Forex Risk Assessment—5 Tips That You Must Know

Seizing the market fluctuations and trade accordingly is the profit rule of forex investment and even all investment transactions.

The forex market is highly volatile, enjoying huge profit potential, but due to the characteristics of margin leverage mechanism, two-way trading, T 0 mode and 24-hour trading time, the risks are also much greater than ordinary assets.

Therefore, one of the imperative things to do before conducting a forex transaction is risk assessment, only after which can you consider whether to trade and how to open a trading position.

Before you start considering the profit points of a trade, it is more necessary to think about the potential risk. If risk is considered first, it means that the order of fund management is placed before the transaction decision, which can greatly reduce the risk in later transactions.

Meanwhile, you should keep in mind that do not accept unnecessary risks under any circumstances, let alone participate in trading situations where the risk range is out of control.

For example, when an important index is released, the market will be volatile and likely to jump short, and the risks are obviously beyond your control. The Non-farm Payrolls(NFP) period is a typical situation, where transactions are generally not suitable. If you can't control the range of risk, do not trade, and it's a good choice to wait and see.

Today, I would like to share some tips for risk assessment of forex margin trading. What every investor should to is to carry out a forex risk assessment, making the transaction details more relevant to his/her own situation.

1. Risk assessment based on fundamentals

Prices of forex and CFD are influenced by fundamental economic factors such as economic changes in monetary countries, related policies, geopolitics, and so on. These factors may include, for example, GDP growth rate, potentially damaging geopolitical events, employment statistics, interest rate, trade balance reports, etc.

A factor can be called the main line fundamental of the current period if it brings momentum to the forex market for a long time. if only a short-term fluctuation is brought about by the influencing factor, it becomes the branch fundamental.

Main line fundamentals often trigger long-term unilateral market with great profit margins, while the branch line fundamentals has an unabiding influence, smaller profit margins, variable direction, and thus greater risks.

To avoid most of the forex margin risks and obtain greater swing profits, investors should choose more unilateral market transactions under the influence of main line fundamentals. 

2. Risk assessment based on technical aspects

Making risk assessment based on fundamentals is to predict forex trends by global events, while based on technical aspects is to make good use of analytical charts to seize investment opportunities.

In addition to risk assessment of forex margin based on fundamentals, traders can also perform forex margin risk analysis through technical indicators to prevent unnecessary losses in advance.

For instance, traders use the moving average as an indicator to assist in trading, and when a golden fork or a dead fork pattern appears, the market may have a turn, which is the opportunity of risk and profit. As long as you master the technical risk analysis method of forex margin, you can make timely adjustments to the feedback of technical indicators, protect your own interests, and pursue more investment returns.

Apart from the two broad categories of fundamental and technical aspects, risk assessment can also be carried out by the following three features:

3. Assessment according to profit/loss ratio

Examining the profit/loss ratio of each transaction is one of the methods for conducting forex risk assessment. When the profit expectation of a forex investment is greater than the loss expectation, it indicates that the potential risk is less than the potential profit, and investors can enter the market; otherwise, investors should not risk entering the market.

Forex profit/loss ratio can not only be use be to conduct risk assessment, but also determine the profit goals for investors, clarify the scope of transaction losses, and make forex transactions more controllable.

Why do more and more investors value profit/loss ratio during transactions, although the winning rate is very important?

Every time we make a trade, a transaction fee will be deducted. From the perspective of rolling a dice, even if the profit probability is 50%, 5 out of every 10 transactions are profitable, and 5 transactions are losing with the profit/loss ratio being 1: 1. In this case, the cycle of transactions continues, and investment funds will always stay in a zone-sum game.

 The more transactions brings the faster loss of capital.

In order to remain invincible in the volatile finical market, investors need to spend more time in two aspects: one is to improve profit probability, the other is to find a suitable profit/loss ratio.

Generally, setting the profit / loss ratio to 2: 1 or 3: 1 is considered to be a reasonable choice. 

If the profit / loss ratio is set to 2: 1 (for example, a profit of 50 points and a loss of 25 points), it means that each profit can bear 2 losses (each time a profit of 50 points can bear 2 losses of 25 points). 

4. Risk assessment based on principle losses

Traders can also conduct forex risk assessment based on the proportion of principal losses. If you set a loss ratio of 50% of the principal amount, when the forex transaction loss amount reaches 50% of the principal amount, you have to leave the market immediately whatever the previous stop loss range is, in order to retain best interests. The advantage of a risk assessment based on a principal loss ratio is that traders do not have to always keep their eyes on the market, but only focus on the principal loss ratio, which saves a lot of energy and makes trading more flexible.

5. Risk assessment based on transaction frequency

Another common method of forex risk assessment is based on transaction frequency. If not controlled well, transaction frequency will not only accumulate excessive transaction costs, but also increase the error rate. Therefore, we need to set a reasonable trading frequency within our own tolerance range. When the trading frequency reaches the standard, decisively leave the market to avoid counter-effects caused by the high frequency, regardless of whether the current situation is profitable or at a loss.

The above are five mainstream methods for conducting forex risk assessment. We can try to use them in daily transactions to see which one is more suitable for our trading style, so as to continuously improve trading standards and conduct a more comprehensive risk assessment, making sure that transactions are conducted in a low -risk state.

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