Most of the content you will find on the web that has to do with forex trading is related to strategies. People are constantly talking about various ways to make money in the forex market and still, the proportions remain the same – a lot of people do not manage to succeed and a few do.
Now, don’t get us wrong, technical analysis and strategies are important in trading. But, if you want to learn online trading like a professional, you will need to take into account other factors, as well. In this article, we will focus on risk management and why traders fail to incorporate it in their trading regime.
Risk management for trading
If you are reading this article you had your own struggles with forex trading. You are probably wanting to learn online trading and an improper risk management is probably stopping you from having results.
Risk management basically means developing a strategy for allocating capital. You’ve probably heard about the 2% rule. It means that traders should not risk more than 2% on any single trade.
Although that could work for some people, the risk per trade is not the only thing to consider. There are other factors that need to be taken into account in order to keep risk under control. One of them is the trading accuracy. How many traders know how many winning trades they have on a percentage basis per week, month, year etc?
Unfortunately, just a few.
Also, how many traders consider the reward to risk ratio?
This is another aspect widely ignored and most of the beginning traders will find themselves taking trades where the risk is greater than the potential return, when in fact, things should be totally different.
Why don’t people consider risk management?
The first reason is the lack of education. The simply do not understand what implication it might have. The second reason is greed. By ignoring risk management principles the potential for profit might be higher.
However, what traders do not understand is that the risk as well increases exponentially. You need to have the mathematics in your favor and also, you need to develop a system that can carry you through those periods when you will encounter losing traders because you like it or not, as a trader, you will have to face losses, no matter how good you are.
Risk Warning and Disclaimer
Trading the foreign exchange market carries risk and may not be suitable for all investors. This is not an investment advice and it is just used for information purposes.