In 10 Minutes, I'll Give You The Truth About WHY THE NEED FOR RISK MANAGEMENT IN FOREX TRADING

 Risk Management is very strategic to regulate trading parameters to fit into a trading plan. Risk management eradicates gambling, helps in planning trade execution and also systematizes your trade.


It is a good idea not to risk more than what you can afford to lose per trade. The conventional wisdom behind this is that you cut your losses short and let your winnings ride! So as to be in trading business for as long as possible.


Forex trading risk management is simply a method of controlling risk exposure when trading. By implementing a risk management strategy, a trader is able to limit the negative effects of a losing trade when the market moves in the opposite direction.


 Risk management approaches can be broken into:

1.     Risk Planning= Have you heard of Risk to Reward Ratio?  Risk Per Trade is an offshoot of a trader’s risk tolerance. Experts in this field advanced that a trader should not risk more than 2% per trade. Amount of money exposed to trade should equals account size multiplied by the percentage risk a trader is using (2%). Amount Risked = Account size x Percentage Risk

Illustration:

$200=$10,000 x 0.02

From the illustration above, the trader’s risk per trade is Two Hundred Dollars ($200).Meaning that the trader have fifty (50) trading chances to trade the account. Traders will then need to calculate their trade size based on how far away the stop is placed in order to risk $200.

 

2.     Trading Risk Reward Ratio: Comprises of three basic components viz:

a.     Entry Price

b.     Stop Loss

c.      Take Profit

In order to determine the risk to reward ratio, you simply need to divide the potential “Total Risk” by the potential “Total Reward:” Risk Reward Ratio = Total Risk / Total Reward

 

To figure out total risk, you will multiply your pip value by the differences between Entry Price and Stop Loss Price.

 

To figure out total risk, you will multiply your pip value by the differences between Entry Price and Take Profit Price.

 

3.     Position Sizing:

This is a trading technique that determines how many units a forex trader should trade to achieve the desired level of risk. To achieve this a forex trader must clarify these 3 things:

1.     Pip value 

2.     Dollar value on risk per trade

3.     Stop loss distance

 

Here’s the formula:

Position size = Amount you’re risking / (stop loss X value per pip)

·         The amount you’re risking = 2% of $10,000 = $200

·         Value per pip for 1 standard lot = $10USD/pip

·         Stop loss = 200pips

Now do the Maths:

Position size = 200 / (200 X 10)

= 0.10 lot

From the calculation above, it is very clear that a forex trader can trade 0.10 lot size. This means 1 micro lots on EUR/USD using a stop loss of 200 pips with an expectation of a maximum loss of $200.

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