It is very crucial that you understand and know how to use strategies in forex risk management, to help you maximize your earnings and minimize your losses. If you are into the forex trading business, you must have a full understanding on how to manage a risk; otherwise, you will face a large chunk of loss from your capital. Generally, to be consistently profitable, you need to make more money than you lose them. Yet, if you make major mistakes, attaining this is difficult.
Here is a list of tips for forex risk management that you can use:
Never Risk an Amount That You Cannot Afford to Lose:
This might be the simplest, yet not always followed tip of all. There is an old saying, “scared money is lost money”. Basically, it means that risking and trading money that you cannot allow to lose will face you to a huge mental disadvantage.
You will probably make mistakes like holding your losers for too long and too quickly to take profits when you trade money that you can’t really afford to lose.
Trade! Not Gamble:
There is a very big difference between forex trading and gambling.
Someone who gambles in the forex markets will make bets without any idea if he will even make money or not. Though gamblers may win trades and go on winning streaks, they don’t really know if they are doing it right or their technique is profitable.
While, a real trader understands and knows their risks. They trained and worked out their trading techniques. He understands that even if he loses and has some losing streaks, his trading methods will work and make him profit in time.
Position Size Your Trades:
Evert trade that you’ll enter will be on a different market, pair and varied size stop loss. If you will be utilizing only the same method for all your entries, you are risking a very huge amount of money.
The simplest way to make sure that you are risking the same percentage and amount of money on your account for every trade you enter is to position size them.
Use A Calculator for Forex Risk Management:
Ensuring your trades are in position size will let you risk only a small portion of your account. This way, you can keep track of your losses and will let you trade for another day.
Once you’ve decided whether to risk a fixed amount or small percentage, you can now start working your risk out for each of your trades.
The simplest way doing this is with a calculator.
The calculator will ask questions like the size of your account, currency, the percentage you want to risk, your stop loss size and the pair you are trading. Upon completion of fields, you will then be given the amount you should trade that fits your risk qualification.
Exercise Your Risk Reward:
Risk reward is the comparison of the amount you are risking versus the amount you can potentially gain. For instance, if you are willing to risk 20 pips and can make a potential of 40 pips profit, you’ll be having a risk reward of 1:2. Meaning, you are risking 1 to make profit twice of that risk.
Whereas, being a forex trader is coming in and managing trades, it is at the same time managing your money and risks.
Having a good trading technique will help you win trades but will not help you manage your risk. Remember that good risk management will lessen your losses and assure you of benefiting from big wins to come.