While trading on the Hong Kong’s FX market is exciting, it is equally risky. The market’s chaotic nature is what makes it both risky and exciting. Traders use certain trading strategies that heavily rely on this chaotic nature to make high frequency trades in hopes of taking advantage of the situation. Exposing your capital to such chaos, however, may lead to great losses.
There are various ways in which you can protect yourself from losing money and other assets when forex trading, one of them is by using risk management tools and techniques. These tools allow you to only expose yourself to the amount of risk you are capable of handling should things go the opposite way.
Above everything, knowledge is the best risk management tool you can have in your arsenal. By having firsthand data on geopolitical and economic events that will happen, are happening and have happened will help you in adapting into the trading world as well as change your trading goals and strategies when necessary. Here are some of the FX trading risk management tools and techniques you should know about.
Invest in money you don’t need
While it may sound obvious, the first rule of forex trading is only risking money that you can afford to lose. The reason why this is important is because there is a possibility of losing all your trading capital. Additionally, trading with money that you live on will only add emotional stress and extra pressure to your trading. This may in turn compromise your ability to make decisions and also increase your chances of making mistakes.
One of the most powerful risk management techniques used in forex trading is knowing when to cut your losses. You can implement a ‘hard stop’ to do this. Essentially, this is where technology for a trading platform is used to confine a stop loss for a particular level. This can also be done using a ‘mental stop’ where one psychologically decides to limit the drawdown, they are willing to take on a trade. In simple terms, this is just assuring that you can move on and change course at a certain point.
Whichever of the two methods you opt for, it is paramount that you fight the impulse to move the stop loss farther especially when an investment keeps declining in value.
Know when to leverage
While leverage is a risk management tool that is use throughout the financial industry, it is frequently used in Foreign Exchange. This is because leverage has the potential of multiplying your gains as well as your losses. Having access to high leverage doesn’t mean that you will automatically gain, it is knowing when to sue it that will help you steer clear of surpassing your risk limit.
Be ardent in watching and reading the news
If you are looking to manage your forex trading risks, news events can be a treacherous to your trade. Events such as inflation reports, state of employment or central bank decisions can build ridiculously large gaps within a market thus creating gaps such as the weekend gap although much more unpredictably.
In the same way that gaps over the weekend can jump over targets or stops, a major news event can create sudden gaps in just a matter of seconds. Therefore, trading after major news events should more likely be a risk-conscious decision.
While this may seem like a piece of advice that is more applicable to athletes, discipline is a major component of forex trading if you want to reach your investment goals – any experienced trader would tell you the same. It is crucial that you develop a strategy that will define both your appetite for risk and goals. One sure fire way of exposing yourself to unforeseen or unplanned risk is having a knee-jerking reaction every time there is an abrupt market fluctuation.