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Why you can't ignore risk management when trading forex

by , 02 June 2015

Forex trading gives you the opportunity to make handsome profits from changes in the prices of currencies.

Whilst you can make good gains, if you don't put any thought into risk management, you can quickly lose money.

So why is risk management so important when you trade forex? And what sort of risk management strategies should you consider?

Read on to find out…


Risk management is a vital tool for a successful forex trader


If you have a good forex trading strategy, you may think risk management isn’t worth the bother. But you’d be wrong.

If you don’t take risk management into account when you trade forex, your winning streak can quickly turn into a losing streak, which decimates you trading account.

By strictly controlling your risk, you can still have losing trades, but come out on top.


The number one risk management strategy


One of the most useful risk management strategies to use when trading forex is position sizing. It works so well for a number of reasons.

By using position sizing, you control how much money you put at risk on each trade. And the better your trading strategy works, the better off you’ll be in the long run.

Position sizing involves risking only a small percentage of your available trading capital on each trade. Each trade you place thereafter uses this as its basis.

For instance, you have R10,000 in your trading pot. You decide to only risk 2% of your capital on each trade. So for your first trade, you’d only risk R200 (2% of R10,000). If your trade hit its stop loss, this is how much you’d lose.

If your first trade goes to plan and you make R1,000, you now have R11,000 in your trading pot. You’d then risk R220 (2% of R11,000). But if you lost R200 on your first trade, you’d only risk R196 (2% of R9,800).

This strategy means if you’re successful over the long term, your trading pot will grow, which in turn means you risk more per trade.

If you have a string of losses, it’s time to take a breather from trading and work on your strategy.

Risk management is crucial to ensure you can keep trading for the long run. And it stops you from taking on big risks with individual trades.

So there you have it. Why you can’t ignore risk management when trading forex.

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