Risk management is the key element to know before entering into the forex world. Successful traders often evaluate the risk before trading. On the other hand, many traders face loss because of not evaluating their risk before trading. Even if you have the best forex system, without risk management strategy, it’s hard to make a profit every time.
Risk management is simply the ideas to protect the investment from losing. This includes minimizing the size of the trade lot, trading in a specific hour or knowing when to take the risk.
No matter how profitable your signal provider is, or how appropriate your account size is, you can still face loss. To prevent this situation, you need to make a solid trading strategy. Otherwise, your signal provider cannot do anything.
Let see an example of how risk management works.
Jack and Nick are two friends and they have started to trade in forex.
Jack is a competitive trader. On each trade, he risks 25% of his account. On the other hand, Nick is a conventional trader who risks 2% of his account.
Both of them receive profitable Forex signals. Their signal wins 60% of the time. The average risk to reward is 1:2.
In the next 10 trades, the results are Lose Lose Lose Lose Win Win Win Win Win Win.
Here is the consequence for Jack:
-25%-25%-25%-25%= Account doomed
The consequences for Nick is:
This means that if Nick has a trading account of $10000, his maximum loss would not exceed $200 (2% of 10000)
Limiting your risk in forex means you have more chances to be in the field. If you are planning to enter into trading, then you should first learn how to minimize the risk first. Otherwise, you won’t be able to succeed.