Forex Risk Management
Now, we are going to get to a part that is very important in your career – Forex Risk management. You should never forget what we are going to discuss in this section. It is said that more than 90% traders fail in the market. While there are a lot of reasons for that, the most important reason is poor risk management.
Controlling The Lot Size
As we explained earlier, a higher lot means more money. If you choose the standard lot size of 1, a profit of 30 pips will give you $300 whereas the same profit with lot 0.01 will give you just $3. So, does it mean you should choose a lot size that is as high as possible? No, Not at all! That is the biggest mistake you can do in Forex.
In every trade you place, you are taking a risk. When you place a trade, you are essentially saying that you are ready to lose the money that you are risking. If the same trade with the standard lot size resulted in losing 30 pips, you will lose $300. That doesn’t sound good. There are many traders who choose a capital as low as $300. For them, this means just wiping the whole account away.
So, there is a general rule in Forex followed by most of the traders. Here it is: Never risk more than 2% of your capital.
You may use the best strategy in the whole world; You may have the knowledge of technicals and fundamentals at your fingertips; But if you don’t follow proper forex risk management, you will still fail. Your survival in Forex depends on risk management.
Another huge mistake to make is not trading without a stop loss. Never do that, that is the worst blunder… A stop-loss is set to control the losses in case the price moves against your prediction.
You may be thinking this way: “Why should I worry about stop loss? Even if the currency pair moves against the prediction, the movement may reverse at any time and go in the desired direction”. No, you are wrong. If you choose any chart and look at the history, you will see that it is not correct. Sometimes, a currency pair may move in one direction for months, or even years. No one can make an accurate prediction regarding this. And, a pair may change the direction at any time, regardless of all the analysis you do about it suggesting you the opposite.
Also, it is common for some traders to keep moving the stop loss out of temptation. Don’t do that… Once you set a stop loss, stick with it.
Choosing A Time Frame
A trader can choose to trade at different time frames. As we already saw there are various time frames available starting from 1-minute time frame to monthly time frame. Trading very short time frames like 1 minute or 5 minutes are known as scalping. A short-term trade focuses on 15 minutes to 4 hour time frames. A long-term trade may last for a few days to even months.