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Risks Profile

Learning how to distribute your risk in order to minimize it (also called risk diversification or risk profile) is crucial to your success on the financial markets.

The Forex market can be quite unpredictable sometimes - unexpected developments might affect it suddenly, such as political events or even the ‘human factor’ - the behaviour of other traders. Sometimes traders have a difficulty predicting how currencies are going to move. In order to protect themselves from possible losses, traders spread out their risk, i.e. they diversify their portfolio. This can mean that occasionally traders would opt to take less profit from more places than more profit from just several deals that can easily turn against them.

Developing a good diversified portfolio is more difficult than it seems at first glance. It is especially hard for forex beginners who may be lured by the prospects of a big profit and forget that bigger profits usually come with greater risks. Since forex brokers offer various leverages to their clients, this allows traders to make deals worth much more than the money they invest. For example, a leverage of 1:200 would permit you to make deals 200 times greater in volume than your deposits. However, traders must recognize the existence of the other side of the coin - the greater the leverage, the higher the risk associated with the deal. To solve the problem traders cannot simply get rid of leverage because it is a tool of vital importance; instead, they need to learn how to manage risks.

There are many ways this can be achieved, and a combination of methods can also be effective. One way to do this would be to employ different trading strategies. For instance, rather than using the total sum of available funds for your own trades, you might consider investing in another trader (e.g. via a PAMM system) to add diversity. No matter what decisions you make in your own trades, chances are that you will face a loss at some point in your trading career. Having your money spread among several traders (yourself included) will give you access to more possible (profitable) outcomes. Another idea is to combine trading strategies by opening some day trades and some long-term ones, for example, or to trade different instruments. The options are endless. In essence, this is all like betting on more than one horse.

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