Risk Management Strategies

The foreign exchange market is very different from other markets. The sheer size and volume, along with the speed plus volatility are enough to overwhelm any trader. Being a speculative business, there is an increased risk entailing chances for a higher profit/loss. Being a totally uncontrollable and unpredictable market, it becomes important to be well versed with management strategies in foreign exchange to trade for success.

Before you step in to trade, ask yourself honestly that how much are you willing to lose? The highly speculative and volatile nature of foreign exchange market raises some issues on foreign exchange risk management, which you may have to face in your daily trades:

• There might be unexpected corrections in the currency exchange rates
•You may face wide fluctuations in foreign exchange rates
•Lost payments
• There might be delay in the confirmation of payments and receivables
• You may see a deviation between bank drafts received and the contract price

Every serious trade must cover these areas before and during a trade. Follow the risk management strategies in foreign exchange discussed below to become a better trader.

Exit the market at profit targets

Profit take orders or limit orders, allow the traders to exit the foreign exchange market at pre-determined profit targets. Limiting orders help to create a disciplined trader and make it possible for you to walk away from the computer without continuously monitoring the market.

Capping losses to reduce risk

Stop or loss orders are used by traders to decide upon an exit point for a losing trade. Hence by capping losses, the traders can control risk by following one of the strategies in risk management. Let your logic dictate you and help you control greed.

Where to place the stop and limit orders?

As a thumb rule, traders should set stop/loss orders closer to the opening price than limit orders. Following these online risk management strategies, a trader needs to be right less than 50% of the time to be profitable. While placing the stop and limit, it will depend on how risk-adverse he is. Remember that stop/loss orders should not be very tight, or else the normal volatility can trigger the order. They should reflect a realistic expectation of profits based on the market's trading activity and the length of time one wants to hold the position. At initial stages, the trader is advised to not to get overexposed to the trade, and not too close to the market. Teaching these risk management strategies in foreign exchange will bring desirable results and may lower an investor's exposure to risk.

Trade like a technical analyst and lower risks when trading in foreign exchange market. You have a good chance of a winning trade, when your fundamental and technical signals point to the same direction. Following the above strategies in risk management will surely put you on the right path.