Your success in forex trading depends on your ability to manage risk. Investment, of any kind is always risky, in addition to expected profit. With you can understand the risks, then you can take steps to minimize losses. To minimize the losses / risks is called Risk Management. That is how we can control the risks that we endure.
In the investment world, there is a law that is an investment that promised big returns, the investment has the same risk amount with the promised return. Conversely, if you are looking for an investment with little risk, usually offered too little return.
Everyone has an investment profile that is not the same. There are people who have type Risk Lover that is, those who love the risk by promising big profits. But there are also so-called Risk Averter that is, those who prioritize security over the funds and choose the investment with minimal risk to the consequences of the return generated is also small. nothing better to each other in order to remain successful in trading. matter back to the private individual in understanding the purpose of investing.
There are 3 kinds of trading risk management that we can use. In this case, we can use one or all of them depend on the willingness and ability of risk will be borne by traders.
1. Cut loss
Close your position opposite the market price movement. Cut loss used to limit the losses suffered so as to avoid even greater losses.
For example, say we're opening our position on Open Buy GBPUSD at 1.6000 price. Open a Buy position means that we expect prices to rise above 1.7000, so we get lucky. Our hope as the price moves up to 1.7100 so that we can obtain 100 points profit. But what power, turns out the price moves against what we expect. It turned out that the price goes down continually from 1.7000 to 1.6950 and still showed a tendency to fall.
Instead of experiencing further losses and ultimately experience a margin call, the better the position was closed even though we bear the loss of 50 points (1.7000 to 1.6950 = -50 points).
2. Switching
This action is similar to cut loss, but the difference after closing the position we are losers, we
opening new positions in the same direction with the market price movement.
In the same case with a cut loss above, then we close our position at 1.7980 and then we open a new position Sell as prices tend to decrease. Thus, if prices continue to fall, say reach 1.7900 then our overall experience loss 20 points but gain profit by 80 points (1.7980-1.7900 = 80) so that the total profit we still get 60 points.
3. Averaging
This method requires extra capital to maintain the position we have open that was moving against the market price.
Say the same case with the example above Cut Loss, then if we want to take action averaging then we open a new position but in this case is not like switching a closed position we are experiencing loss and opened a new position as opposed to our previous position by reason prices have moved down. In averaging we are not closing our position which has been opened (in this case Open Buy) and then we even added by opening new positions in the same direction that is Open Buy back!
Why is that? Do not we have done previously Buy and suffer losses, then why are we doing Open Buy again? The reason is simple, we would expect because the price has come down then the price will go up so that when we perform a second action Buy expected price moves up and even surpass our Buy first so that we gain a double advantage.
The three above risk management is very simple and easy to do.So, be very harmful if we do not know the things above. But the question is, whether by knowing that we do not experience loss?
The answer is of course not. If you look at the three above risk management relies on one thing: our ability to analyze price movements. That's what's at the heart of forex trading. Risk management does not even become effective when we are not able to do the analysis correctly and accurately. So, knowing the analysis is imperative in starting an investment in forex trading.
In the investment world, there is a law that is an investment that promised big returns, the investment has the same risk amount with the promised return. Conversely, if you are looking for an investment with little risk, usually offered too little return.
Everyone has an investment profile that is not the same. There are people who have type Risk Lover that is, those who love the risk by promising big profits. But there are also so-called Risk Averter that is, those who prioritize security over the funds and choose the investment with minimal risk to the consequences of the return generated is also small. nothing better to each other in order to remain successful in trading. matter back to the private individual in understanding the purpose of investing.
There are 3 kinds of trading risk management that we can use. In this case, we can use one or all of them depend on the willingness and ability of risk will be borne by traders.
1. Cut loss
Close your position opposite the market price movement. Cut loss used to limit the losses suffered so as to avoid even greater losses.
For example, say we're opening our position on Open Buy GBPUSD at 1.6000 price. Open a Buy position means that we expect prices to rise above 1.7000, so we get lucky. Our hope as the price moves up to 1.7100 so that we can obtain 100 points profit. But what power, turns out the price moves against what we expect. It turned out that the price goes down continually from 1.7000 to 1.6950 and still showed a tendency to fall.
Instead of experiencing further losses and ultimately experience a margin call, the better the position was closed even though we bear the loss of 50 points (1.7000 to 1.6950 = -50 points).
2. Switching
This action is similar to cut loss, but the difference after closing the position we are losers, we
opening new positions in the same direction with the market price movement.
In the same case with a cut loss above, then we close our position at 1.7980 and then we open a new position Sell as prices tend to decrease. Thus, if prices continue to fall, say reach 1.7900 then our overall experience loss 20 points but gain profit by 80 points (1.7980-1.7900 = 80) so that the total profit we still get 60 points.
3. Averaging
This method requires extra capital to maintain the position we have open that was moving against the market price.
Say the same case with the example above Cut Loss, then if we want to take action averaging then we open a new position but in this case is not like switching a closed position we are experiencing loss and opened a new position as opposed to our previous position by reason prices have moved down. In averaging we are not closing our position which has been opened (in this case Open Buy) and then we even added by opening new positions in the same direction that is Open Buy back!
Why is that? Do not we have done previously Buy and suffer losses, then why are we doing Open Buy again? The reason is simple, we would expect because the price has come down then the price will go up so that when we perform a second action Buy expected price moves up and even surpass our Buy first so that we gain a double advantage.
The three above risk management is very simple and easy to do.So, be very harmful if we do not know the things above. But the question is, whether by knowing that we do not experience loss?
The answer is of course not. If you look at the three above risk management relies on one thing: our ability to analyze price movements. That's what's at the heart of forex trading. Risk management does not even become effective when we are not able to do the analysis correctly and accurately. So, knowing the analysis is imperative in starting an investment in forex trading.
