1. Risk Management.

Today you are going to learn how money & risk management can improve your forex trading. How money & risk management can and will affect your trading, as well as how money & risk management techniques could be used to help you in your trading journey.

Have you ever experienced that although you have a reasonable trading strategy your account just seems to be slowly losing money over time?

Or

Have you ever experienced that you close most trades with a profit, only to give away all those profits in a few bad trades?

If this is the case it could be possible that you are not sticking the principles of risk and money management, but no need to worry we will investigate these topics  with practical examples to ensure that you are fully equipped to manage your trading the right way.

Why does anyone need risk management?

This question can easily be overlooked when trading in the forex market. Let’s look at the underlying effect of poor risk management by answering the polar opposite question. With this scenario below.

Imagine you had a 100% success rate in forex inevitably, just imagine for a moment.

Would you need risk management at all?

Answer: Of Course not.

Why?

Because there is no risk of losing your money.

In fact you could use the maximum lot size for every single trade you took and in no time grow your account way into the millions and millions of dollars.

BUT, back down to reality

Any trader who has had any experience with the market will very quickly pick up the fallibility of the above statement. If you lost just once at the maximum lot size guess what?

Your entire account is gone. That is:

1 bad trade x maximum lot size = 100% loss of account capital = blown account.

See why risk management is important, because if you know that you are inevitably going to lose at some point you will need to mitigate for this loss.

What are the benefits of risk management in forex trading:

  • Managing your risk allows for longevity – The less money you lose on your wrong trades, the longer you can survive in the market.
  • Keeping emotions controlled – The less you risk per trade, the less emotionally affected you will be when a trade does not go your way.

How to implement risk management techniques in forex trading?

There are multiple ways in which you can implement risk management techniques in forex trading. We will look at the main ones, namely:

  • Risk to reward ratio
  • Stop loss
  • Negative balance protection using a legitimate broker
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