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.