Why you must control your risks with forex trading or face losing it all

by , 31 August 2015

Trading the forex market can be very lucrative. But as with trading all geared instruments, there are risks. And these risks mean losing money.

One of the most important aspects of forex trading is risk management. If you ignore it, chances are you're not going to be trading for very long.

So why is risk management so important? And how can you limit your risks when trading forex?

Read on to find out…


The importance of risk management when trading forex


All forex traders should have a strategy to follow. A trading strategy must include risk management. Risk management ensure you don’t decimate your trading account with a run of losing trades.

By not adhering to any risk management, you leave yourself wide open to losing large amounts of money on just a handful of trades. This will result in you leaving forex trading prematurely and being financially worse off.


How to limit your risks when trading forex


Of course, setting take profit levels and stop losses should be part of your strategy, but one of the most effective ways of managing your risk is position sizing.

Position sizing involves only risking a small portion of your trading capital on each trade you put on. By adhering to this rule, your potential profits may be smaller when you start out, but it also means your losses are strictly contained too.

A good rule of thumb is to only risk 2% of your trading pot on each trade.

For instance, if you have R10,000 in trading capital, you’ll only risk R200 (2% of R10,000) per trade. This is the amount that you could potentially lose if your trade hit its stop loss.

Using our example, if you lost your first trade, your trading pot will fall to R9,800. This means you only risk R196 (2% of R9,800) on your next trade.

If you gained on your first trade and your pot grew to R10,400, you’d risk R208 (2% of R10,400) on your next trade.

The more success you have, the larger your trading pot becomes. This means your potential profits will also grow. But if you have a run of losing trades, you can still keep trading, just risking smaller amounts.

So there you have it. Why you must control your risks with forex trading or face losing it all.

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