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Two sensible risk management rules to apply to your forex trading

by , 18 June 2015

When you first start trading forex, like most traders, you're likely to be thinking about how much money you can make.

In fact, the best thing you can do is think about protecting yourself against losing money. Do this and you have a better chance of being a successful trader.

So what are the most important aspects of risk management?

Read on to find out…

Risk management rule #1: Use a positive risk/reward ratio when trading forex

This is a very important aspect of risk management.

At the very minimum, your profit target should be twice your risk when you trade forex. If you can do this with your trading strategy, you’ll be profitable.

If your strategy doesn’t produce more profits than losses, it’s time to look at what’s going wrong with it.

If you go about it the other way and risk twice as much as your potential profit, you’re going to need a string of winning trades to make money. In other words, for each losing trade, you need two winning trades to break even.

So you need to ensure your risk/reward ratio is in your favour.

Risk management rule #2: Only risk small amounts on each forex trade

Another risk management rule to stick to is only placing a small percentage of your trading capital on each trade. Staking 1% or 2% of your trading capital is sensible, Frank Hemsley in Profit Watch explains.

By risking a small amount, a losing trade isn’t going to stop you trading again.

You can work out your risk by calculating the difference between the price you enter the trade and your stop loss.

Let’s look at an example…

If you’re spread trading forex and there’s a 50 pip difference between your entry price and stop loss, and you risk R1 a point, the risk is R50.

If you decide to risk 2% of your trading capital on a trade, you’d need to have R2,500 in your trading account.

If you decided to trade R10 a point instead, the risk is R500. To put a trade of this size on, you’d need to have R25,000 in your trading account to stick to risking 2% per trade.

The more profitable you are, the more your trading capital grows and the more you can risk on trades and potentially profit.

So there you have it. Two sensible risk management rules to apply to your forex trading.

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Two sensible risk management rules to apply to your forex trading
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