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View Full Version : How to Minimize Risk When Trading in Forex



johnsmith00710
06-27-2013, 12:22 AM
Risk management is one of the most important things in forex trading or for that matter stock trading and futures trading. Learn how to manage risk first only then think of taking profit. Many traders think of profit first and then think about risk. What most traders do is to think of profit first and risk later. This only makes their trades losers often.


So how to minimize risk in forex trading? Always use a stop loss whenever you enter into a trade. The first thing that you need to do is to place a stop loss. Never trade without a stop loss. The most important thing is the size of the stop loss and place where you put it.


Before you enter into a trade calculate the Risk to Reward Ratio. This ratio should never be more than 1:2. What this means? Let me explain. Suppose, you spot a high probability trade setup. The risk is 50 pips and the reward is 100 pips. Reward is your profit. The Risk to Reward Ratio for this trade is 1:2. You can take this trade.


Now, suppose, you spot a high probability trade setup where risk is 50 pips and reward is also 50 pips. This gives you a risk to reward of 1:1. Don't enter into this trade. Scalping is done with a wide stop loss. If you are a new trader, avoid it until you gain experience.


The Risk to Reward Ratio is one of the most important parameters that can minimize your risk in trading. Only enter into a trade where the Risk to Reward is 1:2 or less. When calculating the position size or the number of lots that you want to trade, never risk more than 2%.


Let's make this clear too! Suppose, you have $5,000 equity in your account. 2% risk means $100 meaning you should not risk more than 10 pips on a single trade. If the risk is more simply don't enter into that trade. 2% is considered to be a safe risk level. When you have more capital in your account, this 2% risk will translate into more number of pips.


For example, you have $10,000 equity in your account. 2% risk means $200 or 20 pips on a standard lot. The trick is you learn how to make consistent winner using only 2% risk. Overtime, your account will compound into a large sum. Good Luck!