Risk Management

Thanks to margin, today online forex trading is available to any investor. Margin allows a trader to control 100 - 500 times more the amount of money actually deposited. When there is a chance of profit, there is also a possibility of loss. By borrowing sums that a trader doesn’t actually possess, is it possible to lose more money than invested? Is there a possibility of negative balance? Can you end up owing a large sum of money to the forex broker? And if so, how can you protect yourself from it? 

Do You Borrow Money from Forex Broker?

First of all, let’s understand what margin actually is. In forex currencies are sold in lots or in other words - $100,000. When trading with margin account, the term “leverage” joins the game. Leverage displays the money “borrowed” from a broker. Leverage varies from 1:50 to 1:500, depending on a broker and the size of a trading position. For example, you have opened a 1% margin account and deposited $1,000.  Leverage 1:100 allows you to control $100,000 instead of just $1,000.

Read more: Losing More than Invested

Forex trading is considered a risky investment; therefore many are hesitant to even try. Is it the fear of the unknown, or is Forex really that scary? What are the risks involved? Are there ways to avoid the pitfalls? 

To try or not to try? Those unfamiliar to forex are amazed by success stories, however many are still reluctant to give it a shot. The lack of knowledge and general understanding of what forex market is all about keeps many away.

There is risk in everything, not just in Forex. Instead of fearing of it, I believe that it is important to learn and control the risks. The same way you won’t cross the railways when the train is closing in, or you won’t dip your hands into boiling water– you have to learn how to manage the risks in forex trading.

Read more: Real Risks in Forex Trading

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Natural and technical disasters are not uncommon when you trade from home. Computer failure, electricity cut off, hurricane, unexpected visit from a neighbor, health issues and other factors can lead to loss of money if you aren’t careful. What should be done if your positions are open and your trading platform fails? What is the way to limit your risk from all possible disastrous scenarios? Do you have a trading plan for an unforeseen set back? 

We are all familiar with a term backup. Most of the work done on the computer can be copied and saved on home server, CDs, USB jumpdrive and other memory devices. This gives you an ability to restore your work from a backup copy if the original is gone by accident, technical failure, software bugs, computer virus and other misfortune. What about forex trading? How can you back up your trades? What if there is an online system failure with the forex broker?

Read more: How To Backup Your Trading?

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There are regrettable times in every forex trader’s life when trades go wrong. Mistakes lead to panic, greed and impatience and every last dollar slips through the fingers.  After blowing forex account to the last cent, we all seek words of wisdom and guidance to find a way to deal with the pain of loss. How to spot and understand your mistakes? Who is to blame for losing all the money? How to avoid the same slip-ups in the future? These are the questions many of us ask after a bad incident in forex market.    

The flaws in the risk management and forex trading discipline are to blame and therefore the first step for recovery is to expose those errors. An excellent “exposé” method is to keep a journal, or at least making a list of everything you did well and of all the trades that went wrong. In most cases pros will be heavily overweighed by cons. Focusing on your trades and learning by mistakes will make you more successful.  

Read more: Risk Management - Discipline Tips

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In forex trading making correct entries seems to be an easier task than making exits. Most traders suffer from exiting-too-early syndrome and therefore missing out the extra points. In most cases bad exit taking causes you to miss out on more than half the profit you could have. What are the key factors when it comes to staying in or exiting? Is it more profitable, for example, to just set the stop and the limit, and wait until either of them gets reached? Does the understanding of exits available help minimize losses and lock in profits?

How many times has the market missed your target by just a small fracture, and then continued moving in the direction you have predicted without you “on board”?! Or, on another unfortunate trading day, forex market simply misses your profit target and leaves you with nothing, or even worse – loss! Obviously making profits is the hardest part in forex trading. It can take years to figure out how to enter but not how to exit.

Read more: Forex Trading Exits Strategies