to trade with 0.01 lot with a $10 account,then here is how your risk management will look like;
| ACCOUNT SIZE IN $ | LOT SIZE | PIP RISKED |
|---|---|---|
| 10 | 0.01 | 100 |
| 100 | 0.1 | 100 |
| 1000 | 1 | 100 |
| 10000 | 10 | 100 |
From the table above we can conclude that with a $10 account,the risk management for the trader will be to open a position of 0.01 lot while with an account size of $100;$1000 and $10,000 then the risk management will be to open a position of 0.1,1 and 10 lots respectively such that if the market goes against the trader then in order for the trader to completely lose the account,then the market should go against the trader by 100 pips.This is possible in some circumstances because there are some days of trading in which the market goes against the trader by more than 100 pips .To most traders,i do not encourage the usage of this risk management.The best risk management to choose is that one of 0.01lot in an account size of $100.Here is how the risk management will look like;
| ACCOUNT SIZE IN $ | LOT SIZE | PIP RISKED |
|---|---|---|
| 100 | 0.01 | 1000 |
| 1000 | 0.1 | 1000 |
| 10000 | 1 | 1000 |
| 100000 | 10 | 1000 |
From the table above we can conclude that with a $100 account,the risk management for the trader will be to open a position of 0.01lot while with an account size of $1000;$10000 and $100,000 then the risk management will be to open a position of 0.1,1 and 10 lots respectively such that if the market goes against the trader then in order for the trader to completely lose the account,then the market should go against the trader by 1000 pips.This is very impossible in most cases because in most days of trading the highest pips that the market can move against the trader is by 100 pips. Trading with this risk management will enable many traders to be able to survive in the long run.I recommend this risk management strategy since in my company,i also use it to open positions and it is working well
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