Forex risk management

 What are the criteria for determining the maximum risk in each forex trade? Many beginners are not hesitant to risk a large proportion of their capital in a single trade - they see that the main reason that attracted them to the world of forex is that they can control a large amount of money through the use of leverage. However, the fact that cannot be ignored is that professional traders only risk a small percentage of the total account balance. For them, risking 5-10% per trade is too risky. The optimal ratio recommended by many professionals does not exceed 1-2.5%. No matter how much risk you intend to apply, you must always adhere to it in all your trades. The last mistake to be avoided is to risk more deals than others – and although many see rational reasons for making such a decision, in practice it proves to be the shortest way to turn trading into a jealous gamble with calculated consequences.

Why is everyone advised not to take too much risk while trading? The higher the drawdown or drawdown rate, the more difficult it will be to restore the account to its original state. For example, let's say you open a forex trading account with a balance of $1,000 (this is hardly enough to get started, and even if you don't make any mistakes you will need to trade successfully for a long time in order to grow your capital and eventually generate a profitable return). Let's say you decide to risk 50% of the account balance on the first trade. If you lose this trade, then the balance will be reduced by 50% and only $500 will be left in your account. What would you need in this case to recover from the losses of this trade and return to the starting point? At first glance, you might think that you also need a 50% profit — but this is a wrong calculation because in this case you will only recover half the losses. In fact, you need to earn 100% of the current balance, another $500, just to get back to the initial balance of $1,000 — noting that in this case you'll go back to your starting point and have to work again to start earning.

On the other hand, if you decide to risk no more than 10%, and you already lose your first trade, then your account balance will drop to $900. In this case, you need to make a profit of 11.1% to make up for this loss and return the balance to $1,000. Of course you can see how small this difference is when compared to the ratios in the first example, ie 50% and 100%? In the first scenario you will have great difficulty managing the account after incurring the first loss and another failed transaction will be enough to zero the account.

The first advice you may hear from some to achieve success in forex is to avoid losing in the first place. It is really hard to make up for the losses you incur while trading - take a look again at the ratios mentioned in the first example. There are no jurisprudence in this matter because we are talking about mathematical facts. As some say, if you take care of protecting the account balance and avoiding losses, the profits will take care of themselves. Your main goal should be to reduce the number of losing trades as much as possible, and also to minimize the loss you incur on each trade. Capital management rules are one of the most important methods that traders use to achieve this goal. That is why past experiences reveal that conservative forex strategies are more likely to achieve success than adventurous strategies that involve risking a lot of money. Success in forex requires some time and a lot of patience, especially if you are starting with a small capital, but you can be sure that you will eventually reap the rewards of discipline and perseverance as long as you stick to it along the way.

Previous Post Next Post