Risk Management in the Forex Market (Part 1)
The forex market is highly risky, primarily due to the numerous variables influencing exchange rates. Despite the abundance of literature on exchange rate fluctuations—analyzed through economic theories, mathematical statistics, geometric patterns, or behavioral psychology—currency movements often defy traders' expectations. Forex investors and operators must possess diverse knowledge, with risk management awareness and planning being indispensable.
Trading Plan
Traders develop unique styles: some follow meticulous plans, while others rely on intuition. Neither approach is inherently wrong. Intuitive traders may not need textbooks, but systematic traders should study this chapter carefully.
A forex trading plan involves many principles, but its essence is defining entry and exit points for every trade, regardless of profitability. Once a baseline is set, price movements can only rise, fall, or stagnate. The plan must provide an actionable blueprint. When any of these three scenarios occurs, traders execute buy/sell decisions accordingly.
While multiple factors must be considered, the core question remains: When should an open trade be exited? This involves three exit strategies:
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Stop-Loss Plan: Exit unprofitable trades decisively.
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Take-Profit Plan: Exit upon reaching profit targets.
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Inactivity Exit Plan: Exit if prices show no significant movement over time.
The most effective way to exit a losing trade is a stop-loss order, predicated on predefined loss tolerance. If a stop-loss level is set pre-trade, the only action at that point is execution.
Exiting profitable trades is more nuanced. Options include:
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Limit Order: Immediate exit upon hitting a preset profit target.
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Trailing Strategy: Let profits run until reversal signals emerge (e.g., "Sell at stop-loss or when Indicator X triggers—whichever comes first").
Regardless of strategy, the ultimate goal is realizing profits. Traders must set clear exit boundaries unless deliberately risking further. Successful traders know: "Easy come, hard to keep." Those ignoring profit plans will learn the hard way: "Trees don’t grow to the sky."
