Any activity in the financial markets bears the risks. Any activity outside the financial markets does as well. The client, concluding a contract with a broker, always agrees and signs the corresponding risk notification. This is the law.
However, few people actually read it and few people are even aware of the degree of risk in the financial markets. Black Thursday at the beginning of 2015 showed a sharp rise in the Swiss franc. Risks are not correlated by private traders neither by the brokers themselves. After that incident, several companies became bankrupt. A number of customers are in debt until now. Their trading accounts incurred significant losses.
For brokers, everything is somewhat simpler. It is enough to raise margin requirements in anticipation of volatility. Traders need to use all possible risk management tools. They will allow not being at a loss and earning a stable income.
Let’s consider the important risk management tools that will help you minimize your losses and increase revenue:
1) Take profit
Take profit automatically closes the transaction upon reaching a predetermined price level, fixing your income. You give the order that as soon as the price reaches a certain level, it’s necessary to close the deal. With this tool, you can fix your profit until the market has changed movement, thereby causing a loss in revenue earned.
2) Stop loss
SL is the most popular way to manage risk in Forex. Types of SL are as follows:
- Virtual (by price level, by value of loss in account currency).
The first method involves the establishment of SL for a certain value of the price at which the trade will be closed. The second method is more sophisticated. It assumes that stop loss is not set. Upon reaching a corresponding loss (or reduction in profits),the transaction will be closed automatically by an advisor or manually. The latter has a higher degree of slippage. However, such stop-losses are not displayed either in the terminal or on the side of the broker.
3) Trailing stop
It helps limit our losses and even get more profit. This is similar with the stop loss but it has a slightly different algorithm. The key point is that this order helps us minimize our losses in case the price goes against us after it went in our direction.
4) Money management
Whatever the trading system, a violation of money management can lead to irreversible consequences. Exceeding the estimated amount of entry into the market can quickly bring a significant profit as well as enter the unprofitable zone, where fixing the current loss will be the most correct solution. If a trader begins to wait for a pullback
in his direction with a significant amount of position, he makes a mistake. A small pullback against him will bring an increasing risk for the deposit. Compliance with this tool allows eliminating the onset of margin-call and stop-out.
No trading system will bring a stable income if the trader does not use the basic risk management tools. The most important thing in the market is not so much to increase as to save your capital.