There has been lots of heated debate surrounding forex risk management. There are traders on one hand who are willing to slash the size of their potential losses, but on the other hand, there are traders who are willing to gain massively from a single open position.
It is clear for everyone that in a bid to enjoy higher returns, there’s need for the trader to engage in greater risks. It is at this point that you need to start thinking about what proper risk management should look like.
The survival or death of a trader in the currency market revolves so much around the efficiency of your risk management strategies. It is possible for you to own the best trading system in the world, yet fail woefully if you don’t have a suitable risk management Forex system in place. Forex risk management strategies can come in the form of cutting down on your lot size, entering the market at particular market sessions, hedging, or something as simple as knowing when to cut losses.
Video: Equity Management in Forex Trading
Developing a Risk Management Plan
The first step to successful equity management is to remember to never trade money that you can’t afford to lose. A lot of people discard this rule, thinking this can never happen to them, but no one ever gets into the market hoping they’ll lose on a trade. At the end of the day the market can be unpredictable and everything happening in it is speculative in nature.
If you eventually risk money you can’t stand to lose and you lose a substantial amount, or even stand the chance of losing it, your decision making gives in and your chances of making mistakes goes up.
The next step to take is to stay clear off eyeing big profits. Most times you find traders with accounts sizes of around $2,000 or below, chasing profits of $4,000 or above per month. This obviously places the trader under a lot of strain and mistakes are bound to take place under such conditions.
It is usually wise to enter trading sizes that somewhat reflect your account balance. Brokers in the United States are known to offer trades at 50:1, although it’s not an automatic O.K. for a trader to enter the big trades. There’s an inappropriate Forex risk involved in opening say $100,000 trades on a $1,000 account. It is ideal for traders to gather consistent profits rather than aiming for the big kill.
To be able to create consistent and profitable risk management, you have to use stop loss. A stop loss is a type of order that halts your trades, thus stopping them from experiencing further negatives on your account.
Understanding that trades have a 50/50 probability, means a system should be in place to cut losses when they occur. The trick has always been to have your stop loss on price levels that you’re confident price will test, while also reflecting your risk tolerance if you get your analysis completely wrong.