Risk management basics

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Forex is all about having a plan and sticking to it. As soon as veer away from the plan you are unnecessarily exposing yourself to the market in ways that you didn’t prepare for.

Whether that be trading with more money that you are prepared to lose, or using a different strategy than you have practiced and planned to stick to, straying from your plan can be costly.

That said, let’s look at some key areas of risk management for you to follow when trading the markets.

Position size

You need to work out exactly what percentage of your trading balance you are willing to risk on each trade, once you have that information you can decide what size of lot you are going to buy and how many of them you will purchase.

Most professional traders risk 1% or less of their account every time they enter a trade.

So if you have a $10,000 account then you should be risking no more than $100.

You should keep this number consistent at all times. Do not risk 4% on one trade, 1% on the next and then 3% after that.

Choose your account risk and then stick to that at all times. Consistency is key.

Setting stop losses/ pip risk

Now that we know how much we are willing to lose on our trade we need to calculate where to set our stop loss.

We will go into much more detail on stop losses in the next section, but for now just remember that the stop loss should be set at a predetermined distance from our entry point that signifies our maximum amount of risk per trade.

To do this, we must calculate how much one pip movement is worth to our account and then set our stop loss accordingly.

For example, if one pip is worth $1 to us and we have a $10,000 dollar account then the maximum we can afford to lose using a 1% risk is 100 pips.

Taking profit

This is secretly one of the hardest parts of trading, where to exit when we are in profit. We must use ur indicators and trade research to determine key points to exit our trades.

We should always enter a trade with a key idea of where our entry and exit points are, both stop-losses and profit taking areas.

Again, we will go over this in detail in a few sections time.

Keeping disciplined

As we have mentioned many times over this course, consistency and discipline is vital. Follow your trading plan, stick to your risk management strategy with effective position sizes and always place appropriate entry and exit points.

Why is it important

Having a solid risk management strategy that you adhere to is probably one of the most important aspects of successful trading.

Making a mistake with a trading indicator, placing a support or resistance incorrectly, or even hitting short instead of long are all redeemable errors. We are human, we all make mistakes. However, if we don’t stick to our risk management strategies, these small mistakes can wipe out our entire trading balance. This is exactly what we are trying to avoid.

Good things come to those who wait. Trade patiently, diligently, and with discipline and you will be half of the way there.

Note: If you stick to these tips and practice proper risk management you will likely never put yourself in a position of wiping out your account.

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