Risk Management: the first step towards becoming a successful South African trader

By: Chime Amara

What is Risk management？

Risk management is the wise act of safeguarding ones capital against loss in the Forex market. It is a process whereby the trader uses both technical and analytical tools to guide himself to avoid loss of more than 1-2% in any position he takes in the market. Risk management therefore is the first quality of a good and successful trader.

On the other hand, without risk management, the traders capital will be exposed to unlimited loss including regular blowing up of ones account. Hence, it becomes very correct to say that risk management is more important than any profit the trader could even hope to make that would lure him to safeguard against loss.

Proper risk management remains the secret of successful traders and the only way to remain profitable in the Forex Market.

Application of Risk management

There are many ways in which the trader is to guard against loss otherwise known as risk management. The following are practical application of risk management while trading.

A. Stop loss

This is pending order placed at the market by wise traders to guard against much loss if suddenly the market takes an opposite direction contrary to the traders predictions. Often Stop loss is set by calculating 40-50 pips away from ones entry. Some prefer to calculate the position to set ones stop loss to be at least 1% of the capital traded. Stop loss despite bringing back some loss to the trader when hit; yet undeniably remains the trader's best friend who defends him from unimaginable loss and from blowing up his account regularly. It is therefore paramount that every aspiring successful trader should always embrace putting Stop loss and never neglect it for a single trade.

B.Hedging

Hedging is one of the wise means of protecting ones capital against loss by taking two positions in the market at the same time especially at those moments when strong volatility is expected in the market. Since all we do to make profits in Forex Trading is either buying or selling, the trader this time decides to take both position at the same time in order not to miss out or loss much whenever the market goes contrary to his position. In hedging, the trader places a new order immediately below his stop loss position. Such that once his Stop loss is hit, the set pending order which is opposite to his initial position would be activated and he will profit from the opposite direction in which the market has taken after his stop loss was hit. Often the trader who decides to hedge must guard against the market witch hunting known as STOP LOSS HUNT. This later term is a comedy of errors for the trader that could bring him more loss in trying to safeguard his capital.

C. Pending orders

Another good means of safeguarding against loss is by taking proper decision on when to enter the market. Hence good traders target strong resistance and support regions and placing pending orders on them based on previous price actions in the hope that they will be activated. Pending orders includes: Buy/Sell limit, Buy/Sell stop, etc.

D.Take Profit

Another important quality of a good trader is that he knows when to take profits. Of course taking profits means that the trader must not be over greedy expecting 200-300% profits in one trade before he takes profits. A wise trader always detects immediately when the market is changing direction and leaves with the already accrued profits.

E. Trading Plan

Without a trading plan, one can hardly be successful in the Forex market. Trading plan guides the trader on which pairs to trade, when to trade, entry and exit points and volume of orders to place. Trading plan often serves as a wise tutor and mentor to the Forex trader and must never be neglected.