How much risk should you take?
Credit: Jaco van den Berg
Being risk averse and understanding money management in a key component of becoming a successful Forex Trader. Here at BlackBull markets, we want our clients to do well.
By ensuring rational decision-making regarding risk, you can minimize the size of your losses when encountering a losing trade. A common mistake made by newcomers to trading is taking to high risk when entering a buy or sell trade. This does not refer to your stop loss but rather 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 a run of losses can not only be discouraging but will increase stress and may often lead to irrational decision making, resulting in risky trades being taken, without the input of strategy.
Smaller more risk-averse trades will minimize the negative effects of a losing run. A calmer, less stressed trader means for fewer rash trades being taken without the implication of your Forex trading strategy.
When deciding on a percentage or risk, ensure 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.
Example: 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 the EURUSD market on a buying trade at 1.12848 we would put our stop loss at 1.11848, at a trade size of 0.1 lots, we can ensure a maximum loss of only $100.00 or 100 pips at $1.00 per pip move.
Thus, a larger risk will result in a much larger loss per trade as each point traded is worth more. However, this goes both ways, greater risk results in greater reward as more can be earned from each trade, this does not refer to increased risk by having an increased stop loss, but rather a larger lot size. Finding a happy medium between risk and reward is an important element of being a successful trader.
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Risk Warning: Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange, you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money you cannot afford to lose. You should make yourself aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any questions or concerns as to how a loss would affect your lifestyle.
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