Manage your Risk in Forex

There is one thing that distinguishes Forex Trading from gambling and that is-Money management. Money management in forex is as important as trading itself. In fact, it is the money management that should come first and the actual trading next.
Money management is the same as the “Risk management”. The amount of money invested in a trade is directly related the risk it carries. It is ability to bear the loss in case of a bad trade.

Most trading focuses on only making profit. The real focus should be to “protect the capital invested while making profits”. Unnecessary risks only burn the account with false/ill managed trades. Money management allows us to establish our own system in such a way that will guard the most crucial asset-your investment. Without the capital the game is over.

A few principles can be outlined here.

Trading with enough capital:
There isn’t a worst blunder than giving trading a shot without “sufficient” capital. Sufficient has the connotation of the spare/extra money you may have which you can afford to lose. A trader with restricted capital is not only always looking for cutting losses beyond what is realistic and hence always worried. The is one of sure shot way to fail in trading. In India only we have stories of traders committing suicides because the loss was too heavy to bear. Forex is risky by nature. Trading with the hard earned money will only cause heart burn.


Be disciplined:
Forex trading needs to be extremely disciplined. The word has been used to the extent of it becoming a cliché now. Nonetheless its significance has not lessened. And it needs to be continuously emphasized with being equally difficult to master. A disciplined trader will plan the trade and trade as per the plan. If its one word that separates Successful traders from others-it is Discipline.


Rule of thumb: don’t risk more than 2% of your total capital
How many trades will be successful in a system is never certain. Without money management you can be broke even before you can recover with further successful trades. It will require a new deposit each time. With 1% risk the trade is even more secure. But the key is not to risk any more than 2% of your total equity.


To sum it up
• Discipline saves from any unnecessary losses
• Risk is best minimized to a small percentage of the total capital.
• Use the risk-return ratio where less is more.