Profitable Forex trading is based on risk and money management, technical analysis, fundamental analysis and psychology. Risk management is a process of preliminary analysis of all transactions on possible risks and potential profits. A Forex trader has to calculate risks every time before conducting any trade. It is be possible to control risk only after you determine it. That is why you need to know at least the basics of risk management.

Risk and Money Management Tips

There are some useful risks and money management tips, which can help you, achieve good results:

  • Take profits regularly -

    set a take profit, profit percentage of any entry should exceed risk percentage at least 1.5 times, preferably twice or more.

  • Trade with a Stop-Loss -

    a limiter of your loss and an ultimate risk-limiting tool. Place stop-losses for every entry.

  • Do not lose more than 2% of capital in a single transaction (don’t risk more than 2% / trade).

    Losses are normal of any trading system. Therefore, the percentage of capital, which you allocate for one loss, has great importance. A loss of 10% on your account means that you have to gain 11.1% for its recovery. If you lose 50%, you need to double your account to return to the starting point! A loss of 90% means that you need to earn 900% in order to recover your initial capital. Thus, in order to avoid large losses traders impose a risk limit per trade.

  • Know the statistics of your system.

    To fully trust your system, you need to study it well. A trader looking for financial success on Forex has to know what to expect from implementation of his/her trading rules.

  • “Transaction diary” -

    write down all your transactions. Keeping statistics and the "diary of transactions" allows you to see where you earn more and where you lose.

Why the Risk/Reward Ratio Is Used in Forex?

Risk/reward ratio is an indicator that allows you to assess profit potential in relation to a possible loss in any particular entry. Knowing the exact risk before opening a position, a trader can determine advisability of a particular transaction. Risk is determined by stop loss level and is equal to difference between current price and your stop order.
The target level – is the level at which a trader is planning to close an entry with profit. Profit potential is equal to difference between current price and target level. It is necessary to divide profit potential by risk to calculate ratio. If the value is less than 1, it means that risk in the transaction exceeds possible profit; if more than 1, then the potential profit exceeds the risk.
In order to trade sustainable it is important to keep the risk/reward ratio not lower than 1:1.5. Determine the stop-loss and profit before conducting a trade. Also choose the entry point wisely. All these parameters give you enough information to calculate risk and potential profit.
A trader should open transactions only if there us a potential opportunity to make profit greater than the amount of risk. However, if market conditions dictate the need for a larger stop loss, which exceeds a fixed percentage of risk per trade, then such a transaction should be skipped. You should do the same if the potential premium is less than 1.5 of risk.

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