【Forex】The Importance of Risk Management for Trading

A trader that master the risk management will soon master the forex market as well.

 

As far as I have been trading forex for several years, what suffered me the most is “Risk Management”.

And I think this probably is the same thing for a lot of traders.

But if you are not able to overcome this issue, you never be able to succeed in the financial market for sure.

Forex trading is really worth trying business definitely,

but, if don’t understand how to manage the risk of it, you will end up just wasting your money and time.

In order to prevent that case, today, I would like to tell you the 3 important things which you can use to manage your risk and money correctly.

But before getting into it, I would love to remind you

that you always have to do the trade with the right position size.

 

Generally, the amount of loss cut per trade should be under 2% of your deposit.

If you are a new trader, then it should be under 1%.

If you are not sure that your trade is really profitable at the forex market or not, this rule is a must condition. (It is gonna be different if you know the expected value of your logic by backtesting or something.)

 

The important 3 things you need to know for your risk management

 

There are some useful numbers which you can use for risk management. 

☆Win Ratio = win trades ÷ total trades

☆PF(Profit Factor)=  Pips of Total Profit÷ Pips of Total Loss

☆R-Multiples = Pips of average profit ÷ Pips of the average loss

 

PF R-Multiples Win Ratio
1.0 0.3 0.77
1.0 0.5 0.67
1.0 1.0 0.50
1.0 1.5 0.40
1.0 2.0 0.33
1.0 2.5 0.29
1.0 3.0 0.25

 

If you still don’t achieve the 1R-Multiples, please tackle on it first.

It is really hard to raise the win rate for newer traders, but when it comes to R-Multiples, you can raise it easily by changing the entry point like below.

 

Simple trading strategy for small loss and big win

This trade is 1:2 risk-reward ratio.

On the other hand…

This trade is 1:1 risk reward ratio.

 

Well, what do you think which trade is a much better one?

Of course the first one right?

Even if you cannot raise the win ratio of trade, you can produce more money by taking a position at higher reward and lower risk point just like the picture.

If you are doing the trade without having any specific risk management strategy,  you need to realize that it is as dangerous as doing skydive without a parachute.

It will be killing yourself before long for sure.

So…yeah…

Just Do It.

 

 

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