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RISK MANAGEMENT STRATEGY

Currency markets are highly speculative and volatile in nature. Any currency can become very expensive or very cheap in relation to its counterpart in a matter of days, hours, or sometimes, even minutes. This unpredictable nature of currencies is what attracts an investor to trade and invest in the currency market.

The Forex market behaves very differently from all other markets. Speed, volatility, and the enormous size of the Forex market are unlike anything else in the financial world. The Forex market is therefore uncontrollable - no single event, individual, or factor rules it. Just like any other speculative business, increased risk entails chances for gains/loss.

Forex Risk Management

There are things, that every trader should know both BEFORE and DURING a trade.

Exit the market at pre-determined targets
Limit orders, also known as exit orders, allow Forex traders to exit the Forex market at their pre-determined targets. If one is short on a currency pair, the system will only allow one to place a limit order below the current market price. Similarly, if you are long on a currency pair, the system will only allow one to place a limit order above the current market price. Limit orders help create a disciplined trading methodology and make it possible for traders to walk away from the computer without continuously monitoring the market.

Control risk by capping losses
Stop/loss orders allow traders to set an exit point for a losing trade. If one is short on a currency pair, the stop/loss order should be placed above the current market price. If one is long on the currency pair, the stop/loss order should be placed below the current market price. Stop/loss orders help traders control risk by capping losses. Stop/loss orders are counter-intuitive because traders do not want them to be hit, however, the trader would be happy that he had placed them. When logic dictates, one can control greed.

Where the trader places his stop and limit will depend on how risk-averse he is. Stop/loss orders should not be so tight that normal market volatility triggers the order. Similarly, limit orders should reflect a realistic expectation of gains based on the markets trading activity and the length of time one wants to hold the position.

Trading foreign currencies is a demanding opportunity for trained and experienced investors. However, before deciding to participate in the Forex market, one should soberly reflect on the desired result of investment and level of experience. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a currency.

Moreover, the leveraged* nature of FX trading means that any market movement will have an equally proportional effect on deposited funds. The possibility exists that you could sustain a total loss of your initial margin funds and be required to deposit additional funds to maintain a position. If you fail to meet any margin call within the time prescribed, the positions would be liquidated and they would be responsible for any resulting losses. 'Stop-loss' or 'limit' order strategies may lower an investor's exposure to risk.

Lowering risk whilst trading
Trade, like a technical analyst. Understanding the fundamentals behind an investment also requires understanding technical analysis. When fundamental and technical signals point to the same direction, you have a good chance of having a successful trade, especially with good money management skills.

Technical traders use charts, trend lines, support and resistance levels, numerous patterns and mathematical analyses to identify trading opportunities, whereas fundamentalists foretell price movements by interpreting variety of economic data, including news, government-issued indicators and reports, and even rumors. The most exciting price movements however, happen when unexpected events occur. Such events may range from a Central bank raising domestic interest rates to the outcome of an act of war or just a political election. Still, more often it is the expectation of an event that drives the market rather than concrete event.

Therefore, 'Be disciplined!'. Create a position, understand the reason for having taken that position, and establish stop loss and target levels. Discipline includes hitting stops and not following the temptation to stay with a losing position that has gone through stop-loss level. Rule of thumb: In a bull market, be long or neutral - in a bear market, be short or neutral. If one forgets this rule and trades against the trend, one will suffer not only psychological worries but also frequent losses. Never add to a losing position. Many successful traders set their stops beyond the rate at which they made the trade so that the worst that can happen is that they get stopped out.

* Without proper risk management, this high degree of leverage can lead to large losses as well as gains

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.Retail off-exchange foreign currency trading involves the risk of financial loss and may not be suitable for every individual.

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