When you consider currency trading risk management, you have to bear in mind the calculation of a successful trade. To carry that out efficiently, you must have knowledge of both technical and fundamental analytics. You have to have an understanding of the dynamics of the market and know your psychological price trigger points. This can be achieved by making use of charts.
Managing your Risk
Once you have made the final decision to enter trading, you have to consider how you are going to effectively manage the risks associated with trading. The theory is that if you are capable of managing your risk, you will manage trading profitably.
To keep the odds in your favour, you must stipulate a cut-off point if the market reaches that point. The difference between your entry point and that cut-off point is your total risk. This level of risk should be acceptable to you mentally or you should not consider entering the trade at all. If the risk level is too high, your stress level could be so high that you lose all objectivity as you continue with the trade and as the market moves.
Risk and reward are the two sides of the coin you have to deal with and to do so you have to set a second point to where you are willing to allow your first cut-off point to move in order to secure that position. This is called sliding your stops. The second point is normally set at a breakeven price even if you are completely cut out at that point. Once this breakeven point has been set, your risk has been reduced completely. This, however, is dependent on the market remaining liquid and you have confirmation that your trade will in fact be carried out at that price level. To improve how you handle setting cut-out points, you should have a firm understanding of the concepts related to market orders, stop orders and limit orders.
Currency Trading Liquidity
Liquidity means that there are sufficient purchasers and sellers in the market for you to easily trade. Liquidity is normally not a problem for the major currencies. The liquidity level is not always available to all forex brokers and it varies from one currency pair to another. Your trades may be affected by your broker’s liquidity. Unless your trades are done through a large bank, your reliance will be placed on your online broker to carry out your trades. For this reason, it is advisable that you consider opening an account with a large brokerage that has sufficient liquidity to do your trades.
Currency Trading Risk
One aspect of your risk management policies will be dependent on the level of funding you have available for trades. Your single trade risk percentage should not be more than 2% of your total capital balance. So, if you have $2,500 in your trading account, you should not be in a position where a loss on your trade would exceed 2% of that amount. If your parameters have been set accurately, the maximum loss you would make would be $50 per trade. This means that you are able to sustain 50 losses in a row before your account is completely wiped out. This level of loss should not happen if you have a system that puts the odds in your favour.