Risk Management
What Is Risk Management & Why It's Important
Risk management is the process of using strategies and techniques to minimize the potential for financial losses. It’s crucial in forex trading due to the market’s volatility and unpredictability. It helps traders minimize losses, protect their trading capital, reduce emotional impact, and improve trading discipline. Proper risk management techniques can improve the chances of success and help traders achieve their long-term financial goals.
Strategies
Fixed % Risk
Fixed % risk means that you place an equal risk in each trade as a percentage of your current trading account balance. The most commonly used percentages are 0.25 – 2%.
Changing % Risk According to Results
This means that you place % risk on the trade based on past results. This strategy can help you get out of a losing streak with less loss and achieve higher returns in a winning streak.
Rules
In the example, we use a risk of 0.5 – 1.5%.
Start with 1% risk
- If you win, you can use 1.5% risk in the next trade. You continue this until you lose the trade, at which point you return to the 1% risk
- If you lose, you must use 0.5% risk in the next trade. You continue this until you win the trade, at which point you can return to the 1% risk
Example (target= 3R, three times the risk)
In this example, we also use a risk of 0.5 – 1.5%.
- Trade no. 1= win, +3% (1% risk)
- Trade no. 2= win, +7,5% (1.5% risk)
- Trade no. 3= loss, +6% (1.5%)
- Trade no. 4= loss, +5% (1% risk)
- Trade no. 5= loss, +4.5% (0.5% risk)
- Trade no. 6= win, +6% (0.5% risk)
- Trade no. 7= win, +9% (1% risk)
- Trade no. 8= win, +13.5% (1.5% risk)
- Trade no. 9= loss, +12% (1.5% risk)
- Trade no. 10= loss, +11% (1% risk)
Here you can see how the strategy works. Win rate was 50% and still +11% gain from 10 trades.🔥
More Strategies Coming!
Risk Management Plan Example
Sections of Risk Management Plan
Here are some examples. You don’t have to use all points in your plan.
- Risk per trade= How much you risk in one trade (%)
- Max. trades per session= What is the maximum number of trades you can take during one trading session (number)
- Max. trades per day= What is the maximum number of trades you can take in one day (number)
- Max. exposure= The maximum amount you can risk at the same time (%)
- This is for if there are open trades from previous days.
- Max. monthly loss= Maximum loss per month (%)
- Monthly profit target= Your profit target per month (%)
Simple Risk Management Plan Example
- Risk per trade= ?%
- Max. trades per day= ?
- Max. exposure= ?%
- Max. monthly loss= ?%
- Monthly profit target= ?%
Risk management plan can really be that simple. You can add more points to it if you want, but this is enough in most cases. The most important thing is that you follow your own risk management plan flawlessly.
