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Posted on Apr 07, 2022 at 11:34 AM
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How To Manage Your Forex Trading Risks

It doesn't matter if your Forex Trading Strategy is the best—without the required money/risk management skills, the chances that you will make more losses than gains are high. In today's article, you'll learn what it takes to become a pro-trader in the money/risk 'dormitory'.

In Forex trading, we tend to focus so much on technical aspects such as trading strategies, indicators, trends, etc., that we completely neglect the fundamental and most important part—Risk and Money Management.

Poor money management will only cause you more losses than gains, even if your strategy is very good.

Why? Because your trading strategy is the 'head' and money management is the 'neck'; without the neck, there's no movement of the head!

The major difference between a WINNING and LOSING trader lies in the manner in which they deal and manage their open trades—whether winning or losing—and manage risks.

 

Key Takeaways From The Article:

  • Basics of Money Management in Forex Trading 
  • Smart Ways to Earn Profits Regardless of Your Equity Size
  • Creating Your Personal Money Management Plan
  • Applying Risk Management to Your Crashing Trades 

 

APPLYING MONEY/RISK MANAGEMENT LIKE A PRO

A pro-trader is smart, strategic and skilled, and is an expert at converting equities (no matter how small) to profits. A pro-trader does not gamble and only takes calculated risks that are in line with his Money Management Plan.

If you're not already a pro-trader, the good news is that you can be one if you do not take any of what you'll learn here for granted.

The very first thing you need to do before you take any trade is to...

DETERMINE THE MARKET TREND: The trend of the market is simply defined as the likeliness of the price of an instrument to move in a particular direction over time.

Knowledge of the market trend is pretty important. Trading the Forex market without knowing its trend is no different from gambling in a casino—rolling the dice with no faintest idea of whether it's going to be a 'six' or a 'one'.

To not grope in the dark, it's important to confirm the trend of the Forex market first. There are three types of trends:

  1. BULLISH TREND: This is an upward trend or rise in the price of a trading instrument. If price is at the support level of a bullish trend, then it's safe to place a BUY trade and expect profits.

    However, if price is not at the support level of a bullish trend, then it's important that you do not take any action until it moves to the support level, to avoid costly losses.

  2. BEARISH TREND: This is a downward trend or fall in the price of a trading instrument. If price is at the resistance level of a bearish trend, then it's safe to place a SELL trade.

    On the flip side, if price is not at the resistance level of a bearish trend, then it's important that you do not take any action until it does, to avoid costly losses.

    Can't identify support and resistance zones on your chart? Click Here Now to read a simplified guide.

  3. SIDEWAYS TREND: This is a horizontal movement in the price of a trading instrument. A trend is considered 'sideways' if it's neither moving upwards (bullish) nor downwards (bearish).

    Don't take any action when you observe a sideways trend, but wait for a breakout instead. 

    N.B.: A breakout is a price activity outside a support or resistance region. 

 

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RISK MANAGEMENT OR MONEY MANAGEMENT?

Money and Risk Management look somewhat similar but are indeed different. While Risk Management involves trading with large equity (from $100,000 upwards), Money Management involves trading with equity of $100,000 and below.

This follows from the logic that trading with a large capital involves considerable risks (risk management) with little or no concern for the equity, while a small capital on the other hand involves much lower risks, with the major focus/concern being on equity (money management). 

The best strategies usually fail in the absence of Money Management. To this end, always ensure that you don't lose more than 75% of your equity no matter what.

HOW TO PROTECT YOUR EQUITY

Be Realistic: Trading aggressively does not guarantee returns on investment. Depending on the timeframe you're trading, it's important to stick to a realistic profit target and not overshoot it. 

Anticipating a 30 - 60 pips profit on a measly 15 minutes timeframe is simply unachievable. It's only logical to step up to a higher timeframe, of say, 1 hour (which can deliver up to 100 pips).

Admit Your Mistake: It is essential to not waste time 'pushing your luck' and exit the Forex market immediately you realise that you have taken a terrible trade.

You cannot control the market and don't have an infinite amount of money to lose either.

Many times, a door closes on us and we stare so long at it regretting and analysing the 'but ifs' and 'I should haves' that we miss juicy opportunities.

This is not the attitude of a pro-trader. Admit your mistake and move on, there are more fishes to catch.

Prepare For The Worst: Always anticipate the worst-case scenarios at all times to prevent unpleasant surprises.

What has happened in the past may not happen again, but it does reveal what is possible. Narrowingly escaping a bad scenario at one time does not guarantee that you'll always be lucky. Always prepare for the worst and leave no stone unturned.

- Study the history of that currency pair that didn't go well the last time you traded it.

- Determine what contributed to the not-so-good experience, and think about the action you need to take this time to protect yourself if that scenario were to repeat itself again. 

Don't trade the currency pair until you've got all the answers that you seek.

Plan Your Exit Points Before Entering a Trade: Before the U.S. president visits a particular gathering or occasion with his motorcade, a whole lot of planning comes to play, and notable among them is the president's emergency plan in case of an attack—provisions for snipers, medics, blood packs, bulletproof cars, etc.

Exits take much more time, resources and energy to plan than entries as a result of great deal of uncertainty involved.

It's not enough to just jump into a trade because it is juicy and will earn you a decent amount of pips. It's more important to plan your exit should things go down south. 

Therefore, while you're fantasizing about the profits you'll make from a trade, think about the number of pips you're willing to lose if things do not go in your favour too.   

By doing this, you will become an expert trader that remains disciplined even in the heat of a disturbing trade. 

STRATEGIES FOR GROWING YOUR ACCOUNT

Take Your Money and Risk Management Seriously: There is no two-way street about it—Zero money/risk management equals zero profits. Not sure of where to begin? Take note of the following tips:

  • Never trade small equities with large lot-size except when you are scalping.
  • You may remove stop-losses only when you're swing trading.
  • Ensure to define rules for your strategy, as it will assist you in managing your emotions.

Don't Ignore the Stop-Loss Button: It's okay to lose a trade, but never you allow a losing trade 'blow' your account. 

It's pretty difficult to close a trade with losses, and that is why trading by your strategy rules can never be overemphasised. Rules 'rule out' emotions!

By setting a stop-loss, your loss becomes recalculated and will not freak you out, because you only lose what you risk.  

Be Disciplined: The lack of discipline is the root of all misfortunes in Forex trading.

Discipline constitutes your ultimate test as a Forex trader.

It is your ability to remain loyal to your analysis and not chase every single candle or price direction you encounter no matter how juicy it seems.

Focus and trade with rock-solid discipline like a soldier! No deviation from your strategy even in the face of temptation.

Remember the saying: "Bulls win, Bears make profits but Pigs get slaughtered due to their greed". Rings a bell?


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