Poor risk management is the most frequent cause of financial loss when trading forex in Norway. Risk management identifies, assesses, and controls risks to an organisation’s capital and earnings. It is a crucial part of any Forex trading strategy, yet traders with investments in Norway often overlook it. Using a Saxo Bank demo account can help you test risk management strategies before live trading.
The two main types of risk in Forex trading
There are two main types of risk when trading forex in Norway:
Market risk is the risk of losses arising from adverse movements in currency prices. To mitigate market risk, traders must understand market drivers and develop robust trading strategies.
This is the risk of losses arising from the counterparty defaulting on financial obligations. In Forex trading, credit risk generally refers to losses incurred if the broker defaults on their payments to the trader. To mitigate credit risk, traders should choose a reputable broker with strong financial backing.
Poor risk management can lead to significant losses
Poor risk management is often the cause of significant losses in the Forex market. When traders don’t properly manage their risks, they are exposed to the possibility of heavy losses. There are two main reasons why poor risk management leads to significant losses:
Poorly planned trades
Poorly planned trades are the most significant cause of losses in the Forex market. When traders don’t have a sound trading strategy, they are more likely to make impulsive and ill-advised decisions. These decisions can lead to heavy losses, especially if the trade is leveraged.
Lack of discipline
Lack of discipline is another major cause of losses in the Forex market. When traders don’t stick to their trading plan, they are more likely to take unnecessary risks. These risks can often lead to heavy losses, mainly if the trade is leveraged.
How to manage risk in Forex trading
To correctly manage risk in Forex trading, traders must have a sound risk management strategy and should include the following elements:
Risk tolerance is the amount of risk a trader is willing to take. Traders need to determine their risk tolerance before they start trading. Traders with a high-risk tolerance are more likely to take on more significant positions and make more aggressive trades. On the other hand, traders with a low-risk tolerance are more likely to take on more minor positions and make less aggressive trades.
Position sizing is the process in which traders determine the size of a trade. It is an integral part of risk management, as it helps traders to control their risk exposure. Traders should always ensure that their position size is appropriate for their account size and risk tolerance.
Stop-loss orders are used to limit losses on a trade. They are placed at a level where the market is believed to reverse direction. Once the stop-loss order is triggered, the trade is closed, and the trader incurs a loss.
Take-profit orders are used to take profits on a trade. They are placed at a level where the market is believed to reverse direction. Once the take-profit order is triggered, the trade is closed, and the trader realises a profit.
The risk/reward ratio is the amount of risk vs. reward associated with a trade. It is an essential part of risk management, as it helps traders to determine whether a trade is worth taking. A high risk/reward ratio means higher profit potential and a higher potential for loss.
Steps to be taken to improve risk management in Forex trading
- Understand the risks involved in Forex trading.
- Make a plan to minimise the risks.
- Monitor the risks constantly and take action to reduce them when necessary.
- Have a risk management strategy in place before starting to trade.
- Review your risk management strategy regularly and update it as needed.
Risk management plays a pivotal part in Forex trading. Poor risk management can lead to significant losses, especially if the trade is leveraged. Overall, in order to correctly manage risk, traders with investments in Norway must have a sound risk management strategy.