Everyone is talking about the risk management policy. Rookie traders in the United Kingdom are bombarded with the phrase “money management” before they even open a trading account. The role of money management is undeniable in the success of a trader but you must have to know the different types of risk exposure before you can think about the risk management policy. Some of the advanced traders don’t even know that the risk exposure is not limited to the trade execution. Read this article if you want to enhance your knowledge of risk management policy.
Liquidity Of The Market
Liquidity is the key reason why retail traders can make a big profit at trading. But the liquidity should be assessed very carefully as this volatile market often creates an unstable market condition which is very hard to trade. In such a state, traders should not execute any trade and if they do they are just taking the trades with gut feelings. To analyze the liquidity and risk exposure, you have to know about the economic stability of the currency. For that, you must learn fundamental analysis.
Environmental Risk Exposure
By environmental risk exposure, we are referring to the quality of the trading environment. You might take a 2% risk in each trade but by choosing a low-end broker you are pushing yourself into an uncertain industry. An unregulated broker might scam you or they could even hunt the stop. They can manipulate the price feed and the trades will not be closed at the desired price level. So, if you want to limit your risk, you must consider the environmental risk exposure factors. Look at the top Forex trading company and you will realize how well they are organized. They spending millions of dollars only to ensure the safety of their clients. So, try to choose a well-reputed broker to manage the risk in trading.
Economic Risk Exposure
The economic risk exposure is more like trading the volatile market when the price is not respecting the technical levels. If you trade long enough, you will face such market conditions when the market is unstable and the price is just responding to economic news data and rumors. To save your capital, you have to limit the risk in a very unique way. Until the market settles down, you can’t afford to risk more than 1% of your account balance in a single week. This will reduce the risk of losing your capital in uncertain market conditions.
Leverage Trading Account
This is the most type of risk exposure we are familiar with. Taking too much leverage to trade with big volume is not the actions of the pro traders. The maximum leverage you can take should 1:10. Lowering down the leverage will reduce the risk of emotional losses. Thousands of traders are taking the trades with a big volume to recover their losses. To them, taking high risks in each trade is the only way they can win big trades. So, limit the leverage if you want to survive in trading.
Technical Risk Exposure
Due to some technical failure, you might have to take bigger losses. For instance, if you trade with big volume and tight stop, you are bound to experience slippage. Such slippage should be considered in your risk profile. Make sure you can accept fair slippage in the trade without losing 2% of the balance. So, the traditional risk management policy is not going to work if you don’t deal with technical risk exposure factors.
If you have read this article carefully, we are sure you will see the market from a different perspective. Consider these issues while you are trying to trade the market. By following the tips of this article, you can expect to reduce the risk in trading.