Working out your appetite for risk is central to proper forex risk management. This is particularly important for the most volatile currency pairs. Also, liquidity in forex trading is a factor that affects risk management.
Selecting the right position size , or the number of lots you take on a trade, is important as the right size will both protect your account and maximize opportunities. You need to work out your stop placement, determine your risk percentage and evaluate your pip cost and lot size.
Using stop loss orders is another key concept to understand for effective risk management in forex trading. Knowing the point in advance at which you want to exit a position means you can prevent potentially significant losses. But where is this point? Broadly, it’s whatever point your initial trading idea is invalidated.
It’s important to be able to manage the emotions of trading when risking your money in any financial market. Letting excitement, greed, fear or boredom affect your decisions may expose you to undue risk. maintaining a forex trading journal or log can help you refine your strategies based on prior data not on your feelings.
How to manage risk in trading
Risk management is a key component for a successful trading strategy which is often overlooked.