We have already mentioned that all risk management in the Forex market requires a trading system that must be tested to achieve its function: obtain a good return on our foreign exchange trades. One of the practices that, in the long term, can become very convenient is to establish an adequate risk/reward ratio in our trades. Here we will explain the basics of this practice and how to put it into practice.
Risk management in trading or investing is perhaps one of the most important factors in determining the success or failure of a trader, although it is undoubtedly one of the most neglected factors. As Warren Buffett, president of Berkshire Hathaway and possibly the best investor in history, says, “Rule number 1 is never losing money and second, never forget rule number one”. If one of the richest people in the world says this, we must be aware of the importance of proper and systematic risk management in investments. Not in vain, a few wrong or poorly executed market trades can put an end to all or part of our trading account.
Managing risk is not something for which there are exact and simple rules, since it is something totally variable depending on the type of investor we are. In this way, a trader who prefers intraday trading will not assume the same risk in each transaction as a “value investor” whose time horizon is months or years. In the case of the latter they are able to withstand large temporary losses (in some cases higher than 50%) as well as averaging down, aspects that a professional trader can not and should not afford at any time.