Forex Risk and Money Management
Risk and Money Management
Forex trading is risky... if we don't know what we're doing - but this risk can, and should, be managed with every trade we place - and this can often be difficult when we're in a hurry to open our trade as close to the "enter signal" as possible (it is therefore often neglected).
Some effective management actions:
- manage risk first when placing each trade, and THEN look for profits - not the other way around (which is how most losing traders go about it, myself included - in the past). When we start to manage risk first, our odds of winning increase, and our odds of losing decrease.
- use a risk management formula to determine the specific lot/unit size of every trade we place - eg. no more than 8% to 10% of either our Trading Account Balance, or the Equity Balance at any one time. It could also include the size of our StopLoss, and other elements.
- trade during appropriate times - ie. when the Market is most active, such as 06:00 to 20:00 GMT/UTC.
- only trade the "Major" currency pairs - they have far greater movement, therefore offer greater potential profit.
- control the StopLoss during the execution of each trade - eg. move it to "Break-even" as soon as practical, then apply a "Trailing Stop" to take our profit when the market turns against our trade.
Notwithstanding the above we'll still have losing trades, but the goal is to minimise their size and frequency, thereby becoming a net winner over time, again and again, regardless of what the markets do.
We need to make risk management a high priority in our trading strategy, as we do need to stay in the game, & proper risk management will turn a losing method into a winning one.
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