Risk Management in Forex Trading is a term that is very important in trading world and at the same time is a major point which mostly gets out of focus when traders start real time trading. A trader can remain in positive account size if it can strictly follow a sound risk management strategy. The first and foremost difference in trading a demo and a real account is the human psychology. The point is here that how to overcome this problem?
A trader should be able to understand the strengths and weaknesses in its trading. The best thing to do is to trade in demo accounts and test out different strategies for reasonable amount of time. The demo time should also include some major data releases so the trader should get used to taking them into account while trading. Any new thought or modification to the trading style and strategy should be fully tested in demo account.
The trader should learn to trade with major trends and avoid trading in short reversal trends. If the trade is with the trend, more often there are chances for the trader to come our successful of the trade. If the trader is unsure of the trend, it should avoid trading and wait for the time when the trader has the grip and clear understanding of the market. Waiting out the un-certain period is also considered to be part of good trading strategy. Similarly the trader should learn to trade fundamental news. Trader should be aware to avoid trading during that time when it is not sure of the effect of news and should be able to capitalize in case has the knowledge of the affects.
Another important point in risk management is to avoid over-trading. The trader should learn to stop and let go in case of loses and not try to make up for loses on the same day. If there is some loss, stop trading and get back next day with fresh mind.
To devise a good risk management strategy, a trader should be fully aware of the targets and risk tolerance level and then devise a trading strategy. All currencies have different trading nature and the trader should be careful in selecting the currency pair matching the risk management strategies.
The entry should always be covered, means it should always have a stop so that when entering the market, the trader is aware of the maximum loss. It is always recommended to use a fix stop loss and profit limit ratio for a specific currency pair and the best recommended ratio is 2:1. This means that if a trader is aiming for 60 pips profit per trade, it should always use a stop loss of 30 pips. If a trader keeps following this ratio, the trader will be on break-even level even if it is winning just 1/3 of the trades completed following this ratio.
The traders should avoid trading in very volatile markets unless it has the knowledge and good experience of it. Similarly trading in very slow currency pairs should also be given some careful consideration as it can also choke the trading margin
A trader should be able to understand the strengths and weaknesses in its trading. The best thing to do is to trade in demo accounts and test out different strategies for reasonable amount of time. The demo time should also include some major data releases so the trader should get used to taking them into account while trading. Any new thought or modification to the trading style and strategy should be fully tested in demo account.
The trader should learn to trade with major trends and avoid trading in short reversal trends. If the trade is with the trend, more often there are chances for the trader to come our successful of the trade. If the trader is unsure of the trend, it should avoid trading and wait for the time when the trader has the grip and clear understanding of the market. Waiting out the un-certain period is also considered to be part of good trading strategy. Similarly the trader should learn to trade fundamental news. Trader should be aware to avoid trading during that time when it is not sure of the effect of news and should be able to capitalize in case has the knowledge of the affects.
Another important point in risk management is to avoid over-trading. The trader should learn to stop and let go in case of loses and not try to make up for loses on the same day. If there is some loss, stop trading and get back next day with fresh mind.
To devise a good risk management strategy, a trader should be fully aware of the targets and risk tolerance level and then devise a trading strategy. All currencies have different trading nature and the trader should be careful in selecting the currency pair matching the risk management strategies.
The entry should always be covered, means it should always have a stop so that when entering the market, the trader is aware of the maximum loss. It is always recommended to use a fix stop loss and profit limit ratio for a specific currency pair and the best recommended ratio is 2:1. This means that if a trader is aiming for 60 pips profit per trade, it should always use a stop loss of 30 pips. If a trader keeps following this ratio, the trader will be on break-even level even if it is winning just 1/3 of the trades completed following this ratio.
The traders should avoid trading in very volatile markets unless it has the knowledge and good experience of it. Similarly trading in very slow currency pairs should also be given some careful consideration as it can also choke the trading margin
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