RISK MANAGEMENT IN FOREX

Risk management is an important part of a trader’s tool set because it can successfully protect a trader’s capital from high draw downs.

Introduction:

As forex traders we trade in order to make money. To be able to make money consistently we have to know how we can manage risk. The risk we run when trading is that we will lose money. If you trade without regard for the risk you are taking on the trade or without any money management system in place, you might as well be in a casino and gambling your money away. By having a money management strategy you will not only be able to manage your risk but in the end you will lose less on losing trades and therefore make you more profitable.

Risk Management in Forex:

The first question you need to answer when you start out trading is ‘how much capital do I need to get started’? Money begets money so obviously you are going to have to set aside an amount of capital to start with. Also you will need to learn how to trade and you will need to learn about technical and fundamental analysis. There are many courses available but they are not free so if you intend to hit the ground running and have the cash available to invest in some courses then that might be a good solution for you. However, if you are patient you will find that all the knowledge you need to be able to trade successfully is free on the internet. You just need to discipline yourself to focus on your own self education and be a good student.

Whether you are going to trade as a fundamental or a technical trader most trading platforms offer all the forex charting software you need to be a profitable trader.

So how much capital do you need to get started? Well if you have educated yourself properly and have learned money management techniques you could start with a $50k account. Or, if that kind of money is not within your reach, there are many brokers who offer micro accounts where you can trade with as little as $50 of capital. However, whatever the size of your account your money management techniques is the same.

The key pillar of risk management is deciding on how much you are willing to risk losing on each trade. There isn’t a trader on the planet that has 100% of winning trades. So you are going to lose some trades and sometimes you will lose several trades in a row, so it is imperative that you manage your risk. If the percentage of the trade that you risk losing is too high say 10% then if you start with a capital of $10,000 and lose 5 trades in a row, your capital is reduced by $3922. However, if your risk management is conservative and you only risk 2% of your capital per trade and you lose 5 trades in a row then you only lose around 10% of your capital quite a difference from losing 40% of your capital. The key is to set up your risk management so that you are protected from a bad series of draw downs.

Remember that to regain 40% of lost capital your percentage win rate needs to be around the 70% mark. That is the reason why you have to protect your account with good risk management because it is much harder to win back the money you have lost.