Why Risk Management Essential in Forex Trading?
In this article
When it comes to Forex Trading, beginner traders have quite a few topics to research before they can start. This is a handful for most Traders and many topics get overlooked. One of the most overlooked topics when it comes to Forex Trading is Risk Management data-preserver-spaces=”true”>.
The reason most Forex Traders lose their money is not due to the lack of knowledge or experience, but rather the lack of proper Risk Management. Poor Risk management is one of the most causes of traders losing money.
Risk to Reward
When it comes to Risk to Reward, there is no golden ratio. This comes down to personal preference. Mostly a Risk to Reward of 1:2 is implemented. This is a metric used by traders to calculate how much they are willing to risk for how much they can potentially profit. With a 1:2 R:R ratio, you are willing to risk ZAR 100 for a potential profit of ZAR 200. The more you are willing to risk, the more you could potentially profit.
Every trader needs to calculate their ratio before they should even think of opening a trade. Most beginners don’t apply or know how to do this, ending up losing money.
Risk percentage per Trade
In Forex trading, you should never risk more than you can afford to lose. Once a decision is made to take a trade, you have to calculate how much your volume should be. This all depends on how much trading capital you have available to trade with. Most Traders will apply the 2% Rule. Only trade a 2% volume of your account balance per trade. Only after gaining more insights and knowledge within the forex market, do traders tend to increase their trade percentage slightly.
For Example:
If you have ZAR 10,000 available capital to trade with, you will enter your trade equal to ZAR 200 with a 2% calculation. In other words, you have 50 opportunities to make a profit or blow your account.
Use a Stop-loss and a Take-Profit
Many traders are risk seekers and strive to reach the highest profits possible. This can present traders to risk their capital and lose money. With each trade, it is essential to add an SL (stop loss) & TP (take profit).
A stop-loss (SL) is a price limit entered by a trader to prevent further losses. All trades don’t always go your way, a Stop-Loss will ensure to prevent further losses if the trade goes the opposite direction.
A take-profit (TP) is a price limit entered by a trader to capitalise on profits after opening a successful trade. When a trade goes your way, Take-Profit will close out your position for a profit. A take profit can also be used and moved accordingly to lock in profits.
Final Thoughts
Forex Trading isn’t a “Get Rich Quick Scheme.“It takes dedication and hard work to be a successful trader. The more time you invest in your trading, the better your profits will show at the end of the day. You need to analyse the charts, use your indicators and be up to date with news supplied on the economic calendar. There is always the temptation to open large orders, assuming you would make big profits. This is way 90% off all traders lose all their money.
Risk management is not hard to apply. Stick to the basics and don’t chase big profits. Slow and Steady, wins the race.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst
Relevant Posts
Capex Trading Platform
[top_three_brokers] CAPEX trading platform is a multi-jurisdictional online broker. It offers more than 2,100 marketable…
Read more
FSB South Africa
[top_three_brokers] FSB, aka Financial Services Board, was South Africa's financial regulatory body established in 1990.…
Read more
The Benefits of reading Forex books – 10 Best in 2022
[top_three_brokers] Do you want to understand how trading in different currencies works? The best way…
Read more
Trade245 Broker Minimum Deposit
[top_three_brokers] [single_affiliate id="11853" size="big"] The amount needed to open an account with a financial institution,…
Read more
Tickmill MT4 – MetaTrader 4
[top_three_brokers] [single_affiliate id="3179" size="big"] Introduced for all the new or advanced traders, Tickmill MT4 is…
Read more
AvaTrade Minimum Deposit
[top_three_brokers] With AvaTrade, the minimum deposit is just $100 via credit, debit, or e-wallet. When…
Read more
What is Liquidity in Forex?
[top_three_brokers] If a trader gets into Forex trading, one of the first advantages they will…
Read more
Trade245 MT4 Download
[top_three_brokers] [single_affiliate id="11853" size="big"] Trade245 offers trading on MetaTrader 4 - a leading platform for…
Read more
Micro Account Forex Explained
Do you know what micro account forex is? Given the tough competition, it's no wonder that…
Read more
Is Forex Trading Gambling?
[top_three_brokers] Would you like to know if forex trading is gambling or not? There are…
Read more
Capex Trading Platform
[top_three_brokers] CAPEX trading platform is a multi-jurisdictional online broker. It offers more than 2,100 marketable…
FSB South Africa
[top_three_brokers] FSB, aka Financial Services Board, was South Africa's financial regulatory body established in 1990.…
The Benefits of reading Forex books – 10 Best in 2022
[top_three_brokers] Do you want to understand how trading in different currencies works? The best way…
Trade245 Broker Minimum Deposit
[top_three_brokers] [single_affiliate id="11853" size="big"] The amount needed to open an account with a financial institution,…
Tickmill MT4 – MetaTrader 4
[top_three_brokers] [single_affiliate id="3179" size="big"] Introduced for all the new or advanced traders, Tickmill MT4 is…
AvaTrade Minimum Deposit
[top_three_brokers] With AvaTrade, the minimum deposit is just $100 via credit, debit, or e-wallet. When…
What is Liquidity in Forex?
[top_three_brokers] If a trader gets into Forex trading, one of the first advantages they will…
Trade245 MT4 Download
[top_three_brokers] [single_affiliate id="11853" size="big"] Trade245 offers trading on MetaTrader 4 - a leading platform for…
Micro Account Forex Explained
Do you know what micro account forex is? Given the tough competition, it's no wonder that…
Is Forex Trading Gambling?
[top_three_brokers] Would you like to know if forex trading is gambling or not? There are…