I am not afraid to say that it is one of the most important things to avoid losses and earn money. It is a key to successful forex trading. You can trade profitably for one month, and in the second month, you can lose everything in 1-2 trades.
I think bad forex risk management or even it’s absence main thing that puts down so many traders, not even newbies, but altogether.
Now I don’t talk about forex trading strategy; it’s not so important for risk management. Let’s talk just about risk management:
Plan your trades
Before entering a trade, you have to plan it and do research. Keep in mind that before you enter a trade, you have to know what price you will close your trade if it goes against you. Don’t trade before thinking where to close the trade if it goes against you. You have to be prepared to take losses at a specific price. If you are trying to develop a trading strategy, you must focus on risk management, you can’t just enter a trade and when to think where you will get out if your trade is profitable or not. Remember not to enter a trade and when to think random of a situation where will be your profit targets and stop loss. I agree that you can follow the situation and then make decisions where you fix your position if it goes to benefit. When we talk about stop loss, you have to know it before you enter a position. I
remember very well, when I started forex trading I don’t even thought about my stops before I entered a position. Today I can say that profitable trading starts from risk management and psychology. You can have good trading setups for many times, but you have to know that you will get some situations where your trade goes against the market, and you will get losses, that’s a part of this business.
Use stop loss
Before opening a trade enter stop loss and take profit prices. Take profit price is not so important, but a stop loss price must be there.
To know at which price to close a trade aka use a stop loss, you have to count it. Let’s say you risk 2 per cents per trade, so count how much you can lose and not more. Let’s say you think to close trade if it reaches a price of 1.4470, now price is 1.4570, so you are risking 100 pips. Your deposit is 10 000 USD; you want to risk 2%. So it is 200 USD. Usually, you don’t need to count it manually, today’s forex trading platforms often automatically calculate it.
Follow forex correlation
It’s important if you want to have more than one active trade at once. In my previous articles, you can find more information on correlation.
Leverage is can work for you and against you. I think trader should use about 1:50, but not more than 1:100. Huge leverage can you destroy. In theoretical with 1000 $ deposits and 1:100 leverage you can open 100 000 units position, but again, it‘s only in theoretical because after like this trade you even don‘t have free margin and trading like this there is no any risk management. That style trading it‘s all about gambling and no place about real trading.
In the end, I can say that you must look very seriously at risk management every trade you take. Calculate position size and correlation, always use stop losses and reasonably use leverage.