Summary on risk management

Summary on Forex Risk Management is an overview of what we covered in previous lessons. The 6 risk management tools you must know, Drawdowns and maximum drawdown etc.

forex risk management tools

A risk is a situation where you have only 2 options. That is to win or lose, to fail or succeed. And only one must happen.

However risks can be avoided before happening or reduced when they have already happened. Risk Management.

Risk management is one of the most important topics that every trader should not take lightly or ignore.

Summary on forex risk management – 6 RISK MANAGEMENT TOOLS

  1. Stop loss and targets levelsIt is the  price level at which your order closes out when you are wrong about the market direction. This is the maximum loss you can take when a trade goes wrong.
  2. Risk – reward ratioIt is the amount of profit you plan to get on a trade relative to what you are risking in case of a loss.
  3. position sizePosition sizing in Forex trading determines how many units of money/ lots you trade in each position you take.  
  4. Risk per tradeRisk per trade is the amount of money you are willing to risk on each trade you take
  5. Trading rules; Dos and Don’ts on your trading plan
  6. Leverage and marginLeverage is trading with more money than the balance of your accounts.

margin is an amount of money you need to have on your account in order to open a trade on a bigger amount you have on balance.

Forex trading requires you to invest in money to make money.

The amount of money you need to start trading all depends on you.

How much you should trade with depends on,

The type of a trader you are;

Short term traders such as daily traders can trade on small accounts . However, this is not the case for position traders.

Position traders need large capital to cater for large price movements since they hold trades for long. Trades run for a month to a few months even more.

It also depends on how much you can afford.

Invest only that you can afford to lose and your life style doesn’t change. If you can afford large sum to trade well and good. If not, start with a small account and first develop it.

Expected return.

Your expected return also matters a lot when it comes to how much you should trade with.

A higher return comes with a higher risk and so you must have a bigger account to risk a lot. This also dictates your percentage risk per trade and the position size you use on each trade.

Risk appetite.

To trade with a higher risk, you need to have a larger capital account. This is to cater for large stops, margins and enough balance to sustain the running trades.

For example,If you use a big position size on a small account, and a trade goes wrong, you are likely to lose all the money in a single trade.

Some Forex brokers accept small accounts as low as $30. If you feel that’s what makes you comfortable to start with, well good for you.

But all that matters is to only invest money you can afford to lose.

Forex trading is a very high risk venture that operates on probability basis.  

What are draw downs

Draw downs refer to aggregated consecutive losses on your account that can lead to a big loss or reduction on your account.

Draw downs always occur due to common mistakes traders make as a result of greed and failure to accept loss.

They include:

  • Staying long in a failed trade hoping it will turn around and make a profit.
  • Failing to set stops and take profit targets
  • Using a big size on a single trade with a hope of making a bigger profit
  • Exposing a bigger percentage of your account to risk.

You can minimize draw downs using risk management tools like

  • Setting stop loss targets and take profit targets.
  • Applying the 2% risk rule
  • Using a size that matches your stop loss.
  • Following your trading rules and trading plan.

Risking only 2% or less helps you to minimize risk per trade and gives you more chances to utilize other available opportunities in the market.

Your %loss is minimized and it also becomes easy to break-even.

The 2% risk rule is highly recommended by most successful traders. You can use it, if it works for you.

What’s important is to keep your risk as low as possible. You can still to use 1-3% risk but make it consistent.

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