ere Because forex is a business for making money. Like any other business, you must learn to control the risk of loss (potential loss).
Unfortunately, many traders underestimate this because they are in a hurry to jump into direct trading without taking into account the risk. If you trade forex without using financial management rules, this is tantamount to gambling.
Risk management will not only protect you from loss but will enable you to survive in the world of forex trading in the long run. According to Forex Boat, managing risk is an art. If you want, there’s a delicate balance between managing Forex risks and traders’ emotions. Additionally, forex trading is a probability game, which means you have to use every factor as well as possible to increase your chances of winning.
There are various factors that you should pay attention to in terms of risk management:
Capital
In the forex trading business, in order to make money, we need money as financial capital. In business, insufficient capital (under capital) is a common mistake, as well as in the world of forex trading. If you cannot open an account with a sizeable amount of capital, it’s better to be patient. You can collect money first while learning to trade properly until you are truly financially ready.
Drawdown & Streak Losses
If you have $ 1,000 and a loss of $ 500. You have lost 50%. In the world of forex trading, this is known as the drawdown. Drawdown is a condition where your capital decreases after losing in a row and generally expressed as a percentage.
In forex trading, we must have an advantage in dealing with the market. For this reason, traders use a trading system. A superior trading system of 70% seems like a good way to implement it.
Can you ensure that 70 of these transactions will make a profit? Of course, you can’t. You could lose 30 times in a row at the beginning of trading and then win 70 times. It still includes a 70% superior trading system. However, you have to ask yourself whether your capital still enough to continue trading if you have lost 30 times in a row.
No matter what forex trading system you use, you may experience a losing streak. Even professional traders can experience a losing streak. But in the end, they still get profit because they use the right financial management.
In each transaction, they will only use a small portion of their capital as a risk. Thus, even if they experience a losing streak they can survive.
Drawdown is an unavoidable reality. The key to the success of a forex trader lies in the adoption of a trading plan that allows it to persist despite losing streaks, and risk management is part of a trading plan that must be carried out in a disciplined manner.
Reward-to-Risk Ratio
Another way to increase profit opportunities is by trading only if you have the potential to make a profit three times the loss. If you use a reward-to-risk ratio of 3: 1, the greater your chance for profit.
However, there are things you need to be aware of. If you are a scalper and you take the risk of loss of 3 pips per transaction. By using a profit-and-loss ratio of 3: 1, it means the target profit for each transaction is 9 pips. But remember, there is a spreading factor that you must take into account.
If you reduce the number of your positions, you can widen the Stop Loss distance to reach your desired profit and loss ratio. If you increase the risk of loss by 50 pips, your profit target will be 150 pips, so that it approaches the 3: 1 ratio as you originally wanted.
In fact, the profit and loss ratio is not a sure thing, because it must be adjusted to your timeframe, market conditions, and entry/exit points. It makes sense for a long-term trader to use a 10: 1 profit-and-loss ratio, while for a scalper a 0.7: 1 ratio might be more profitable.
