Risk management

Like any other business, forex trading also carries risk. To become a successful trader it is necessary that you manage those risks properly. Moreover, it has flavours of gambling, and traders can get hung onto bad trading practices and end up losing all their money.

You probably don't want to read about risks, but go straight into trading. We say,
"To be a successful forex trader, risk management is mandatory!"


The key elements of risk management are discussed below:

1. Capitalization: Refers to how much money you are willing to put into trading. Choose the correct trading account (standard, vs mini vs micro) depends on this.

2. Drawdown: A measure of how much money you are willing to risk before calling it quits.

3. Understand Risk –Reward Ratio

4. Choosing Leverage

5. Margin calls and Leverage

6. Exposure & position sizing

7. Setting stop losses

This is something a new trader may not want to hear, but an important psychological part of trading Forex is to understand that unless a trader has a big enough account to weather adverse market moves, the capital in one's account should be considered risk capital. Forex is not the same as other investments since traders, depending on one's leverage options, can and should be ready to lose all the capital in his or her account. Of course, in reality a trading plan is designed to do just the opposite, not to lose money. When beginning a trading plan, another step for a trader is to determine the psychological level of drawdown on the account that one is willing to tolerate. This is called Drawdown.

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