Futures Knowledge - Managing Risk

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Home > Forex > Managing your Risk
Article By Rick Thachuk
World Link Futures

The following are guidelines to help you manage the risk of FOREX trading:

Keep Excess Margin
Cash in the FOREX account that is above the amount required to meet the margin for outstanding positions is referred to as excess margin. A trader should always maintain excess margin - enough to be able to tolerate several losing trades in a row since several losing trades may occur before a winning trade does. When excess margin approaches zero, the trader should begin to liquidate some or all positions, or deposit more cash into the trading account. As a built-in safety measure, open positions are automatically closed should excess margin dip below zero. Excess margin is provided on a continuous, real-time basis and so is immediately available.

Start with a Flexi or Mini Account
The Flexi and Mini accounts allow you to trade in amounts of foreign currency that are much smaller than the standard contract, and therefore less risky. For example, profit and loss on a mini contract fluctuates 1/10 the amount of a standard contract.

Use Stop Orders
Stop orders are used to automatically close a position once loss has reached a specific point - a point that you specify. For example, say that a trader who believes that the British pound will strengthen against the U.S. dollar has just bought a GBP/USD mini contract at a price of 1.8331 and wants to risk only $50 on the trade. Since every pip value is worth $1 for this mini contract, the trader will enter a stop order to sell one GBP/USD mini contract at a price of 1.8281. Now, if the GBP/USD bid drops to 1.8281, the trade will be automatically closed.

Practice First
The demo account provides an excellent and safe arena to practice your trading skills and learn first-hand about the risk management techniques listed above.

See Also:
Risk Awareness

Home > Forex > Managing Your Risk

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