In the Foreign Currency market, what is market risk? Market risk can be defined as: “The possibility of financial loss caused by changes in the Foreign Currency Market variables.” Once you understand what market risk is, then you have to look at your personal market risk management so the potential of significant losses can be held to a minimum.
Everyone has an aversion to risk and this will go a long way to establishing your market risk management philosophy. Poor risk management will end up devastating your Foreign Currency trading account, that is a guarantee, so learning the practices that minimise market risks has to be a corner stone of any Forex strategy.
In the exchange based markets, any stock broker or financial planner worth his salt knows this, and as part of their practices should help you determine your risk tolerance. Foreign Currency is different since the only intermediary is your broker and they only provide you with the trading facilities, they have no control over your trading strategies or practices. You are in total control of these.
In the foreign Currency trading world, you are in total control of your market risk management and this should have a clearly definable relationship with your trading strategy.
So what is market risk management from a personal viewpoint? It is knowing how much money you have to invest, what your investment and financial goals are and how much you are prepared to lose if one or multiple trades go wrong.
Think about this for a moment: If you plan to retire in ten years, and you don’t have enough money saved, you may have a high risk tolerance, but minimal money to lose. Yet, you need to do some aggressive, or risky investing to reach your financial goal. This has the potential to create a very hostile situation because your personal needs and your trading strategies conflict.
But if you are in young and just starting to invest for your retirement, your risk tolerance is low, as you have time to recover any losses.
Poor risk management is something you do not want to consider, nothing is worth the pain of loosing a lot of your hard earned cash, when the alternative is minimising losses by adhering to well established FX risk management practices.
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