You must know the market you trade. You must know its specifics, and most importantly, you must understand the risks.
The management of risk is a key factor in the forex trading systems.
An unprepared trader is as doomed as an unexperienced one. Luck may sometimes smile upon you, but it’s far more reasonable to rely on solid principles, when it comes to managing your money.
MARKET RISK
This is the risk of the market performing differently from your expectations. Every market has its dynamics and failing to understand them can lead to unpleasant surprises. That is where fundamental and technical analyses play a key role.
COUNTRY RISK
Instability within a country can impact its currency. If some adverse event occurs or traders fear that something could happen, they might move out of a country’s currency, which devalues it. This can happen fast and can leave you with open positions in a thin (illiquid) market.
DEVALUATION RISK
Some countries may intentionally devaluate their currency, as part of their monetary policy. This is not a bad thing overall, nor it is unexpected (usually). Still, it might come as a surprise for the unprepared traders.
LIQUIDITY RISK
There are very liquid markets and markets that are far less liquid. The former provides smooth trading experience, fast order execution, minimal or no slippage. As for the latter, less liquidity might mean time delays and slippage in the execution price.
LEVERAGE RISK
Leverage is a very useful tool when applied wisely. Heavy leveraged positions lead to high risk of incurring larger losses. A volatile market may further increase the risk of receiving a margin call.
MATHEMATICAL EXPECTATION
The expected value (or mathematical expectation) of the trading strategy is very important. It puts into the equation not just the possible profit and loss, but also their relative probabilities.
The mathematical expectation refers to the very small risk to incur a very large loss. So, when considering a trade with just a small chance for a bad outcome, we should also bear in mind what would happen if that small chance hits us.
RISK OF RUIN
This is the risk of running out of capital to execute trades. This typically means that the trader is forced out of the market and the reason usually is that he did not utilize some measure, or rule, that was aimed at protecting him from this very risk.
