What is forex risk management?
Forex risk management enables you to implement a set of rules and measures to ensure any negative impact of a forex trade is manageable. An effective strategy requires proper planning from the outset, since it’s better to have a risk management plan in place before you actually start trading.
What are the risks of forex trading?
- Currency risk is the risk associated with the fluctuation of currency prices, making it more or less expensive to buy foreign assets
- Interest rate risk is the risk related to the sudden increase or decrease of interest rates, which affects volatility. Interest rate changes affect FX prices because the level of spending and investment across an economy will increase or decrease, depending on the direction of the rate change
- Liquidity risk is the risk that you can’t buy or sell an asset quickly enough to prevent a loss. Even though forex is a highly liquid market, there can be periods of illiquidity – depending on the currency and government policies around foreign exchange
Leverage risk is the risk of magnified losses when trading on margin. Because the initial outlay is smaller than the value of the FX trade, it’s easy to forget the amount of capital you are putting at risk
Forex risk management in summary
If you have a particularly effective risk management strategy, you will have greater control over your profits and losses. We offer a wide variety of tools to help you get geared for success. These include the educational resources at AAA Academy, free webinars and seminars, a demo account option, forex trade ideas, and much more.
1 You will incur a premium if a guaranteed stop is triggered.