Forex Trading Basic

Forex Trading Risk Management Guide

How to Trade with Triangle Chart Patterns

Forex Trading Risk management is not that much different from risk management in other business. Starting Forex trading can be a thrill in its own, that’s right! But you have to be very careful of the risks associated with it. In particular, you have to always look for ways to keep risks from being worse than they could be.

You don’t want to end up risking that money in trading what you can afford to lose. The last thing you probably would like to do is to get out of the Forex market with nothing on hand after a short span of time.

Remember! Situation in Forex market can be unpredictable at times, so is the return from investment in it. It has characteristics like gambling, except it is legal everywhere and doesn’t really have much of a questionable slant to it.

What is Forex Trading risk management?

Forex Trading Risk management involves finding a way to keep Forex Trading risks under control. You need to ensure that you know what you are risking and that you are not trying to spend more money than what you can afford to lose. It’s about making sure that you are only spending a certain total what you are comfortable with.

Why Forex Trading Risk Management is needed?

Why Forex Trading risk management is so important? Here, we are in the business of making money, and to be able to do so we need to learn how to manage it well in order to prevent continuous loss. Unfortunately this is one of the most overlooked areas in trading. Many traders are just anxious to get right into trading with no regards to their total account size. You need to determine how much they can lose in a single trade and get into the trade.

In Forex trading, the investor has opportunities to multiply his money, but he also risks losing future profit and much more, the invested capital. Deviation from expected profit average is what determines the investor’s risk on the financial market. Risk management methods are applied before and after opening positions. The reason behind all risk management method is to reduce losses.

How much to risk in Forex Trading?

It will be best if you just go after a maximum risk of 5% of your portfolio on a single trade. You need to keep your portfolio intact to where a single losing trade will not cause you to lose a great deal of money.

If you suffer from a greater loss of capital that means that you have to put in more of an effort to get back what you lost. This is all just to help you break even. You have to limit your total risk so you will not fall too far back in your investment.

How to manage Forex Trading risks?

#Maintaining standard Risk-Reward ratio

The Risk-Reward ratio is the potential for you to make a certain amount of money times the money you risked. You may easily calculate this by looking at the trends on a pair to see how the value can go up while it can also go down. All you need to do is to use this information to help you understand what the best deals to get into are.

You can always enter into a good trade if you have a smart Risk-Reward ratio to make it work. A 3:1 Risk-reward radio is always a good one to look for. This will enable you to make a greater amount of money off of your investment if you do your research and find a proper investment.

Always check on the trends and lines within an investment to see what you can get out of a pair so you’ll have a choice that you know is easy to follow through with. Be careful when calculating the ratio as anything below a 3:1 ratio may not be a good option for you to invest in.

#Using Protective Stop-Loss to Control Risk

We would like to advice you to place a protective stop-loss for every open position. Stop-loss is a point when the trader leaves the market in order to avoid an unfavorable situation. When you are opening a trade position, it is recommended to use stop-loss to insure against extra losses.

While you are in an active trade, it is good to protect your fund against potential total loss. That is the central purpose of money and risk management. Too often, the beginning trader will be overly concerned about incurring losing trades. Trader therefore lets losses mount, with the hope that the market will turn around and the loss will turn into a gain.

All successful Forex trading strategies include a disciplined procedure for cutting losses. When a trader is down on a position, many emotions often come into play, making it difficult to cut losses at the right level. The best practice is to decide where losses will be cut before a trade is even initiated. This will assure the trader of the maximum amount he or she can expect to lose on the trade.

#Risk a Tolerable Account Portion per Trade Position

While managing your investment fund, you have to decide before the opening of any position that how much of the money you can afford to lose in case the trade brings a negative result. In this case, you can decide that for every opened position your risked money will be 2%, 5% or 10% of the total fund, by doing so, you have known the highest amount that can ever go out of your money on that single trading position prior to the execution of the trade.

Essential factors needed to work out this are:

  1. Total fund in your account
  2. Stop loss in terms of pips
  3. The Volume (lot) size traded

For example:

Suppose, your fund balance is $2000 and your predetermined stop loss pip is 50 pips and you have determined to risk only 5% of your fund for a position.
What do you do?

Work out the 5% of $2000

Which is = $100

That means you can afford to lose $100 in case of any negative result.

Then, you should divide $100 by 50 pips

The result is $2

Your lot size must be 1 pip to $2. So, the lot size is 0.2

So you must use 0.2 lot size.

Another thing to remember- try not to be greedy, to be less greedy is to be able to minimize risk. Leverage can help to control risk: but make sure that your leverage is relatively low it will limit you against opening a trade with high lot size.

#Re-Evaluate Your Trading Strategies

One of the key elements of controlling risks is the overall account risk. You need to pre-determine if trade is going against you, at which point will you stop and re-evaluate your trading strategy? If you have lost 30% of your account, 40% or 75% or when you have lost the entire fund? Always assess your market analytical methods and see if there would be need for further perfection or even a change.

Also, check out if your set lot size is too large for your entire account size.

#Additional tips for Forex Trading risk Management

We would like to give a few extra tips that you can use for your risk management needs:

  • You should look at the high and low bands on a currency pair versus the current price of an investment. This will help you to get a better idea of the total risk that you will get into in trades.
  • Always have a look at the market sentiment on certain pairs so it will be easier for you to trade something in proper manner.
  • Please, have a close look at what might drive a currency pair before you choose to invest. Always look for the underlying story or news report that might lie underneath anything you are investing in.

The Bottom Line: Forex Trading Risk Management

Remember one thing that Risk management and fund management go hand in hand. If you can manage your funds well, then you are reducing your risks as well. In other way, if you can control your risk properly, then you are equally protecting your funds.

Remember that some broker’s trading condition may conflict with your risk management system. We recommend you to trade with a broker like HYCM, who has friendly trading conditions that will help you to get going with almost any kind of risk management system. Read more on this broker from HYCM Broker review.

If you found this article useful, consider reading Good Forex Trading Technique and Money Management Tips in Forex Trading.

READ MORE

Chapter 9Money Management in Forex Trading
Lesson 1money Management Tips
Lesson 2Good Forex Trading Technique
Lesson 3Using risk-reward ratio in Forex trading
Lesson 4How to use leverage
Lesson 5Forex Trading Risk management

Go back to Main Page: Forex Trading for Beginners

About the author

Syed Nazim

Syed Nazim is the Marketing Manager of RedMaroon, a Digital Marketing Agency for Financial Institutions. He is also involved with Forexing24.com as a writer and financial Analyst. He is a brilliant marketing geek with vast experience in every sector of Digital Marketing. He likes sharing strategies, tactics and proven methods to help you build a business and live the life of your dreams.

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