Risk and Return in the Forex

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Trading is a rewarding activity but extended periods of market volatility can be difficult for many investors to deal with. The problems of overleveraging, overtrading and lack of diversification are amplified in this kind of market environment.

Like many Forex traders, I have seen countless traders, enter the market and then leave shortly after blowing up their account. Why this can happen so fast is often a mystery to those dealing with catastrophic losses. In this article, I will try to explain why large losses can be so damaging to your portfolio and trading future.

At Learning Markets we usually advocate risk management as more important than just about any other investing activity. Savvy traders can use risk management to smooth portfolio returns and survive during periods of market disruptions.

The trade-off that prevents many traders from approaching the market from a risk management perspective is usually related to the fact that you are usually trading off some potential rewards for additional risk coverage.

That trade-off is more compelling if you can put some numbers behind it.

For example, in today’s video I will walk through the required returns necessary to reach breakeven after a variety of portfolio drawdowns. I would suggest that new or struggling traders take away a sense for the kind of repercussions they will be dealing with when taking on too much risk.

If there is one certainty about the market, it is that there are surprises in store that none of us can imagine or plan for. I think that is justification enough to be very thoughtful about how you put your hard-earned portfolio into the market.

Click below to see the video about risk, drawdowns and returns in the forex.

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John Jagerson is a contributor to LearningMarkets.com. To learn more about him, read his bio here.

This article originally appeared on the Learning Markets Web site.