How do I determine my maximum risk before I enter a trade?
This is done through the use of a simple calculation and a stop loss order.
If you wish to have a 3:1 risk reward ratio, and you use the advice of risking only 2% per trade – then assuming you are trading with a $1000 dollar account and you use fundamental analysis to determine that the price of the EURUSD will increase from 1.20000 then for every 20 dollars you might lose, there is a potential of gaining $60.
Using a lot size of 0.1 ( 1 pip = $1) then you would put your stop loss 20 pips in the selling direction and your take profit 60 pips in the intended direction of your trade (buy position).
Therefore: EURUSD price = 1.20000
Stop loss (SL) = 1.19800
Take Profit (TP) = 1.20600
With this you have used all the methods of risk management that have been discussed remember in trading there is no such thing as risk free, all that risk management does it allows you to have a framework to better manage the risks that are inevitable.
Lastly ensure that when you trade you use a reputable forex broker which has negative balance protection. This is often also known as a margin call.
Negative Balance Protection
Negative balance protection ensures that you as the trader, do not go into debt when you lose money. You are in essence protecting against your account going into a negative balance. The large majority of reputable forex brokers have negative balance protection, but always be aware of this when managing your trading risks and signing up with a forex broker.