I need to continue the debate on a way to find the right trading technique for Forex trading. Formerly, I shared that for any Forex trading method to be considered, it has to be a total methodology ( insert a link to a prior article ). Today, I need to add to that by talking about risk management. This is maybe the area where 95% of Forex traders screw up and lose cash. Handling risk is about reducing your losses AND about shielding trade capital by employing precise techniques to do each of these simultaneously.
What Do I Mean by That and Why Is It Important
First, most Forex traders make straightforward trading mistakes: they take too giant of a position and reveal themselves to significant and steep losses if the markets move against them. 2nd, they fail to guard their Complete account by permitting ONE trade to put their full account balance at risk.
Here’s a Fast and Maybe Extraordinary Example
For each point this foreign exchange trade moves against the currency exchange trader, the trader loses the total account balance. For more see my Forex Income Engine 2. At first, peek, that might not seem to be a steep loss. However, should the Forex trade move a total of fifty pips against the Forex trader, and the trader afterward exits the position, the currency exchange trader’s total loss would be Superb. This is poor risk management and it often leads to finish wipeouts of Forex trading accounts.
How did we work out that loss? One pip for the EUR/USD pair is the same as $10 ( on the standard lot trade ). A 50 pip loss equals a monetary loss of; and remember our example forex trader had traded 5 standard lots for a whopping loss of $2,500! Instead, any trading method should teach you very specific guidelines for incorporating money management and risk management into every forex trade you take. To find out more read this Forex Income Engine.
The Right Trading Technique For Forex Trading
Money Management should involve the distribution of a forex account among the various trades a forex trader takes. As an example, forex traders should never trade their complete account on a single trade, and should barely have more than some open positions. By using multiple positions, the currency exchange trader distributes the chance among each one of the foreign exchange trades they have taken. Risk management should involve the maximum risk in any SINGLE Forex trade, and should limit the impact of a losing Forex trade on the trader’s account balance.
Here Are 2 Fast Examples
Money Management: A unproven foreign exchange trader takes four separate one-lot trades on 4 separate pairs. Assuming here that each of the pairs has a pip value of $10 on a standard lot, then the total amount of the account being margined across all four trades is about 40% (it may be higher depending upon the actual pairs traded. With correct stop loss management in association with risk management, it is Improbable the currency exchange trader would attract a total 40% loss.
Carrying forward to chance management: In every one of the unproven currency exchange trades above, the foreign exchange trader hazards only 2% of the trader’s total account balance on each currency exchange trade. That implies a maximum loss per forex pair traded if ALL FOUR trades are stopped. Total loss, in this case, would be a much more recoverable scenario than the first forex trade example. Furthermore, Risk Management has the capacity to make loss recovery easier. For example, in the first case, where the Forex trader lost, the trader would need a nearly 250% gain on their next trade to recover the lost value on the first trade.
The second part of Risk Management not typically discussed in poor trading methods is protecting gains. Though this starts as a dialogue on Exit Method rules, it’s also a factor in risk management. Once a foreign exchange trade turns profitable, it is urgent the foreign exchange trader manage the gains with smart stop loss management. The worst thing a forex trader can do is allow a profitable position to reverse and become a losing position. So, handling risk reaches the protection of gains on a foreign exchange trade, just as it does defend against deep losses on a currency exchange trade.
Therefore, in considering any trading technique to be used in your Forex trading, you should make sure that risk management is not just debated, but obviously explained with the use of the trading technique. If risk management isn’t present, confusing, or not particular to the trading technique, you need to avoid using that trading method. For additional info see read this Forex Income Engine 2 Review.