Trading risk management is very critical to your survival in trading forex because forex trading has its risks!
If you want to keep trading for a very long time, you need to understand trading risk management techniques which are so simple yet, can make a huge difference between you winning or losing when trading.
It does not matter if you are trading a $1,000 forex trading account or $1 million dollar trading account, you should know before every single trade is placed, what you are going to risk on each trade.
WHY TRADING RISK MANAGEMENT IS CRUCIAL FOR FOREX TRADING SURVIVAL
Well, let me paint a picture for you here by telling you some of my own mishaps when I was starting to trade forex. Maybe after reading this, you will understand it because you have got into this situation. Or if you have not, you would soon experience it ( I can bet on that!).
When I was beginning to trade and learning, there were times when I was so confident that the trade I was going to place was going to be a winner…
Guess what I did? Because of my confidence, I took a lot more risk on that trade than I would normally have.
As soon as I placed that trade, it starts to get negative, and my paper loss continues to increase.
I’m hoping and praying that the market will reverse but it does not.
Now, I watch helplessly as the my losses continue to increase beyond my comfort level and I am too paralyzed to exit that trade because I know that when I close that trade I am going to suffer a massive loss!
Soon, I start to see red signal on my order on MT4 platform when my stop loss is about to be hit.
Ding! My stop loss is hit! I’m out with a massive loss.
Now I would struggle to bring back my forex trading account to its original balance because I’ve just taken a massive hit (massive loss!).
Why?
Because I did not get into that trade in the first place with a loss which I was comfortable with.
I risked too much on one trade!
HOW MUCH RISK PER TRADE?
Before placing a single trade, you first determine how much you are comfortable to risk on each trade you place.
Which means, you need to determine, how much %(percentage) of your account you have to risk per trade.
Lets do some calculations:
- if you risk only 2% of your account on each trade, then 50 consecutive losing trades will wipe off your $10,000 trading account.
- risk 5% and you only need 20 consecutive losing trades and you wipe your trading account clean.
- you risk 10% each trade and you need only 10 consecutive losing trades to wipe your forex account.
Can you see the pattern here? If you cannot, here it is: the more you risk per trade, the less time it takes for your to blow up your forex trading account.
If you have a $5,000 forex trading account:
- with 2% risk per trade, this means you are risking $100 per trade
- with 5% risk, you are risking $250 per trade.
- with 10% risk, its $500 per trade.
Personally I trade with risks from anywhere between 1% up to 5%. Risking anymore than 5% per trade is suicide.
1%-5% risk per trade are levels of risks I am comfortable with taking.
You may be different. You may prefer a 1% or 2% risk per trade.
DAILY TRADING RISK ALLOCATION
You also should have a daily trading risk which you are comfortable with.
Here is what I mean by daily trading risk allocation: how much of your account are you going to risk per day?
It can be 1% or 5% or anything you prefer.
But remember, the more you risk, the more you will lose and the sooner your forex trading account will disappear.
Here is what I do:
- I risk anywhere between 1% up to 5% on a single trade.
- My max risk per trade is 5%.
- That means my daily max risk is 5%. I cannot exceed that. I’f I’ve hit my 5% loss for today, I stop trading.
- When I trade tomorrow, I will trade more likely with a 1% or 2% daily trading risk. I will trade with small risks until I bring back my trading account up.
- If I suffer a loss on that 1% trade, I will not trade again during that day.
A 5% trading loss is my maximum trading account loss I am willing to suffer in a day.
So when I come to trade tomorrow, will I trade using 5% risk again? NO!
Why? What if I take a trade and I lose 5% of my trading account again? Then I have lost 10% of my trading account in just 2 days.
That is bad.
So how will I trade tomorrow?
I will trade with anywhere from 1% t0 2% risk. I go small, ok? Go small.
Here’s a tip that will save your forex trading account: when you’ve lost a large chuck of your forex trading account, you need to start trading small contracts or place trades with very small risks like 1% risk per trade until you build your trading account up again to where it was.
THE 2% RULE FOR RISK MANAGEMENT IN FOREX TRADING
I have read and bought trading books & ebooks about trading risk management and many of these books say that we should risk 2% per trade.
You must risk only 2% of your trading account for each trade. Why 2% trading risk per trade? Well, first, with 2% trading risk per trade on a $10,000 trading account, you only need to risk $200 for each trade. Which means if you lose 50 times in a row, you will be wiped out.
What are the chance of that happening? Not much.
But if you trade with big risks per trade, the chances of that happening are very likely.
TRADE EXIT STRATEGIES
Before you enter a trade, you should also have a plan of how you going to get out(how you are going to exit your trade).
You either exit a trade when:
- your stop loss is hit
- your take profit target level is hit
- or your trailing stop loss is hit
- or you exit a trade when you realize that your losses are getting too much for you.
- or you exit a trade when you see that there is an opposite trade signal entry just soon after you enter a trade.
- or some traders have systems where they exit a trade during certain times or days(time based exits)
By the way, you may also be interested in reading these:
- price action trading secrets & tricks
- list of best forex trading strategies
- best trading trading strategy for capturing insane amounts of pips.
- candlestick patterns for trading powerful reversal.
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