Risk management always go hand in hand with forex. Why? Since forex market is all about risk, it is risk control that tells how far a trader can go. The concept of risk management in trading currencies is a concoction of ideas (hedging, lot size control and stop loss) that traders find far from difficult to learn. However, it is also as hard to apply in the actual forex situation.
It is important to know the survival strategies in forex because this melting pot of currency traders is very volatile and impossible for a single factor to control. Cutting on trade lots is one strategy. Basically, there is no specifics that determines the correct lot size but always, it is safe to begin trade with a smaller lot. Every trader has his own risk tolerance though, so it all boils down to how much you can spare to lose.
The use of a stop loss is quite difficult to use in a forex trade. It is meant to end a trade when it shifts its weights against you and you start losing money. In every trading, a stop loss should be used at a price where it is very likely for the trade to turn against you when marketed at. This will overcome the reduced profit when using stops and is more effective compared to targeting other traders’ stops.
Setting a stop loss can be in two different style, depending on what type of forex trader you are. Flexible forex traders will find it more comfortable to put stops at prices which they think will change the atmosphere, that point where they will begin to lose money. The reason behind this tactic is you will always have an easy escape when the tide turns against you.
If you are a system forex trader, mastering system trading method is for you. Stop loss and indicators, or stop placing at ratio determined prices are used in this forex trading method. As a rule of thumb, when indicators provide the most advantageous trade end, the placement of stops is based on them.
In cases where an exchange is down, stop orders are useless. Protection comes only in the form of hedging, which is essentially making a secondary forex trade that protects the open trade. Hedging methods vary and you can choose among them depending on what trade you have open.