A Primer on Risk Management for Forex Traders

01/25/2016 9:00 am EST

Focus: FOREX

It doesn't matter how great your trading strategy is if you don't have a robust risk management system in place as well, notes the staff at DailyForex.com.

You should always use some kind of hard stop loss order that is entered into your trading platform. When your stop losses are hit, it can feel like a slap in the face. If the price then comes back in the direction that you originally wanted it to go, the anguish increases even more. You will need to ignore these feelings and instead be grateful that your stop loss order limited the maximum amount you could possibly lose. Sooner or later you will be grateful that you had the stop in place.

Experts sometimes trade without hard stop loss orders (also sometimes referred to as stop limit orders). They can get away with this because they are experts and because they are probably using little or no leverage. Ignore these methods, for your own safety, and be sure to always use a stop loss or stop limit order.

The most common mistake people make is assuming that stop loss orders should be put in a place where they will not get hit unless the trade is a real loser. That is one way to arrange things, but there is nothing wrong with using tighter stop losses as with most breakout strategies they produce higher profits over time. This is because the best trades usually spend little or no time in negative territory. However, most new traders cannot stand the psychological pain of trading strategies with low win rates, so newer traders can find it much easier to use stops in a traditional way.

Regarding how much you should risk per trade, you should always risk a defined amount of your capital. If you are using a strategy that tells you that every trade you make has the same chance of winning, then you should bet the same amount of your account on each trade. Figures of 1% or 2% are often quoted, we suggest instead that you risk no more than 0.5% per trade. This may seem over-conservative, but it gives a beginner the chance to trade with less pressure and worry. Losses will be less painful and easier to forget. You can always raise the amount when you have a well-established track record of trading profitably with real money.

By the Staff at DailyForex.com

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