Risk Management is one of the most discussed topics in financial trading. Most traders end up with an unsuccessful trading journey because they have never studied what risk management is and how to implement it in their trading plan. Not having a trading plan is one other major drawback but today’s focus is on risk management and in coming articles we will cover trading plans for our readers.
How Much Should You Risk?
In simple terms, you should not risk more than 1% of your balance on a single trade, and you should not risk more than 3% of your total balance on all open positions at a time.
Let’s say you have a $1000 balance in your account. One percent of that is $10, so this means that you have to adjust your stop loss within a $10 range. It’s very important to know the pip value as it will help you to calculate the potential profit/loss for each instrument.
For example, let’s assume that you have one open position:
Account Balance: $1000
Risk: 1% ($10)
Pip Value for EURUSD: $10 for 1 Lot
Stop Loss: 20 Pip (200 Points)
Position Size: 0.05 Lot
Pip Value: $0.50
Risk per trade: 20 pip x $0.50 = $10
Now, if you want to open more positions, keep in mind that you can risk a total of 3% of your balance on all open positions.
Considering the above example means you can open a maximum 3 positions at a time with a 0.05 lot size by having a 20 pip stop loss. If your stop loss is wider than 20 pips than you have to lower the lot size. Let’s say, if your stop loss is 50 Pips than your lot size should be a 0.02 Lot.
It is proven that by implementing a proper risk management plan, you will make you money in long run.
Use Filters to Lower the Risk Further
There are several steps you can take to help lower your risk:
-Do not place a trade without knowing your stop loss
-Always use a stop loss – it’s a wall that protects your capital
-Use a trailing stop, never give away your profit
-If your winning ratio is low, lower the lot size
-Eliminate emotions while making trading decisions
To conclude we’d like to say that without a doubt, risk management is extremely important to consider in your trading. You should not start to trade Forex without thinking about a strategy and considering the risks associated. Be vigilant, do your research and implement suitable steps to maximise potential gain. Trading Forex always some risk associated with it but if you prepare yourself properly you can look forward to a profitable future in trading.
To read more informative articles, take a look at our Forex Education section here.