Risk Management in Forex Trading.
Risk Management in Forex Trading
Risk Management in Forex Trading is a term that is very important in trading world and at the same time is a major point which mostly gets out of focus when traders start real time trading. The first and foremost difference in trading a demo and a real account is the human psychology. The point is here that how to overcome this problem?
The best way to go is to practice hard and I strongly recommend to practice for at least 3 months as this time period will cover up learning the different time frames as well during that time; a trader can experience all effects of fundamental news and attributes.
Devise and test a risk management strategy over that period without changing it, no matter it is not providing any profits, just keep using it and analyze your strategy after 3 months of so that you can average out all the good and bad runs you had during that time.
Now coming to other part, i.e., devising a good risk management strategy. Originally the market used to not be for the small traders as brokers only allow standard lots or micro lots. Therefore if you are trading a small account, you are risking too much for a trade. In the recent years, there are introduction of new brokers that allows you to trade even 1 unit. This way, you can still apply the same proper risk management strategy or else your account will be blown before you know it.
To devise a risk management plan, first of all figure out what is the risk percentage per trade? For example, how much percentage of the account can be lost in the worst case of a trade?
Usually good traders make 1-2% as a mark to risk per trade. Next you have to set a percentage % of how much can you lose in your forex account (your maximum drawdown). For example, if you lose 30% – 50% of your account using a system. You should stop trading altogether and reflect back on your system. Find out why is it not working and where to tweak it to improve your future trades.
Once the maximum drawdown and the risk percentage per trade is defined, Always keep your stop fix and don’t extend it while you are winning trades.
I have seen traders extending their stops in hope that the market will come back and they won’t have to face loss in that trade. Believe me, often I have seen traders getting them into this situation and loosing out all account. There will also be times when you will be just stopped out and market will reverse, even in those cases don’t get disappointed and keep following the same strategy.
Therefore, even before any one starts trading, one has to devise a proper risk management. With a proper risk management system and combined with a good trading system, you are on the right track to success in forex trading.
Ezekiel Chew from ww.asiaforexmentor.com
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Nice article. No doubt practicing on demo is best. But as the real trading starts, traders find it hard to overcome fear factor and emotions.
It is a good article on risk management.
The problem is that most of the traders do not stick to one plan and they keep changing it. That is why even an effective risk management strategy becomes useless. Risk management is only effective if a trader has a successful strategy and professional attitude.
Originally posted by JogiIt is a good article on risk management.
The problem is that most of the traders do not stick to one plan and they keep changing it. That is why even an effective risk management strategy becomes useless. Risk management is only effective if a trader has a successful strategy and professional attitude.
Risk management is defined by trader depending on how crucial is the investment for him? How much can he afford to loose and how much profit he wants to get.
Generally we see fixed percentages (e.g 1% to 5%) of capital r written in different articles and forums to be used for risk management purpose. But in my opinion, it purely depends on trader. These articles are useful to get an idea. But a trader should be able to manage his risk in his own way and own style. Usually traders ignore the risk warnings of forex trading. For such traders, this percentage is a good estimate.
Stick to your rules
Risk management is defined by trader depending on how crucial is the investment for him? How much can he afford to loose and how much profit he wants to get.
Generally we see fixed percentages (e.g 1% to 5%) of capital r written in different articles and forums to be used for risk management purpose. But in my opinion, it purely depends on trader. These articles are useful to get an idea. But a trader should be able to manage his risk in his own way and own style. Usually traders ignore the risk warnings of forex trading. For such traders, this percentage is a good estimate.
Its true but it is only true for Pro traders. It requires a lot of knowledge and experience to define risk percentage urself. If traders do not have much experience then they will have to rely on these fixed percentages in order to avoid bigger losses and drawdown.
Its true but it is only true for Pro traders. It requires a lot of knowledge and experience to define risk percentage urself. If traders do not have much experience then they will have to rely on these fixed percentages in order to avoid bigger losses and drawdown.
I have said similar thing :). Novice traders shouldnt use high percentage of their capital.
Usually beginners start with low capital. That is why risk management strategies fail. Traders try to earn more in terms of cash. So they use high leverage and loose everything.
Stick to your rules
Risk management is a very important part of a profitable trading plan and a trader needs to always minimize their risks and losses to make sure that they make more profits and losses saved is profit earned.
both risk management and money managements are very important for all traders.if we will not follow them we will be like trading blind.these both are the main rules which we have to follow.it will help us to protect our capital and stay in game longer and safer.
Trading is risky by nature and find the right level of risk is not always easy.
@ FXlord yeah forex trading is risky business and it surely contains risk and you have to take the risk if you want to be a profitable forex trader and you know you can be millionaire too here by doing this business.
I think just some basic rules r enough for small investors.
1- Lot size should be according to capital investment. $500 to $1000 is good if u want to trade micro lots. Small investors with $100 or 200 r at risk even with micro lots but they have no other choice.
2- Tight SLs especially when ur account size is very small.
3- Trade pairs with lowest spreads.
There can be other simple points. As ur trading skills grow, u can make more rules.