Friday, November 24, 2017

My Forex Risk Management Tips

January 15, 2010 by  
Filed under Fx Tips

Having proper risk management can totally change your trading account. First of all, let me ask you a question. “Do you think that being able to trade with a winning ratio of 5 out of every 10 trades is able to make you money that can allow you to quit your day job and becomes a full time trader?

I bet most of you will say “Breakeven

But the Answer is “YES!

The real reason why you are able to make sufficient profit even if you manage to make 5 profitable trades for every 10 trades you take lies in the secrets of your trading risk management which is commonly known as win-loss ratio or risk-reward ratio.

Imagine you are always trading with a risk reward ratio of 3:1, what it means is that you can afford to lost 3 times with every win you got and that is how you can make money even with a 50% winning accuracy. Imagine a trader who always places his stop loss at 20 pips and only exit his trade when the trade hits 60 pips profit. If he manages to win 5 trades out of every 10 trades, he will make 200 pips profit.

5 Wins = 5 x 60 = 300 pips

5 losses = 5 x -20 = -100 pips


Total = 200 pips profit

Therefore it is important for any traders to learn how to maximise his/her trades profit while minimising the losses.

Besides having a good risk reward ratio, it is also important for you to know the amount of loss per trade that you can afford. I have seen people starting trading account with as little as $250 and I always wonder how these people trades.

Personally, I think that every trader should trade with a stop loss of maximum 3% of the capital in his/her account. Why is this so important? “To live to trade another day” is the reason behind this small stop loss percentage. Imaging yourself losing 50% of your trading capital in a trade, you will need to make a 100% profit to get back to your starting capital.

Therefore having good forex risk management system can be crucial to your trading success and this actually differentiates a successful trader from a failure. Spend some time to think about the above mention information and hope it can help you to properly manage your risk in future and make you a better trader.

Below are forex strategies that you can use to help you profit in your trades.

Comments

2 Responses to “My Forex Risk Management Tips”
  1. wallace says:

    Hi, Kelvin!
    Thanks for this site and your book – it is great that you share your experience with other peoples 🙂
    Here is my question relative to this post.
    When you are talking about 3:1 risk ratio (60:20 pips in your example for TP and SL), how can trader be sure that he will get this 60 pips of profit from any success trade? Doesn’t 40 pips give him a win? It does! But this gives ratio 2:1, which is not we want. Did you get my point and my question?
    P.S. Sorry for my english 🙂

    • Kelvin says:

      Hi Wallace

      Welcome to this community.

      As for your question about the risk reward ratio, it really boils down to your planning before you enter your trade. Let say that you have identified a good trading opportunity to go SHORT, you should not enter the trade until you have identified where you want to place your stop loss and your target profit. When you have identified the target profit which could either be a major support or resistance or the end of a price projection, you will know how much is the profit you can get from the trade. If the profit and stop loss can make up a risk reward ratio of 3: 1 or 2: 1 depending on your personal target. You should then enter a trade.

      If you find that the risk reward ratio is too low, you can then abandon the trading opportunity and look for another one. That’s why discipline is very important in trading. I hope that I have answered your question and do feel free to comment if you have any other doubts.

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