Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Currency trading is not so much about gaining and losing, picking entry and exit points, but risk management . For a forex trader, the risk management side is inherently more important than guessing which direction the market will go. It is those funds and forex traders, who are maxed to the hilt with high margins, with no stop losses, that expose their clients to the huge risks in the forex markets.
Forex trading allows for a great degree of risk management not available in other capital markets, such as: margin, being able to buy or sell without limit, high liquidity (1.9 trillion traded daily). In other words it is not possible to have such a sophisticated risk management policy in other markets.
- Stop-Loss
- Take multiple positions, as a hedge against your original position
- Cut and switch
- Averaging
Every investor in the forex market should have a solid risk profile. Your risk capital will determine the risk-profile of your account. For example, if you have $10,000 to invest, you can say that you are willing to risk $3,000 of that capital with the potential to gain another $10,000. Thus your losses can be limited to 30% or 40% of invested capital. It is not impossible, but would be very reckless, for someone to lose 100% of invested capital in less than a year. That means they are using high margins and purchasing more than the account's risk profile can handle. This is not only unprofessional, it is dangerous and bad for the client and the industry.
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