Top 5 Fundamentals of Forex Risk Management

1. Appetite for Risk
Working out your appetite for risk is central to proper forex risk management. Traders should ask: How much am I willing to lose in a single trade? This is particularly important for the most volatile currency pairs , such as certain emerging market currencies . Also, liquidity in forex trading is a factor that affects risk management, as less liquid currency pairs may mean it is harder to enter and exit positions at the price you want.
If you don’t know how much you are comfortable with losing, your position size may end up too high, resulting in losses that may affect your ability to take on the next trade – or worse.
Let’s say 50% of your trades are winners. In the long term, mathematically you can expect to have runs of multiple losing trades in a row. Over a trading career of 10,000 trades, the odds suggest that you will face 13 sequential losses at some point. This underlines the importance of knowing your appetite for risk, as you need to be prepared, with sufficient money on your account, for when bad runs hit.
So how much should you risk? A good rule of thumb is to only risk between 1 and 3% of your account balance per trade. So, for example, if you have an account of $100,000, your risk amount would be $1,000-$3,000.

2. Position Size
Selecting the right position size, or the number of lots you take on a trade, is important as the right size will both protect your account and maximize opportunities. To select your position size, you need to work out your stop placement, determine your risk percentage and evaluate your pip cost and lot size. For more on how to do these things, click on the link above.

3. Stop Losses
Using stop loss orders – which are placed to close a trade when a specific price is reached – is another key concept to understand for effective risk management in forex trading. Knowing the point in advance at which you want to exit a position means you can prevent potentially significant losses. But where is this point? Broadly, it’s whatever point your initial trading idea is invalidated.

Traders should use stops and also limits to enforce a risk/reward ratio of 1:1 or higher. For 1:1, this means you are risking $1 to potentially make $1. Place a stop and a limit on each trade, ensuring that the limit is at least as far away from current market price as your stop.

The table shows how the outcomes of different risk-reward ratios can change a strategy:
Risk-Reward 1-1 1-2
Total Trades 10 10
Total Wins (40%) 4 4
Profit Target 100 pips 200 pips
Stop Loss 100 pips 100 pips
Pips Won 400 pips 800 pips
Pips Lost 600 pips 400 pips
Net Gain (-200 pips) 200 pips

4. Leverage
Leverage in forex allows traders to gain more exposure than their trading account might otherwise allow, meaning higher potential to profit, but also higher risk. Leverage should, therefore, be managed carefully.
While researching how traders fared based on the amount of trading capital being used, DailyFX Senior Strategist Jeremy Wagner found that
traders with smaller balances in their accounts, in general, carried much higher leverage than traders with larger balances. However, the traders using less leverage saw far better results than the smaller-balance traders using levels over 20-to-1. Larger-balance traders (using average leverage of 5-to-1) were profitable over 80% more often than smaller-balance traders (using average leverage of 26-to-1).
Based on this information, at least when starting out, it’s advisable for traders to be very wary of using leverage and to be mindful of the risks it poses.


5. Controlling Your Emotions
It’s important to be able to manage the emotions of trading when risking your money in any financial market. Letting excitement, greed, fear or boredom affect your decisions may expose you to undue risk. To help you take your emotions out of the equation and trade objectively, maintaining a forex trading journal or log can help you refine your strategies based on prior data – and not on your feelings.

You can always count wisely in order to keep your risks to a minimum.

Dorigda posted:
You can always count wisely in order to keep your risks to a minimum.

Rightly Spoken

Marraby posted:
Wow, a very helpful post) I love the way you wrote about the importance of risk management and its most popular misconceptions. In fact, nowadays, taking advantage of risk management and reducing your losses is a necessity, without which it's very difficult to trade successfully. Thank you author for the valuable information, I support your desire to share it. The more people follow the basics of risk management, the more profitable traders will be on this forum))

You are welcome, If you stick to the above rules, you are made. It's sad I traded for the wrong person for years, who refused to pay me my dues after 9 years.

All the points are important, but to me, the most important point of all is stop loss point. Many people ignore them, thinking that this tool somehow interferes with their trading strategy and stuff like that. But it isn't like that at all, but only a big misconception. The importance of stop loss in risk management is much greater than some of its dislikes are willing to admit.

Pretty practical advice, because everyone wants to make the amount of risk as small as possible.

NzeCapitalTrades posted:
4. Leverage
Leverage in forex allows traders to gain more exposure than their trading account might otherwise allow, meaning higher potential to profit, but also higher risk. Leverage should, therefore, be managed carefully.
While researching how traders fared based on the amount of trading capital being used, DailyFX Senior Strategist Jeremy Wagner found that
traders with smaller balances in their accounts, in general, carried much higher leverage than traders with larger balances. However, the traders using less leverage saw far better results than the smaller-balance traders using levels over 20-to-1. Larger-balance traders (using average leverage of 5-to-1) were profitable over 80% more often than smaller-balance traders (using average leverage of 26-to-1).
Based on this information, at least when starting out, it’s advisable for traders to be very wary of using leverage and to be mindful of the risks it poses.


5. Controlling Your Emotions
It’s important to be able to manage the emotions of trading when risking your money in any financial market. Letting excitement, greed, fear or boredom affect your decisions may expose you to undue risk. To help you take your emotions out of the equation and trade objectively, maintaining a forex trading journal or log can help you refine your strategies based on prior data – and not on your feelings.

Thanks @NzeCapitalTrades for sharing such wonderful tips. Especially newbie in trading ignore the risk of forex market. They want to be million in one. They use high leverage to gain more. But in the end, they lose all their capital.

SofieAndreasen posted:

NzeCapitalTrades posted:
4. Leverage
Leverage in forex allows traders to gain more exposure than their trading account might otherwise allow, meaning higher potential to profit, but also higher risk. Leverage should, therefore, be managed carefully.
While researching how traders fared based on the amount of trading capital being used, DailyFX Senior Strategist Jeremy Wagner found that
traders with smaller balances in their accounts, in general, carried much higher leverage than traders with larger balances. However, the traders using less leverage saw far better results than the smaller-balance traders using levels over 20-to-1. Larger-balance traders (using average leverage of 5-to-1) were profitable over 80% more often than smaller-balance traders (using average leverage of 26-to-1).
Based on this information, at least when starting out, it’s advisable for traders to be very wary of using leverage and to be mindful of the risks it poses.


5. Controlling Your Emotions
It’s important to be able to manage the emotions of trading when risking your money in any financial market. Letting excitement, greed, fear or boredom affect your decisions may expose you to undue risk. To help you take your emotions out of the equation and trade objectively, maintaining a forex trading journal or log can help you refine your strategies based on prior data – and not on your feelings.

Thanks @NzeCapitalTrades for sharing such wonderful tips. Especially newbie in trading ignore the risk of forex market. They want to be million in one. They use high leverage to gain more. But in the end, they lose all their capital.

You are welcome

Thank you for your valuable post. Risk management is the most ignored aspects of trading by many traders. Everyone wants make money very quickly, that too without proper knowledge, skills and understanding.

Very good writing. This will help a lot of new traders in the market.

I agree withe the 5th point that is controlling emotions as too many traders fail to overcome emotions while trading.

The risk-reward ratio of 1:3 must be followed.

IvanMelnik posted:
I agree withe the 5th point that is controlling emotions as too many traders fail to overcome emotions while trading.

Right! That's one of the biggest obstacle that most traders face.

If you want to make money from this market, you need to have proper strategy for ros\\isk management. Otherwise, you can lose all your money in this risky market.