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Managing Risks in Forex Trading

It is common that one afraid of being involved in Forex market because of high risk in this trading field. Although every capital market involves certain level of risk, the risk of loss in foreign currency trading market can be extensive. It would be wise to learn about the potential risk (and managing it) if you wish to trade in Forex market.

Knowledge

As we had repeat and repeat again within this website, knowledge deficiency is one of the main reason traders lose their money. Most new FOREX traders don&rsquot take the time to learn what drives currency rates. When news or a statement is due out they must close out their positions and sit out the best trading opportunities. They are taught to only trade after the market calms down.

So essentially they miss the whole move and then trade the random noise that follows a fundamental price move. Just think for a moment about technically trading the aftermath of a price move; there is no potential. Seminars, eBooks, Internet, papers, video courses -- take all the time you need to learn this new trading skill well. The return of Forex trading can be very lucrative but the risk lie beneath is equally great. Invest smartly, and I wish you all the best in the trading world.

Forex Dealer

Often we heard that getting started in Forex trading is easy and instant. All you need is a computer with Internet connection and a funded Forex account with foreign currency exchange broker. However, the hard part is who to open the Forex account with? Who should we appoint as our Forex dealer?

Choosing the right FX dealer is crucial to avoid unnecessary risks. Forex dealers are not all regulated the same way. Although Forex dealers must be regulated by law, firms and individuals can solicit retail accounts for Forex dealers and manage those accounts without being regulated. As a trader you should take up the responsibility of finding out if your Forex dealers are regulated. If they are not, you may be exposed to additional risks.

Also, beware of dealers with investment schemes that sounds too good to be true. Pay extra cautions to dealers that you first knew and always look into the investment offers. If you are from United States, you can always refer to CFTF or NFA for further information of a particular Forex retailing firm or individual disciplinary history.

For NFA, contact number (800)621-3570; official website www.nfa.futures.org/basicnet/; For CFTF, toll free number (866)366-2383 official website http://www.cftc.gov/enf/enfforex.htm.

Maintaining Your Risk Profile

A Good dealer in Forex market might gives free professional advice, free trading system, or free related education.Some dealers provide trading system and info such as analysis charts and pivot data; some provide trading tools to help you define the overall trend from a position trading point-of-view. All these are useful in maintaining your risk in Forex trading.

Nevertheless, out of all this extra benefits, the most important role of Forex dealers is maintaining your risk profile. Forex traders should have rock-solid risk profile when investing in Forex market. A good Forex dealer should have pre-arranged agreements with you regarding on your risk profile &ndash meaning how much percentage of the invested capital that you are willing to risk.

Further more, you can avoid losing your investment totally setting up a stop loss order with the Forex dealer. A stop loss order is a pre-defined limit to exit from the FX market. Examples, you long Euro in EUR/USD at price of 1.2075, stop loss order at 1.2035. If things turn into your unfavorable direction and drop to 1.2030, you can still exit market with the price of 1.2035. Needless to say, a stop loss order is very useful in limiting the risks you are taking.

Avoid Overleveraging

Leverage is the key for profiting in Forex. Forex dealers often allow their clients to trade with high margin.  Margin trading refers to the leverage amount given to the traders to make purchase in the FOREX market. Typical FOREX margins can go up to 100 to 1 or even 200 to 1 where traders are given the power to buy 100 to 200 times more than what they can afford. With high leverage rates in Forex market, traders often find themselves controlling a big sum of money with a little cash put on the table.

Yes, margin trading might sounds attractive as 1,000 cash in a 200 to 1 margin rates account will have the power of purchasing currency worth $200,000. It magnifies the ROI of the trades with less money outlay on the table. But, as most experts say, leverage is a two way street. The brokers want you to use high leverage because that means more spread income because your position size determines the amount of spread income; the bigger the position the more spread income the broker earns. Not to forget the market does not always go in the direction you want, leveraging can magnifies your ROI in your Forex trade but it as well can turn your losses big.

It would be stupid for someone to believe that there is no risk involve in Forex market. Yes, there is an inherit risk in Forex market, but the risk is not in the market itself. The risk of losing money in Forex can be greatly reduce by working with the right dealers, having proper training and education, as well as diversifying your model. Manage risk, instead of thrilled bu risks. The return of Forex trading can be very lucrative but the risk lie beneath is equally great. Invest smartly, and we wish you all the best in the trading world.

Do you have more questions regarding on Forex trading? Next, we will take a look on Forex FAQ and Forex Glossary section where most common questions and keyterms in Forex trading are answered in this sections.

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