Handle a proper risk management

Whether you possess a good forex trading system and whether you have the right mind-set, if you’re not employing a proper risk management, you’ll not going to be profitable in the long term. An adequate risk management has to avoid a forex trader going broke and at the same time has to see to it that the forex account has the opportunity to grow.

Probability plays an important role in handling an adequate risk management. The risk percentage per trade is based on the possibility to go broke in a less favorable period while at the same time the comfort zone as well as the growth potential needs to be thoroughly observed.

Minimize the possibility to go broke

For instance, if each time you’re playing for high stakes to such an extent that you’re risking 50% of your account, there will be a fair chance that you’ll be going broke when having the slightest bit of bad luck. Regardless of the potential of your trading system, there’s always the possibility that you could lose a number of trades in a row. Without having money at your disposal you’ll not be able to trade, so it’s important that you handle your financial resources with great care!

Guidelines regarding risk percentages per trade

In general forex traders risk about 1% up to 4% of their account per trade. With these percentages the chance to go broke should be negligible. The smaller the risk percentage which a trader is used to handle per trade, the smaller will be the possibility that he/she is going bankrupt.

Growth potential

On the other hand of course a forex account has to get the opportunity to grow. If a trader takes a 1% risk each time he/she is making a trade, consequently the possibility of him/her going broke is very near to zero, but on the other hand the balance on his forex account sure isn’t likely going to increase too fast.

Handling a risk percentage of 2% per trade still reduces the possibility of going broke to a considerable minimum, but an increasing potential growth is not entirely out of the question anymore.

Comfortzone

A good risk management however differs from one person to another, as it happens to be especially dependable on the individual interpretation of the comfort zone. That way it’s possible that a trader might get too nervous by risking 4% per trade and by doing so is making the wrong decisions based on emotional motives. However, an opposite reaction could also be possible. If a trader is convinced that 1% is not sufficient, there is a chance that he might become too casual and as a consequence will deviate from the rules. So see to it that you handle a risk management that will fit your comfort zone!

The dangers of an aggressive risk management

The above described guidelines do not exist for nothing. You’ve already learned that probability plays a very big role and that you should observe everything in the long term. In that case you should allow the law of large numbers to do its work and to make that possible, your forex bankroll should be large enough for you to be able to get through less favorable periods. You’ll have to realize that the more aggressive your risk management is becoming, the more you’re going into the direction of gambling!

You also should not forget the psychological side of this development! When you risk a comparatively big percentage per trade and things are not in your favor for a while, as a result of this the negative consequences will be quite a lot bigger than just losing the money that you have been investing until then. In situations like these, people are often inclined to risk even more hoping to make up for their losses. In other words: the emotions are gaining the upper hand and in that case most of the time the misery can no longer be overlooked. Many traders are crying out loud that they are being able to take a step back on a moment like that, but in actual practice it seldom happens that this turns out to be successful.

Of course the other way around could also be a possibility. At the beginning it’s all moving out well and the profits are enormous. But then follows a less favorable period and you’ll watch your balance on your forex account disappear like snow in the summer. What does it to you?

Conclusion:

With forex trading it’s all about probability and also in case of handling a risk management you’ll come across this again. Though handling a proper risk management, you’re not only letting the law of large numbers do its job, but you also see to it that you avoid unnecessary psychological obstacles and that you handle a proper long term vision! It’s important to approach forex trading in an abstract manner and to avoid emotions as much as possible. Handling a proper risk management is a good basis to achieve this purpose.

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