Risk Management Strategies in Forex Trading

Abstract:
In this paper we will discuss about several risk management strategies used by the Fores traders to increase their profits. Two most popular risk management tools are Limit Order and Stop Loss. These will be described briefly as well. Forex market is growing day by day and more investors are now interested in Forex trading.
The first time traders also can earn profit through Forex currency trading. However, several risks are also associated with Forex trading. Therefore, the traders, especially the first time traders, have to adopt some risk management strategies to stay in the Forex market for a longer period. The Forex traders to reduce the risks use several risk management strategies.

These are discussed below.

Limit Orders: The traders stop trading after a certain stage and exit the Forex market at “preset profit objectives”.

Limit orders help the Forex traders to set an upper limit on their aimed profits by establishing an efficient trading methodology. Moreover, the Forex traders have no need to monitor the market conditions throughout the day.
Stop Loss: It is basically an exit point. It allows the Forex traders to come out of a sudden loss, when the Stop Loss is hit, and reset their position in the market. Stop Loss has been a very popular risk management tool for several years.

Positioning the Stop Losses and Limit Orders: The success of Stop Loss and Limit Orders hugely depends on their positioning, that is, where does the Forex traders place their stop losses and limit orders.

The Stop losses should be placed far away from the current market price, for a subtle change in the market condition may trigger the losses.

Likewise, the Limit Orders should be placed on the basis of the market’s current trading activity. The traders should maintain a gap between the rate of Limit Order and market rate.

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Last Updated on : 23rd July 2013