Risk Management Forex Trading

Understanding how to implement Forex trading money management to grow your trading account is essential to the success of all traders.

However, many beginning traders are largely unaware of some or most of the basic concepts of effective Forex money management, and this is a major reason why so many traders fail to make money over the long-term in the markets.

How much should I risk on a trade?

Unfortunately, there is really no “concrete” answer to this question because there are a lot of variables that are different from one trader to the next. A good place to start when trying to determine how much to risk per trade is to honestly answering this question: how much money do you have as disposable income that you can realistically afford to lose?

the best % to risk is always 1% and then once you improve you can start playing more risky

I find that many beginning traders fund their trading accounts with money they really shouldn’t be risking in the markets, and if they don’t initially make this mistake, they make later down the road after blowing out their first account. So, first off, you should never risk any money in the markets that is not truly disposable, and by truly disposable I mean “fun money”, money you don’t need for any other purpose besides entertainment. I am not implying trading is entertainment, I am just trying to convey the point that you should only trade with money you truly do not need. Doing this will start you on an “even” emotional playing field, because you will have no emotional attachment to your trading money.

by other side do not start trading with 10 dollars 100 dollars 250 dollars. Honestly better keep that money and invest it on education and then start trading with a demo account and once you have consistency start funding you account with at least 1000 dollars. ? Why because when we start trading with small accounts , even the 0.01 does not represent 1 % of the account . In that way trading with small accounts = automatically overrisking.

Next, when determining how much you should risk on a trade, always think in terms of dollars risked, not in pips. The notion that a trader should think in terms of pips instead of dollars is simply not conducive to effective risk management in forex trading Pips are basically irrelevant because one trader could risk the same amount of pips as another trader but they could have drastically different dollar amounts at risk, this is a result of position sizing and will be discussed below.

In my own personal approach I take a more discretionary approach to how much I will risk on any given trade, this is contrary to what the popular Forex web presence might say. I typically risk a set amount of dollars per trade, rather than a set risk percentage, this approach works for me because I have mastered my trading I know exactly what I am looking for in the markets. Also, because I trade with purely disposable income, I have no problem risking a set dollar amount on a price action trading setup that I feel 100% confident in.

Risk reward

Risk reward should be thought of as the “workhorse” of money management, the proper implementation of risk reward is how professional traders make money. Indeed, it is so powerful that you can even enter the market essentially randomly and not lose money over the long run, and perhaps even turn a small profit, through the proper execution of risk reward.

Unfortunately many traders take the wrong approach to risk reward by worrying first about the potential reward and last about the potential risk! They start finding setups with unrealistic potentials…

You need to first calculate the risk involved on any potential trade setup AFTER you determine the most logical place to put your stop loss. Once you have done this, you then can determine what the potential reward is based on multiples of your dollar amount risked. So, if you risked $100 on a trade, you ideally want to aim for a reward of at least $200 or more; the R:R would be 1:2. The idea is that if you can make at least 2 times your risk on all your winning trades, you will, over a series of trades, offset your losers to the point of turning a decent profit. Obtaining a R:R of 1:2 or better even gives you the potential to lose on the majority of your trades and still make money.

Position sizing

Many traders do not understand position sizing, but it is a very simple concept that you must understand if you want to effectively manage your money. Position sizing allows you to risk the same amount of money no matter what price action trading strategy you trade or how large or small your stop loss distance is. Some traders erroneously believe that by having a wider stop loss on a trade they are risking more money or that by having a smaller stop loss on a trade they are risking less money… wrong wrong wrong…!!

The truth of the matter is that you can adjust your position size up or down to meet the necessary stop loss distance. So, you first should determine the most logical place to put your stop on a trade setup, you never want to determine your position size first, this should always come AFTER you determine the best and safest place for your stop. After figuring out where to place your stop loss, you THEN calculate the number of lots you can trade to maintain your pre-determined risk amount. This is the correct way to maintain your risk on any trade; it is a basic but essential component to an effective Forex money management plan.

How effective money management helps you manage your emotions?

This is a very important factor of successful trading, but it is something that depends heavily on correct Forex trading money management. Put simply, if you don’t logically manage your money and risk on every single trade, it will be nearly impossible for you to manage your emotions effectively. There is a reinforcing loop between money management and emotion management, and it can go either way. For example, the better you manage your risk and money in the Forex market, the easier it becomes to manage your emotions, simply because if you are effectively managing your money you are unlikely to become emotional.

Both go together!

Conversely, if you do not take risk and money management seriously you are opening a can of “emotional” worms that will be very hard to contain. The temptations of over-leveraging your trading account are very difficult to contain if you aren’t trading with truly disposable income or aren’t comfortable with the amount you are risking per trade. So, you see, you need to build your Forex trading money management plan on a solid foundation, and this starts with the concepts discussed previously of disposable income, risk / reward, and position sizing.

Master your Forex trading strategy

Finally, in order to truly exploit all of the above topics, you need to truly master your PA strategy. As I discussed earlier under the “how much should I risk on a trade?” topic, the main reason that I am comfortable using a somewhat discretionary approach to risk amount is because I am 100% confident in my knowledge and awareness of my edge in the market; price action.

Experienced traders like myself know that trading less often than most amateurs is conducive to growing their trading account. Put simply, there is no reason to trade if there is no reason to trade. All of the above money management principles are simple best taken advantage of when you are confident in your trading strategy and have no doubts in your mind about what the market should look like before you risk your money in it. Essentially, domination of your chosen Forex trading strategy will tie all of the pieces of money management together and make them work in your favor.