This risk management is the risk that has been owned by the market itself, well before you engage in and after it. You simply can not do anything against these types of risk, but recognize, analyze and seek remedies.

Each instrument has its own uniqueness trading. The three most important risk management that you should consider are:

Changes in Price and Volatility
The first and most basic is the change in market prices. This change of course will create a separate risk management for your trading activities. Shares that have large capital usually move more stable than having a small capital. Forex and the index is the same, some index and currency moves are more stable than others.

Liquidity Risk
To liquidate stock positions, usually in the input data will be in the queue. If the market is down, and buyers are hard to find, you may be unable to liquidate a position to override your great loss. Such risks should also be considered in the management of risk, and sought ways to cope with such losses, you could, for example, do the shot sell (if possible) or to hedge in the futures market or CFD market.

Such is the instrument futures or other derivatives is minimal, especially after the introduction of online trading activities, allowing the implementation of electronic transaction

Risk of Leverage and Margin
Leverage risk can be defined as the management of risks arising from the use of a larger scale than the capital paid-up capital. For example you can buy or sell an instrument worth $ 100,000, Ė with only a deposit guarantee fund of $ 1,000. Assurance is not the maximum amount of losses if the market moves against your position, but a portion of the total capital that you deposited also share in the risk. This happens because it contains leverage loan and we have to pay to the broker if the deal goes bad.

Overnight Risk
Futures instruments for risk management, you keep positions overnight. Specific news can cause the market to move in the desired direction, or vice versa. Sometimes, you can not save the order of liquidation when the market closed. So keep positions overnight is a risk management need to be considered.

For example: for Lehman Brothers (LEH). A day before the announcement of bankruptcy, LEH shares closed at $ 4.00. On the day of bankruptcy, LEH opened at $ 0.24. This decrease amounted to 94% in a day. Short positions will yield tremendous gains on the day, otherwise positions would undermine the entire capital.

Assumption of risk management to note: In preparing risk management, there are three things you need to consider as the basic material your risk management, the first is the risk to reward ratio, the second is the win loss ratio and the third is the Pareto principle.

Risk to Reward Ratio
Risk management is the ratio used to compare the potential benefits with the risks in any decision-making transaction. Risk reward ratio in this case is different from the commonly understood term in the world of trading is very simple to use as an overview of risk management that you will take to get a certain amount of profit.

For example, if you have a risk reward ratio of 5:1, it does not mean that you are actually receiving benefits five times greater than the risk. Once again that this is a ratio not a fact.

To sort the risk reward ratio for each person will vary and are subjective. Investors have capital would have a level of acceptance of greater risk than the small investor. Other personal factors of risk management, such as the purpose, character, and age was also influential in setting the ratio.

To adjust this ratio into the risk management transaction activity is not too complicated, there are many ways that can be done, for example by changing the composition of capital, stop loss, or even by changing the exit point.


Source

Risk Management In Forex (II)