Summary on risk management

A risk is a situation where you have only 2 options. That is to win or lose, to fail or succeed. And only one must happen.

Forex trading requires you to invest in money to make money.

The amount of money you need to start trading all depends on you and the type of a trader you plan to become.  You can invest as much as you can afford. Whether big or small amounts.

Some forex brokers accept small accounts as low as $30. If you feel that’s what makes you comfortable to start with, well for you. But all that is important is that you should only invest that money that you can afford to lose.

Along your trading career, expect to see some drawdowns on your account. Forex trading is a probability venture, so where we expect a win there can be a loss too.

Drawdowns refer to aggregated consecutive losses on your account that can lead to a big loss or reduction on your account.

Drawdowns always occur due to common mistakes made by traders as a result of greed and failure to accept loss. They include:

  • Staying long in a failed trade hoping it will turn around and make a profit.
  • Failing to set stops and take profit targets
  • Using a big size on a single trade with a hope of making a bigger profit
  • Exposing a bigger percentage of your account to risk.

A drawdown can be minimized by using risk management tools like

  • Setting stop loss targets and take profit targets.
  • Applying the 2% risk rule
  • Using a size that matches your stop loss.
  • Following your trading rules and trading plan.

Risking only 2% or less helps you to minimize risk per trade and gives you more chances to utilize other available opportunities in the market. Your %loss is minimized and it also becomes easy to breakeven.

The 2% risk rule is highly recommended by most successful traders. You can use it if it works for you. What’s important is to keep your risk as low as possible. You can still to use 1-3% risk but make it consistent.

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