General trading risks

Your profit opportunities are always connected to comparable risks. Forex risk management can be seen as a brief-case containing numerous instruments, which you can use to help keep your trading losses low and potential gain high.

Forex trading risk management is based on four important principles, including:

recognizing the risks
analyzing and evaluating those risks
finding solutions to reduce those risks
managing and applying those solutions consistently.

Assessing the market is a primary focal point for new and seasoned traders. Yes the right market position is important – but experienced traders consider risk management equally important.

Leverage effect

One of the main reasons for choosing to trade Forex and CFD is access to leverage. Why? Because leverage offers a reduced margin requirement when compared to a full investment - you put in less to potentially gain more. But remember, if the market does not react your way, you can also lose more too.

UBFX offers Forex trading leverage up to 30-to-one. For example at a leverage of 30-to-one, you can move to 15,000 USD with a margin of just 500 USD.

The higher the leverage, the faster you gain profit or loss. If you lose, it may be because of over leveraging - meaning you chose a leverage level with a risk too high for you to manage. While trading with smaller investments is an attractive option for avoiding over-leveraging, it also reduces your potential profit. So, always carefully select your leverage according to your account volume.

Inaccurate market assessment

Forex and CFD trading is subject to consistent market movements and every order starts slightly in the negative because the spread (the difference between bid and ask price) gets deducted on order opening. With these points in mind, it`s little wonder that your market assessment won`t always be right and you will sometimes lose profit. But how much you lose, can be controlled by setting a stop loss mechanism at the final level you are prepared to accept loss. However, bear in mind that setting stop losses too narrowly, might lead to your order being closed on a minimal market movement.

Remember, not every trade will conclude in a profit.

Rapid market movements

The market is constantly influenced by news, opinions, trends and political decisions in milliseconds. Two examples from the many options, are:

an influential central bank announcing a major interest rate decision, can cause huge gaps on the trade chart within seconds
a professional market player employs large funds to intentionally cause a significant shift in a particular market.

Even if you are actively paying attention to the market, it is not humanly possible to know every change before it happens. Our point? Set up automated stop mechanisms like the stop loss, to close your trading order for you. But remember, the stop loss cannot help you completely avoid loss - just indicate when action can be taken to reduce it.

Market gaps

These are significant leaps in price, that are shown on a trade chart. Market gaps usually occur when the markets are closed, but even open markets can react to unexpected economic news that causes trading orders to close far from the desired threshold. So why is this important? Because even automated mechanisms like the stop loss, can only close orders at the next available quote after the jump. The EUR/USD chart example, shows:

an unusually large gap right after a weekend in July 2015, and
that there are no prices inside the gap, which makes it impossible for stop loss to trigger before the next attainable market price.

Gap

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