The Importance of Risk Management In Forex Trading
In this post, I am going to share with you guys one of the trade that I have recently taken for user of my trade copier service. I will also like to take this opportunity to emphasize the importance of risk management in trading.
Actually most new traders do not care about risk management as most of them do not know the importance of it while some do not even know what is it actually about.
In fact, risk management is one of the most importance factor in successful forex trading but let me take sometime to share with you guy what is risk management in trading in case some of you do not know at all.
1) Lot Size To Enter
As a trader, we must make sure that we have enough margin for us to trade if we encounter several consecutive losses in trading.
Therefore I will advice all of you to risk between 3 to 5% of your account in every trade. I know of some traders who risk 15 to 20% per trade and trust me, you just need 3 consecutive losses to use up all your margin.
Here is how you calculate the lot size based on the % risk per trade.
If you have $5,000 in your account and you decide to risk 5% on a trade. Therefore you will risk $250 in each trade.
Now you will need to know how many pips you are going to set your stop loss. If you set a 25 pips stop loss and 1 standard lot is $10. That means that you are going to enter
$250/25pips/$10 = 1 standard lot
Below is the formula for you
Step 1: Calculate the amount to risk based on % risk per trade
In this case, you are risking 5% and therefore the amount to risk is
$5,000 x 0.05 = $250
Step 2: Decide on the stop loss
Step 3: Calculate the lot size to enter
Step 1 answer/Step 2 answer/20
In this case,
$250/25/10 = 1
2) Protection of Account
Besides calculating the lot size to enter, the next most important thing to do is to protect your account while you are trading.
The only way you can do that is by shifting the stop loss to breakeven when the price has moved certain pips in your favor.
Sometime, if you are targeting very high target profits like 100 pips and above, you can actually shift the stop loss to 25 pips when the price has moved more than 50 pips in your favor.
This is to ensure that you still get 25pips profits even when the price starts to reverse.
If you have been following my trade copier service or my blog, you will know that I have the habit of shifting the stop loss to breakeven when the price moves certain pips in my favor and that is why you will see breakeven trades in my BTB performance report and my trade copier performance report.
I will suggest all of you to have this habit of protecting your account by shifting your stop loss to breakeven when the price has moved certain pips in your favor as this is the best way to protect your account when the price reverses.
I know that some of you are afraid that the price will hit your breakeven stop loss and then move in your favor. Most new trader are only concerned about their profits and do not care anything about their account.
Below is a live trade that I have recorded for the trade on my trade copier service.