Risk Management in Forex Trading
Risk management in forex trading, also known as money management, the concept of money management is to avoid risking more than 1-2% of personal funds in any single transaction. This concept can greatly reduce risk in forex trading.
Risk management can help us become successful traders. With proper risk management, you can control the amount of money that may be lost in a transaction. Even in the worst case, risk management can limit risk.
The risk-reward ratio represents the potential profit compared to the amount you may lose in a single transaction. For example, when you take the potential risk of $5 to get a return of $10, the risk-reward ratio is 1:2.
Potential profit and loss can be defined by stop loss and take profit level.
Stop loss and take profit are orders that close a position when the price reaches a certain predetermined level. The stop top loss or take profit levels can be identified by various technical analysis tools, such as support and resistance, overbought and oversold areas, pivot points, previous high-low, trend lines, etc. Stop loss prices are usually located above or below support and resistance zones.
Please keep in mind that neither stop loss nor profit is guaranteed: when the market is volatile, your order execution price may be different.