If you’re just starting out as a Forex trader, risk management should be one of your top priorities. Many new traders are so eager to begin trading that they ignore the dangers of not having a solid risk management system in place.
The dangers of risking too much of your account on any trade can be a surefire way to ultimately lose most, if not all of your trading capital before you even get your feet wet in the markets.
If you start with a small account, lets say $5,000.00, risking a large percentage of your account is ill-advised. For the sake of argument, let’s assume a trader risks 10{43188a7dd839b6435400250daa1cfd1f7fa6a9f2f74b5d47d7c17eef7596ad2a} of his account on each trade. With a $5,000.00 account that amounts to risking $500.00 on your first trade.
Most veteran traders would agree that is not a wise decision. What if you had 5 losing trades in a row? By risking 10{43188a7dd839b6435400250daa1cfd1f7fa6a9f2f74b5d47d7c17eef7596ad2a} of your funds on each trade, you would have lost over $2,000.00. Roughly 40{43188a7dd839b6435400250daa1cfd1f7fa6a9f2f74b5d47d7c17eef7596ad2a} of your trading capital. Far more than a smart trader should ever risk. Each time you lose a sizable amount it makes it very difficult to make back your losses and restore your account to its original size.
The same trader who only risked 3{43188a7dd839b6435400250daa1cfd1f7fa6a9f2f74b5d47d7c17eef7596ad2a} of his capital could withstand 5 losing trades in a row, and would be in a far better position than the trader who risked 10{43188a7dd839b6435400250daa1cfd1f7fa6a9f2f74b5d47d7c17eef7596ad2a} on every trade. With that same $5,000.00 account, a trader risking 3{43188a7dd839b6435400250daa1cfd1f7fa6a9f2f74b5d47d7c17eef7596ad2a} would lose roughly $700.00. Or about 14{43188a7dd839b6435400250daa1cfd1f7fa6a9f2f74b5d47d7c17eef7596ad2a} of their capital. Quite a difference.
In the above examples you would of course hope to not have 5 losing trades in a row. But in the world of Forex trading, nothing is guaranteed. Good Forex money management combined with proper risk control are one of the most important skills any Forex trader can learn.
Becoming a successful Forex trader involves more than just opening an account and begin trading. In order to profit, and maybe even more important, survive, you must learn as much as possible about the markets. Don’t invest one cent before you get a solid education about trading, learn proper discipline, and understand that you must have a proven plan in place before beginning to trade.
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