It takes money to make money.
But how do you know how much money is enough money?
And how do you know how much money is too much money (to risk)?
Let’s recap what we’ve learnt in the previous chapters on how to manage risk in Forex.
Before you place a trade, it is important you always calculate how much you could to lose in the worst case scenario.
You never know, the market can move quicker than you thought or gap, or million other things that can prevent you from getting out of the trade at the level you wanted to.
This is super important to remember especially when using leverage as your losses could be bigger than your deposit.
It is important you distinguish between rational and emotional decisions when trading.
Making decisions based on your gut feeling will most likely end in disaster, so it’s crucial you back up your decisions with analysis.
Simple as that.
And just to be sure, repeat after me.
I WILL NOT TRADE BASED ON MY EMOTION NOR WILL I TRADE BASED ON MY GUT FEELING.
And with that in mind, let’s move to the next point.
Don’t put all your eggs in one basket.
Don’t put all your capital into a single currency pair. Why?
You might lose it all if the market goes in the other direction.
Instead, keep your options open with other currency pairs. Then, your losses won’t have such a devastating impact on your overall trading account.
Okay, so now that we have looked at some general methods of managing your risk, let’s discuss two techniques you can use to figure out how much risk you should be taking on with every trade you place.
Choosing how much to risk per trade is completely up to you.
You will find traders that advise not to risk more than 1% of your trading capital per trade, while others say it’s okay to go all the way up to 10%.
However, most traders do agree that going anywhere above that would be MAD. Why?
If you go on a big losing streak, the amount you are risking per trade will have a huge effect on your capital and the ability to claw back your losses.
Say you’ve got $10,000 on your trading account and so it happens you lose 15 trades in a row. Here’s the difference between risking 2%, 5% or 10% per trade:
The reduction of capital after a series of losing trades is called a drawdown but more on that later.
You can also work out a risk-per-trade scale. It might look like this:
Remember, all traders will be affected by a losing streak at some point, but the ones who plan their trading to cope with those streaks are usually more successful in the long run.
The truth is that it is possible to lose more times than you win, and yet still be profitable.
It’s all down to risk vs reward.
For example, if your maximum potential loss on a trade is $300 and the maximum potential gain is $900, then the risk vs reward ratio is 1:3.
Pretty simple, right?
If you stick to these 5 rules, the chances are you can make it as a forex trader.
And we are not just saying it. In fact, we want to be there when it happens.
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