Risk Management in the Forex Market (Part 2)

Capital as a Planning Element

Every plan contains key components. The first decision is determining the capital allocation for forex trading. The actual amount depends on multiple factors:

1. Trader's Motivation: If for experimentation or leisure, minimal capital is advisable.

2. Risk Appetite: The willingness to take risks for potential profits.

3. Personal Circumstances: Age, family responsibilities, health, career stage, and family support for speculative activities. These are critical considerations. The fundamental principle is that traders should never risk amounts disproportionate to their profit potential and personal financial significance.
   
   

Trade Selection and Evaluation
Profitable forex trading requires a systematic selection approach. Key considerations include:

1. Selection Methodology: Methods vary—consulting experts, independent research, or following peers. The optimal approach depends on individual preferences. Core criteria:

   • Theoretical soundness: Avoid methods with illogical foundations.

   • Market signal identification capability.

   • Practical exit strategies to prevent capital depletion.

2. Market Coverage: Determine the number of forex futures markets to monitor and trading frequency within a given period.

3. Time Horizon: The intended holding period is crucial.

The overarching goal is maximizing risk-adjusted returns. Like all investments, "return" is time-dependent—a small profit earned in 2-3 days signifies success, whereas a 100% return requiring 2-3 months may not justify the time cost.

Terminating Trades
As previously detailed, exit strategies are integral to planning and require no further elaboration here.