Volatility within the FX market presents a range of opportunities for profit, but this also comes with added risk. Learn about the risks associated with forex trading, and find out how to manage them

▪︎ What is forex risk management in forex trading
Forex risk management enables you to implement a set of rules and measures to ensure any negative impact of a forex trade is manageable. An effective strategy requires proper planning from the outset, since it’s better to have a risk management plan in place before you actually start trading.

▪︎ What are the main risk in forex trading
▪︎ Currency risk is the risk associated with the fluctuation of currency prices, making it more or less expensive to buy foreign assets
▪︎ Interest rate risk is the risk related to the sudden increase or decrease of interest rates, which affects volatility. Interest rate changes affect FX prices because the level of spending and investment across an economy will increase or decrease, depending on the direction of the rate change
▪︎ Liquidity risk is the risk that you can’t buy or sell an asset quickly enough to prevent a loss. Even though forex is a highly liquid market, there can be periods of illiquidity – depending on the currency and government policies around foreign exchange
▪︎ Leverage risk is the risk of magnified losses when trading on margin. Because the initial outlay is smaller than the value of the FX trade, it’s easy to forget the amount of capital you are putting at risk
▪︎ How to control risk in forex trading

1• understand the forex market :
The forex market is made up of currencies from all over the world, such as GBP, USD, JPY, AUD, CHF and ZAR. Forex – also known as foreign exchange or FX – is primarily driven by the forces of supply and demand.
Forex trading works like any other exchange where you are buying one asset using a currency – and the market price tells you how much of one currency you need to spend in order to buy another.
The first currency that appears in a forex pair quotation is called the base currency, and the second is called the quote currency. The price displayed on a chart will always be the quote currency – it represents the amount of the quote currency you will need to spend in order to purchase one unit of the base currency. For example, if the GBP/USD currency exchange rate is 1.25000, it means you’d have to spend $1.25 to buy £1

▪︎ Get a grasp on leverage
When you speculate on forex price movements with CFDs, you will be trading on leverage. This enables you to get full market exposure from a small initial deposit – known as margin.
While trading on leverage has its benefits, there are also potential downsides – such as the possibility of magnified losses.

Let’s say you decide to trade GBP/USD using CFDs, and the pair is trading at $1.22485, with a buy price of $1.22490 and a sell price of $1.22480. You think that the pound is set to gain value against the US dollar, so you decide to buy a mini GBP/USD contract at $1.22490.

▪︎ Build a good trading plan
A trading plan can help make your FX trading easier by acting as your personal decision-making tool. It can also help you maintain discipline in the volatile forex market. The purpose of this plan is to answer important questions, such as what, when, why, and how much to trade.
It is extremely important for your forex trading plan to be personal to you. It’s no good copying someone else’s plan, because that person will very likely have different goals, attitudes and ideas. They will also almost certainly have a different amount of time and money to dedicate to trading.
A trading diary is another tool you can use to keep record of everything that happens when you trade – from your entry and exit points, to your emotional state at the time.

▪︎ Set a risk-reward ratio
In every trade, the risk you take with your capital should be worthwhile. Ideally, you want your profit to outweigh your losses – making money in the long run, even if you lose on individual trades. As part of your forex trading plan, you should set your risk-reward ratio to quantify the worth of a trade.
To find the ratio, compare the amount of money you’re risking on an FX trade to the potential gain. For example, if the maximum potential loss (risk) on a trade is £200 and the maximum potential gain is £600, the risk-reward ratio is 1:3. So, if you placed ten trades using this ratio and were successful on just three of them, you would have made £400, despite only being right 30% of the time.

▪︎ Use stops and limits
Because the forex market is particularly volatile, it is very important to decide on the entry and exit points of your trade before you open a position. You can do this using various stops and limits:
• Trailing stops will follow positive price movements and close your position if the market moves against you

  • Normal stops will close your position automatically if the market moves against you. However, there is no guarantee against slippage
  • Limit orders will follow your profit target and close your position when the price hits your chosen level
  • Guaranteed stops will always be closed out at exactly the price you specified, eliminating the risk of slippage1

▪︎ Manage your emotions
Volatility in the FX market can also wreak havoc on your emotions – and if there’s one key component that affects the success of every trade you make, it’s you. Emotions such as fear, greed, temptation, doubt and anxiety could either entice you to trade or cloud your judgment. Either way, if your feelings get in the way of your decision-making, it could harm the outcome of your trades.
▪︎ Keep an eye on news and events
Making predictions about the price movements of currency pairs can be difficult, as there are many factors that could cause the market to fluctuate. To make sure you’re not caught off guard, keep an eye on central bank decisions and announcements, political news and market sentiment.
▪︎ Start with a demo account
Our demo account aims to recreate the experience of ‘real’ trading as closely as possible, enabling you to get a feel for how the forex market works. The main difference between a demo and a live account is that with a demo, you won’t lose any real money – meaning you can build your trading confidence in a risk-free environment
When you open a demo account with us, you’ll get immediate access to a version of our online platform, along with £10,000 in virtual funds.

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