Why Risk Management Essential in Forex Trading?
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.
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.
Table of contents
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
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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, traders tend to increase their trade percentage slightly.
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.
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.
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Hein is a Forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best Forex Brokers in South Africa. Join him on his Jounrney!
Content Writer | Market Analyst
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