Despite the fact that risk management is one of the easiest topics to deal with, for many traders it is one of the most difficult practices to follow.
Too often, it is observed how traders, mainly beginners, end up transforming winning positions into losing positions and how even solid and profitable long-term strategies end in losses and not profits.
Regardless of how smart they are or the knowledge they have in relation to the markets, these traders end up losing money for their own psychology.
Most investors in the markets end up losing their money simply because they don’t care about it or don’t know about risk management.
Basically, this concept means determining how much the trader is willing to calculate risk management in forex trading and how much he wants to obtain.
If good monetary management practices are not applied, the trader will simply lose too much money in positions where the market moves against him by excessively running losses and taking profits prematurely in winning positions.
The result of this is a scenario that although it may seem contradictory, in reality is very frequent: the trader performs more winning trades than losing ones, but in the end he ends up with a negative profit status. In this situation.
There happens to be some essential practices and principles that every trader must apply, regardless of the trading strategy they are applying, such as:
Risk / benefit ratio
Before opening a position in the market, the trader must try to calculate lot size forex risk / benefit ratio. This defines that before entering into the market, the trader must have an idea of how much he is willing to lose and how much he expects to gain from the transaction.
Stop Loss Orders
It is essential that the trader uses stop loss orders as a way to specify the maximum level of losses that he is willing to accept.
When stop loss orders are used, investors can avoid ending up in a situation where they have many winning trades, but a single losing transaction ends up destroying the profitability of the account, ending up with the gains made so far and leaving the account in critical condition.
These situations are much more common than is believed.
Using stop loss to manage risk
Due to the importance of capital and calculation of risk management in forex trading successfully operate in the Forex market, the use of stop loss orders is essential for any trader who wants to be successful in this market in the long term.
Stop loss orders allow the trader to determine the maximum loss that he is willing to tolerate in a specific transaction.
In the event that the market price reaches the level specified in a stop loss order, the position will be closed immediately.