When you invest you manage your risk no? It’s the same with Forex risk management.
You won’t buy a used car before being super-duper sure it won’t be trouble, right?
I mean, you can’t be 100% certain, but you’re preeety sure no?
Well, we need to apply the same mentality to Forex trading.
In this piece, we will cover some of the most important elements of your “shield”:
All these pieces come together into what we call:
Forex risk management is all about containing your losses as much as possible.
However, many traders ignore some of the most important aspects of a complete risk management strategy.
What are some of these?
Starting with the most obvious one:
1. A Stop Loss Order. Given how simple, useful, and basic this is, you’d be surprised how many traders actually jump-in without placing one.
The next few are much less obvious:
2. Little to no leverage. The less leverage you use, the less money you’ll lose. Yes, we think of the money to be made, but if you’re like most, you’re not consistently profitable (yet), so you’ll just lose your account.
On this point. It’s important to dwell a bit longer.
New traders love to blow up their accounts.
They think they’ll become millionaires in a few months.
Maybe they used leverage once, and doubled their account swiftly.
Well, I shouldn’t make it rain in your parade, but…
It ain’t gonna last sir.
You will blow your account up.
With leverage, each failed trade takes a bigger part of your account.
But you also make more! (you say).
Someone didn’t do their math homework…
How much is 10% of $100?
So if you gain 10% of $100, now you have $110, right?
So far so good…
How about 10% of $90?
So if you make 10% of $90, now you have $99, right?
Ok, but where is the problem?
If you lose 10% of $100, now you’re at $90.
Which means, you will have to make more than 10% just to get back to even.
And that’s the cold-hard-truth.
Gaining isn’t the same as losing when it comes to trading.
That’s why you need to be careful with leverage as part of your Forex risk management.
Every time you lose, you make it that much harder to get back to where you where, when you use leverage irresponsibly.
But that’s enough. I’ll write a piece on leverage later.
How about we continue?
1. Sound Mental State. This one really goes off people’s radar. If snow has fallen, you would be extra careful while driving no?
Same with trading.
Don’t trade when you are angry, tired, sleepy, bored, annoyed, in a bad mood, too excited, somewhat out of your usual calm self, etc.
This should be obvious, but it’s NOT!
Some say common sense isn’t common. I agree (I don’t have any…).
Finally, but not least,
1. Know your shit! As simple as that. Don’t go throwing your money away in a trade you’re unsure of. Know what you’re doing. Invest in some quality education (I’m talking several hundred if not thousand dollars).
Something else you can do?
Get yourself a solid paid news feed service.
If you’re going to put money at risk, why not do it right?
Exceptions apply of course, if you’re working full-time, there’s no need to do so, but if you plan to day trade at home?
You’d be crazy not to.
Not really, we covered the most important aspects.
I’ll probably write a more in-depth page on each of the four aspects mentioned.
You need to use as many of them as possible.
And try to use them to the best capacity, otherwise you’re exposing your account, and yourself to unnecessary losses.
Forex trading is a business like any other. So minimize your exposure to losses by following those four basic tips of Forex risk management to the best of your ability.
Before you know it, you’ll be losing less money, less frequently. And that’s a big part of what the game is about.
Till next time,
The Forex Economist
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