This article looks at the risk limits you should have when trading on the foreign currency exchange.
When you trade on the foreign currency exchange you should consider what your risk limits are. The most important risk limit that you will have is the risk per trade amount. It is important that you understand why you need to have this limit. You should also consider what the repercussion are if you do not consider using this limit.
Why You Need Foreign Currency Exchange Risk Limits
There are a lot of risks that you face on the foreign currency exchange. It is important that you know what these risks are and how you can avoid them. The problem is that there are many risks that you will not be able to avoid. When faced with these risks all you can do is limit the impact they will have on your forex trading account balance.
The best way to limit the impact of the risks is to have a risk limit. When you have a risk limit you will set a limit on the amount you will lose through the risks that you face. By limiting the losses that you are going to make, you limit the impact of the risks that you are taking.
Choosing the Risk Limit
When you look at risk limits you have to choose one that you are comfortable with. The most important risk limit that you should be looking at is the risk per trade. This is commonly set at 2% of your trading account balance. There are many traders who choose to set this limit at 1% or 3%. When you do this you need to consider what the repercussions could be when you trade.
If you set your risk limit at 2% and hit a losing streak of 10 trades then you are going to lose 20% of your trading account. If you have set the risk limit at 1% then you will only lose 10% of your trading account. These amounts are easier to make back when you lose them. It has been shown that when you lose 25% of your trading account you will need to make a 33% return to bring the trading account back to what it originally was. When you are losing only 20% of your trading account on a single trade then you so not have to worry about the return amount being too great.
The Repercussions of Not Having a Limit
There are a number of repercussions that you will face when you do not have a risk limit. The first is that you are going to lose more of your trading account balance than you will be able to regain. This can lead to a margin call on your account which has been the end of trading for many people.
When you do not have this limit you are also increasing the risks that you trade with. All traders will have a risk capacity that they should use when they trade. If you do not trade according to your risk capacity then you are not going to be able to trade for very long.