Being risk averse and understanding money management in a key component of becoming a successful forex and CFD trader. Here at BlackBull markets, we want our clients to do well and encourage them to engage in safe risk management practices.
By ensuring rational decision-making regarding risk, you can minimize the size of your losses when encountering a losing trade. Finding a happy medium between risk and reward is an important element of being a successful trader.
A common mistake made by trading beginners is to dive in to trading without considering the level of risk they want to take with each trade. Here I am not referring to the use of stop-losses. Rather, what I am referring to is the percentage of the money of your trading account you are willing to risk per trade.
When the percentage of risk is relatively large, encountering losing trades can not only be discouraging but will increase stress and may often lead to irrational decision making. These conditions can result in risky trades being taken, without the input of strategy and the further abandonment of proper risk management.
Smaller and more risk-averse trades will minimize the negative effects of losing trades. A calmer, less stressed trader means for fewer rash trades being taken without considering your forex trading strategy.
When deciding on a percentage or risk, you should ensure that a run of losses will not deplete your trading account by more than what you as the trader is willing to lose. Smaller risk means for smaller losses and therefore, a less stressful, more efficient trading experience.
A trading account of $10,000.00 USD traded at 1% risk, will ensure no more than a $100.00 USD loss per trade.
Assuming we enter a buy trade for EUR/USD at 1.12848 at a trade size of 0.1 lots, we would put our stop loss at 1.11848. With a stop loss triggering at this price we can ensure a maximum loss of only $100.00 or 100 pips at $1.00 per pip move.