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Chapter 6 - Trading philosophy and capital management
How to Manage Risk in Forex Trading?
Risk management is defined as the practice of identifying, analyzing, and taking steps to reduce the downside of “losses” in advance Any entity involved in formulating decisions related to financial well-being for itself or others regularly uses the principles of risk management. Some examples of these entities are companies, banking institutions, governments, and individual retailers.
In the area of foreign exchange "Forex", risk management is one of the major disciplines to maintain profitability. If the risk issue is not addressed comprehensively before entering the market, unexpected fluctuations may lead to chaos on the trading account. The risks must be placed in the appropriate context every time the market is entered.
Depending on the type of trading and the market being entered, your risk management style may vary. However, there are four basic measures that can be very beneficial in reducing exposure to risks:
- Adherence to a comprehensive trading plan.
- Using stop loss and profit targets.
- Regular risk \ reward ratio.
- Dealing with market conditions wisely.
Regardless of whether you're trading in futures, Forex, or stocks, the first reason why most traders leave the market is capital loss.
