Forex Trading Risk Management

Forex is a shortened term used to refer to the world’s largest market: the foreign exchange market. The foreign exchange market is the largest market in the world thanks to the enormous amount of people that travel and need to convert their own currency into local currency, as well as businessmen from two different countries that need to convert their currency into the currency of their business associate or would like to conduct business using a neutral, stable currency, such as the American dollar, in case the currencies of the countries the two businessmen belong too are volatile in their value, thereby putting the businessmen at risk of losing money due to this volatility.

There are also several businessmen who have turned the trading of currency into an actual business. The profit that can be earned through the smart trading of currency can get to a point where the savvy trader can make a living solely by trading currencies. This is possible due to the varying values of currencies throughout the world.

For example, as the economic sanctions against Iran were about to be lifted by the permanent members of the United Nations Security Council, several smart currency traders began to invest in Iran by purchasing its currency. This was done due to the fact that Iran’s currency possessed little value before the sanctions were lifted, but after the lifting of the economic sanctions the Iranian rial saw a huge boost in its value thanks to the flurry of economic activity that was possible now thanks to the new economic freedoms.

The traders that had purchased the Iranian currency were now able to sell it at a much higher value, thereby earning a good amount of profit. Additionally, the lifting of economic sanctions caused the American dollar to drop. This occurred due to the fact that Iranians usually invested in American dollars in order to keep the value of their money up. When the sanctions were lifted, the value of the dollar began to drop, as people began to exchange their money back to the rapidly gaining rial.

Just like any other business or trade, there are risks involved to playing in the foreign exchange market, just like there are risks involved in the stock market. What needs to be understood is that trading in the foreign exchange market is a lot like gambling. Information is collected, predictions are made, and purchases (or bets) are made based on the data collected. In order to minimize the risks involved, most traders use risk management techniques.

There are three basic types of forex trading risk management strategies. The first one involves simply doubling up the investment each time a loss is incurred. The theory behind this is that eventually the trader will make one enormous score once the losing streak ends. Another type involves decreasing your investment each time a loss is incurred but doubling it each time profit is made. The third type involves speculation, gathering data and making investments based on the information.