Risk Management Guidance For Traders
As traders, we often face issues when it comes to how much we should be willing to risk on each trade, how many trades we can have open before our leverage becomes non-existent and quite frankly problematic for the maintenance of the account.
This occurs especially when a Forex trader starts in the markets using their savings, a loan, or even capital they cannot afford to lose.
What tends to happen is traders will start off with a small account and expect to take that account all the way to $1,000,000 in the space of 60 days! Now, please note I do not believe that is logically possible (in most cases). Due to probability, traders are bound to lose trades. This get rich quick phenomenon doesn’t occur consistently!!!
In these cases, traders will tend to risk way more than they are supposed to whether that be on a $100, $250, or $500 account. All in the hope of making quick dimes and living a lifestyle now. All Forex traders need to realize that this is not a short term game, and if you are not in it to obtain the skill, you might just lose in the long run.
Check out Forex Traders Approach To Goals.
Now to get into the risk management aspect. Risk Management is a very broad topic area because it consists of how much of your equity you risk, how you will manage that risk when the trade is in action, and you must consider how many trades at a certain lot size your account can manage at a given time.
For example, below is a trading risk management guide for different account sizes, which would be dependent on several variables such as leverage.
Risk management - Lot size guide
£100: MIN – 0.01 | MAX – 0.05 lots
£200: MIN – 0.02 | MAX – 0.10 lots
£300: MIN – 0.03 | MAX – 0.15 lots
£400: MIN – 0.04 | MAX – 0.20 lots
£500: MIN – 0.05 | MAX – 0.25 lots
£600: MIN – 0.06 | MAX – 0.30 lots
£700: MIN – 0.07 | MAX – 0.35 lots
£800: MIN – 0.08 | MAX – 0.40 lots
£900: MIN – 0.09 | MAX – 0.45 lots
£1000: MIN – 0.10 | MAX – 0.50 lots
Often when a trader doesn’t pay attention to their own guidelines they tend to lose more. Soon enough this will lead to the dreaded margin call. Less is more in this case too!
- You keep your leverage levels higher.
- You focus all your attention placing quality trades rather than the quantity of trades placed.
- You can focus on maximising the profitability in any given trade.
It is of the utmost importance that you keep your risk consistent until your account grows to a sufficient $ amount (depending on you). This is important because it builds discipline and allows you to focus your attention on managing that particular trade in the best possible way.
The last tip I want to leave you with is making sure your risk to reward ratio is always positive. A risk to reward ratio of 1:1 is not positive. It is neutral. Neutral won’t get the results you’re looking for. In fact, over time your equity curve will decline (due to trading costs).
Make sure you trade with a good risk to reward ratio which will help when managing your risk in terms of trailing stops etc.
Happy trading Traders!
Have a great week!