Money and Risk Management in Forex

Did you know that 90% of all new forex traders fail and lose their money? Why do most of the traders fail within their first trading month? Have you ever managed your own business?

Forex is a world-class business. That is why you should learn how to manage cash flow, but most importantly - potential losses. Money and risk management is one of the most important elements in every successful business. Have you ever wondered how much money are you willing to lose in one Forex order? Forex trading can easily transform from a highly intellectual challenging business to gambling, if you don’t set and follow clear and strict rules for money management. Sure, if you get lucky, you can earn some fast money, but gambling won’t lead you anywhere in the long run. After all the main rule of money management is to achieve outstanding profits. The first step is to learn how to properly manage your losses. Many traders say “I have a lot of problems with the Forex market”, but they all fail to realize their real problem – loss and profit management. Do you want to be a successful trader? Of course, you do, everybody wants this.

The simple rules for high profits.

• Your brain is your trading engine. Your engine can make you either a loser or a winner.
• Drop the emotions; your power is your intelligence.
• Stay 200% FOCUSED.
• Do not be greedy. Trade as long as you have planned.
• The luck won’t help you.
• Invest in yourself. Spend much time reading and studying the techniques of the successful traders, then practice with a demo account.
• If you fail, call it a day and do something else then will distract you. You can do yoga, sports, meet a friend. You have to stop thinking about trading.

Good technical and fundamental skills will help you recognize price patterns and you will learn when to open and close a trade, but this is not enough. High-level traders spend a lot of time perfecting their money management techniques, because they want to control their cash flow more efficiently.

Do not put all the eggs in one basket.

Making money is challenging and your number one task is to survive. A good trader is a hunter, skillful survivor. He or she protects the trading account and hunts profitable price movements. If you are not well-prepared, you can lose all of your investment and thus become the prey.

Let`s investigate a simple example of two traders with equal initial investment, but with different risk management policy. The first one is going to trade with 3 % risk, while the second one is going to trade with 11%.

3687 — 27% of the account has been lost.

1560 —69% of the account has been lost.

Have you ever met someone who lost in Forex? 

When most traders lose some money, they all seek revenge. However, returning losses is much harder than it seems. Observe the table below to better understand what we are trying to tell you here.

Notice one more thing, in the table above we are talking about “loss recovery”, not profits! Please, try a little experiment: how much time does it take to recover the lost money, if you use a demo account? Do it for yourself and you will have the answer.

Calculate the reward-risk ratio before trading.

When you start building your own risk and money management strategy, think of a concrete win-to-loss ratio of pips that you should always follow. The golden rule here is that the reward ratio value should be three times more than loss value – 3:1 or higher (winning pips – 60, losing pips 30). If you strictly follow this rule, the negative trades will decrease, while the profits – expand dramatically.

The stop loss is your seat belt.

The other well-known risk management rule is that driving without a seat belt is as reckless as trading without a stop loss. Every minute there are many traders that trade without the protective feature of the market: stop loss. Do you like this tool? Most traders will answer “Oh, no I don`t like it”. The truth is that most traders find this tool difficult to use, but if you learn how to use it correctly, then your trading skills will go to the next level.