October 18, 2013

How to Minimise Foreign Currency Exchange Risk

This article looks at the ways that you can minimise the risks you take on the foreign currency exchange.

Minimize Foreign Currency Exchange Risks

When you trade on the foreign currency exchange you need to know about the risks that you face.  There are a number of different risks that come with foreign currency exchange trading.  While it is important to know about the risks that you face it is also important that you know about the ways to minimise the risks.  If you are able to minimise the risks you will be able to trade with more safety.  Of course, you have to consider what the other implications are of minimising the risks that you trade with.

Inherent and Trader Made Risks

There are two kinds of risks that you face on the forex market.  The first is the inherent risks of the market that come from the unpredictable nature of the market.  There is no way that you can completely eradicate these risks.  However, there are a number of ways that you can limit their impact.

There is possibly more trader made risks on the market then inherent risks.  There are many ways that you can increase the risks that you take on the market.  This can be done through the use of leverage with your trading.  It can also be through the manner in which you trade.

Knowing Your Foreign Currency Exchange Risk Capacity

The first way that you can minimise the risks that you face on the market is by knowing what risks you should be using.  The risk capacity that you have when you trade will help you determine what risks you should be taking and when your risks fall into dangerous levels.

The risk capacity that you have is more than the risk tolerance you have.  Risk tolerance relates to the amount of risk you can personally handle in an emotional and mental capacity.  Risk capacity is more than this because it looks at the risks that your trading is able to handle.  This will be a combination of the risk tolerance you have and the financial capacity of your trading.  If you have a low risk capacity then you know that you should be using limited risks.

Understanding the Use of Leverage

The best way to minimise the risks you take is to understand the leverage that you use.  The leverage that you use should never raise the risks you take above your risk capacity.  If it does then you are using excessive leverage and should reconsider the trade you are completing.

The Strategy You Use

When you trade on the forex market you need to use a trading strategy.  There are some strategies that are considered to be high risk because of the way that you trade.  These strategies generally call for high amounts of leverage to be used and for you to trade more proactively than reactively.  This means that you are not going to be waiting for confirmation of the movement before you trade.

The Problems with Minimised Risks

While minimising the risks that you face will increase the safety of your trading it will also lower the returns you have.  The higher the risk of your trading the greater the returns are going to be.  It is important that you weigh the lost returns against the safety of your trading.




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