Posts Tagged ‘forex exposure’

Forex Risk Exposure

The Importance of Managing of Your Forex Risk Exposure

Reducing and minimizing your forex risk exposure should be one of the keys to your forex trading strategy.  Without a good forex trading plan in place and utilized, you are more prone to suffering a trading loss, perhaps even a significant one which could wipe you out.  All seasoned forex traders have heard (if they’re lucky) or experienced (if they’re not) a forex horror story at one time or another.  There are no absolutes in forex trading; any trade can go wrong, but a bad trade doesn’t have to become a horror story, provided you understand your own forex risk exposure.  There are several ways you can minimize your forex risk exposure, and a few of them will be discussed here.

How to Minimize your Forex Risk Exposure

The simplest way to minimize your forex risk exposure is to reduce your leverage risking, say, just 1% or 2% of your account balance.  This may be a difficult concept to grasp for the novice forex trader, who is anxious to make his or her first big trade.  Just remember, trades can go in any direction, and risking much more than 2% may make your first big trade your last.

Another way to minimize your forex risk exposure is by putting in a stop for your trade.  A stop is the ultimate protection should a serious market or price reversal occur, and a very effective way of minimizing your forex risk exposure, however, normal stops tend to be quite rigid and you may miss out on an opportunity if you need a little more breathing room.

Finally, yet another very effective way of minimizing your forex risk exposure is through forex hedging, whereby you set up more than one trade, each using different currencies, yet still relative to the other so that an impact on one currency will affect another in an inverse direction.  For example, if you set up buys with EUR/USD and USD/JPY you will learn that even if the USD appreciates, your loss will be offset by the probable appreciation of the JPY.  Effectively, in this way, you’ve minimized your forex risk exposure to loss.  Forex hedging offers the trader the breathing space that a normal stop might not.

The actions that you take to minimize your forex risk exposure, whether a singular or combined, are critical to your long term investing goal – to achieve success and profits in your forex trading.