3 Simple Ways of Risk Management in Forex Trading
The most basic investment law is always the investment risk. Especially if we are investing forex trading business. As we discussed in the previous article, that there is High Risk High Return on forex business. High earning potential but there is still a high risk of shadowing. Not everyone is able to accept high risk in Forex Trading business. But the profit would want ya?
High risk in forex business can not be eliminated. Even Fund Managers of the International caliber did not guarantee or eliminate those risks. Risks in the forex include the possibility of losing all funds (exhausted) because of its moving in a liquid (cash flow) and there is no way / method of Holy Grail (Surely Untung).
Also it must be realized by us all that this business is not a way to get rich quick. Due to the risks mentioned above. Therefore, appropriate learning is needed and in this article we introduce Three Simple Ways of Risk Management in trading. You are also required to minimize risk and transfer High Risk High Return to Managed Risk High Return.
First is, CUT LOSS or called trim loss. This action is done to limit the actual losses incurred from our position. Usually, the direction of price movement is opposite to our trading position.
For example, we should buy GBPUSD at 1.28000 expect GBPUSD to move up to optimal target. But in fact, the price of GBPUSD is moving down to 1.27500. All we can do is let or trim the losses to avoid greater losses. If we do a cut loss by closing BUY position at 1.27500 then our losses are only 50 points, as the price of GBPUSD continues to decrease.
Second is, AVERAGING is to maintain the old position and open a new position in the same price when the opposite direction. Similar example above, hold buy at 1.28000 and add new buy position at level 1.27500 with same lot amount. The hope is that the price will move upwards according to the first position analysis. And when the price moves to the 1.28000 level, then the buy position at 1.27500 has profit 50 points. But the downside is if prices continue to fall. Losses can get bigger.
Third is, SWITCHING is closing the old position and opening a new position opposite from the old position. For example, we buy GBPUSD at 1.28000 and when the price falls to 1.27500 then we close the buy position at 1.27500 (in 50 points loss, Cut Loss) and open a new sell position at 1.27500. This means that price expectations move upward not realized and anticipated to be the price expectation to move down.