Unlike most other financial markets, the currency market has no physical location and no central exchange. It operates "over the counter" through a global network of banks, brokers, corporations and individuals. The foreign exchange market is the world's largest financial market, operating 24 hours a day, with enormous amounts of money traded on a daily basis – the latest Bank for International Settlements estimate puts it at $3.98trn.

Currencies are not quoted in isolation; they can have strengthened only relative to another currency, for example, the dollar, the euro or maybe even all of them. Most of the volume in global foreign exchange markets is concentrated in a few currency pairs, with the vast majority of trades involving the US dollar.

Risk management is one of the most difficult things to master in any market but it is vitally important. Understanding the principles and then applying the methodology is vital. However, in practice, trading is very different and this prompted me to begin researching the psychology of risk and decision-making. Psychology is the most important factor in whether you succeed or not in investing. As JP Morgan put it: successful long-term investing is a mental game and "to be a money master, you must firstly be a self master".

The complexity of financial markets induces poor decision-making with investors being too emotional and not cutting their losses when they should.

Risk appetite for an individual is determined by the amount of money you start with and whether or not you are in a position to make or lose money. When you are faced with the possibility of losing money, you are far more likely to make a risky decision than play it safe. There are two main reasons for this.

If you made a profit you will be more rational than if you lost money.

Secondly there's loss aversion: people make risky decisions because they want to believe in the small chance they will not lose. This is why investors often hold onto losing positions longer than they should.

Investor mindsets therefore need to be adjusted in general. To be successful in this business you have to be realistic with your investing or trading, do lots of research, learn to analyse charts, and understand trends.

When dealing with risk you need to consider that any one trade may go wrong, weigh the risk against the potential rewards and then determine your position size.

Position sizing is absolutely critical. This deals with how much money to risk on any one trade or investment, relative to the size of your overall trading portfolio. For example if you only have €1,000, you don't put €750 of it on any one trade. The most important rule is "Never trade or invest money that you cannot afford to lose". The biggest mistake people make when starting out is risking far too big a percentage of their capital on one trade.

This failure to appreciate risk is the main reason why trading any market can turn into a painful and expensive experience.

The idea of having a stop-loss in place – an order to close the trade at a loss if it gets to a certain level – is appreciated by most people when they start trading or investing. A common mistake people make is setting their stop-loss too tight, particularly in currencies. When placing stop losses, it is key to give some thought to the typical volatility for your chosen market.

Broadly speaking, there are two types of stops available, the normal stop and the guaranteed stop. Usually the normal stop has no charge to place while the guaranteed stop attracts a charge (typically by incurring a wider spread when opening and closing the trade).

Every sensible trading strategy needs to consider how the trade will be exited if things don't go to plan. A strategy without a plan or rules is no strategy at all. We cannot control the markets; we can only control the way we react to them.

Peter Whelan is a precious metals, commodity and currency expert. He can be contacted at 086-6166583 or email peter­whelan­88@gmail.com