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Forex Risk Management
Written by: PaxForex analytics dept - Monday, 12 May 2014 0 comments
Today we will cover a very important aspect of successful forex trading which is often neglected especially by new forex traders; risk management. The majority of forex traders are so concerned about generating profits, that they often ignore their bottom line and how to protect it. The majority of traders do not understand the importance of risk management and do not spend the required time to learn how to protect their portfolio from losses.
The best forex strategy is absolutely worthless if one bad trade will wipe out your entire portfolio. It is also meaningless if you close 95% of trades at a profit, if the 5% you will face a loss will wipe out your profits and so much more. It is important to understand how much of your capital should be deployed in each currency trade and how much you can afford to let a trade move against you so that the entire structure of your portfolio as well as trading strategy does not collapse. We will give you two examples, one of a conservative portfolio and one of a more aggressive portfolio which you may refer to as you find the level which best suites your trading style, strategy and risk level. Once you have chosen your parameters, it is vital to remain committed to them and execute your risk management procedures in every single forex trade in order to ensure long-term profitability of your forex portfolio.
Conservative Forex Risk Management A conservative forex portfolio should set the amount of capital deployed to each trade as well as the amount of losses which can be endured between 1% and 2%.
What does this mean? This means that if you have a forex account funded with $1,000 you will set your stop loss order to a level which will equal losses between $10 (1%) and $20 (2%). It is very important that you set this level as you fill out your order and we do recommend traders to use a
href="https://www.paxforex.com/metatrader4/mt4_userguide/start_trading/pending_order">pending order. It is very important to set this level as you place your order and you may want to refer to a very important article which explains that Forex Profits are generated when you enter a Currency Trade.
Semi-Aggressive Forex Risk Management A semi-aggressive forex portfolio should set the amount of capital deployed to each trade as well as the amount of losses which can be endured between 3% and 5%.
What does this mean? This means that if you have a forex account funded with $1,000 you will set your stop loss order to a level which will equal losses between $30 (3%) and $50 (5%). The above two examples are among the most simple rules to follow. They are simple, but not easy as roughly 98% of forex trader’s display. Despite their simplicity they are very effective to protect your portfolio from losses and ensure that you do not place too much weight on one single trade which may offset your portfolio. Determine which level suits you best and once you have found one remain committed to it and do not adjust it under any circumstances. You need to calculate how many pips you can afford to move against you before you place your order and set your stop-loss level accordingly. We also advise that you set your take-profit level as you enter your order and do not adjust it once you have placed it. All of this is conducted as you place your order and not added after your order has been executed. It is recommended that your take-profit level should be realistic and according to your analysis. It totally depends on your forex trading strategy.
One Final Forex Risk Management Tip: Always trade the same amount of lots. Do not trade different amounts on each trade. In case you are trading 0.25 lots then place the same amount for each trade. When you decide to make a general adjustment to your trading volume, maintain it for all future trades. It is natural that you make adjustments based on the overall size of your forex portfolio.