Forex Trading Risk Management Basics

Definition: Strategies to minimize potential losses in trading.
Key Concepts:
- Position Sizing: Determine the amount of capital to risk on each trade.
- Stop-Loss Orders: Pre-set orders to exit a trade at a specific price to limit losses.
- Risk-Reward Ratio: Measure of potential profit compared to potential loss; commonly targeted is 1:2 or 1:3.
- Diversification: Spreading investments across different currency pairs to reduce risk.
- Leverage: Use with caution; can amplify gains but also increases potential losses.

Market Structure:
- Decentralized Market: Operates over-the-counter (OTC) without a centralized exchange.
- Major Players: Banks, financial institutions, corporations, retail traders, and governments.
Currency Pairs:
- Major Pairs: Include USD, EUR, JPY, GBP, and AUD (e.g., EUR/USD, USD/JPY).
- Cross Pairs: Do not include USD (e.g., EUR/GBP, AUD/NZD).
- Exotic Pairs: One major currency paired with a currency from a developing economy (e.g., USD/THB).
Market Hours:
- Open 24 hours, five days a week, segmented into major trading sessions: Asian, European, and North American.

Definition: Use of historical price data to forecast future price movements.
Tools and Indicators:
- Charts: Line, bar, and candlestick charts used to visualize price movements.
- Trend Lines: Lines drawn on charts to identify upward, downward, or sideways trends.
- Support and Resistance Levels: Price levels where the market tends to reverse direction.
- Indicators: Common ones include Moving Averages, RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence).
Patterns:
- Continuation Patterns: Indicates the existing trend will continue (e.g., flags, pennants).
- Reversal Patterns: Indicates a potential change in trend (e.g., head and shoulders, double tops/bottoms).

Definition: Evaluation of economic, financial, and geopolitical factors that influence currency prices.
Key Economic Indicators:
- Interest Rates: Central bank rates impact currency value; higher rates generally strengthen a currency.
- Inflation: Measured by CPI (Consumer Price Index); affects purchasing power and central bank policy.
- Employment Data: Non-Farm Payrolls (NFP) and unemployment rates indicate economic health.
- GDP Growth: A rising GDP attracts investment and typically strengthens the currency.
Geopolitical Factors:
- Political stability, trade agreements, and economic sanctions can significantly impact currency values.
Market Sentiment: Traders’ perceptions and expectations can drive currency movements, often reflected in news events and reports.

Strategies aimed at reducing potential losses in forex trading.
Position sizing helps to determine the risk amount for each individual trade.
Stop-loss orders automatically exit trades at predetermined prices to limit financial losses.
A risk-reward ratio compares expected profit against potential loss, with common benchmarks being 1:2 or 1:3.
Diversification involves investing in multiple currency pairs to mitigate overall risk exposure.
Leverage amplifies both potential gains and losses; therefore, it requires careful management.

Operates as a decentralized market without a formal exchange, facilitating trading over-the-counter (OTC).
Major participants include banks, financial institutions, corporations, retail traders, and government entities.
Currency pairs are classified into:
- Major Pairs: Involve significant currencies like USD, EUR, JPY, GBP, and AUD (e.g., EUR/USD).
- Cross Pairs: Pairs that do not feature the USD (e.g., EUR/GBP).
- Exotic Pairs: Include one major currency paired with a currency from a developing economy (e.g., USD/THB).
The forex market is open 24 hours a day, five days a week, divided into Asian, European, and North American trading sessions.

Involves analyzing historical price data to predict future price trends.
Utilizes various tools, including:
- Different chart types such as line, bar, and candlestick charts to represent price movements visually.
- Trend lines, which help identify market directions (upward, downward, or sideways).
- Support and resistance levels signify price points where the market may reverse direction.
Indicators like Moving Averages, RSI (Relative Strength Index), and MACD (Moving Average Convergence Divergence) assist in decision-making.
Recognizes patterns:
- Continuation patterns suggest that current trends will persist (e.g., flags, pennants).
- Reversal patterns indicate potential shifts in market direction (e.g., head and shoulders, double tops/bottoms).

Focuses on assessing economic, financial, and geopolitical factors impacting currency valuations.
Key economic indicators include:
- Interest rates set by central banks, with higher rates usually strengthening a currency.
- Inflation levels measured by CPI (Consumer Price Index), which inform purchasing power and central bank policies.
- Employment statistics such as Non-Farm Payrolls (NFP) and unemployment rates reflecting economic health.
- GDP growth, where increasing GDP is often a sign of a healthy economy that attracts investment.
Considers geopolitical influences that can sway currency values, like political stability and trade agreements.
Market sentiment captures trader perceptions and expectations, often influenced by news and economic reports.