Many of us heard about Risk management and its importance in the world of trading. The main reason for those who constantly lose in Forex is Risk management because there is no importance for a strategy that makes a lot of money and doubles the account if you do not apply Risk management; this is what we will talk extensively about how you can determine the appropriate Risk management for you and how to control the psychological factor to control Risk management and other questions that may cross your mind.
What is Risk management?
Capital Or Risk management keeps you in the market as long as possible and reduces losses and profits, too, to achieve excellent and appropriate earnings in the long term compared to capital. Also, when a good opportunity appears in the market, you are still in the market, and you can seize this opportunity with a slightly higher risk to achieve higher profits. The percentage we talk about in risk does not exceed 5% in a single trade, and you can determine the appropriate rate for you according to your Strategy. Risk management is the main factor in building any successful trading strategy; without it, it is impossible to be sure that this strategy becomes ineffective.
Why Risk management?
Is it required for a trader to work with Risk management? Of course not; you can choose between working with it or not, but if you trade without Risk management, be profitable?
This is the correct question, as many traders who lose in Forex constantly dream of quick profit and finding buried treasure, but in reality, this does not happen; adherence to market conditions is the secret of success in Forex, and 80% of your success factor in Forex is Risk management, as it protects you Of losing your money in all the meaning of the word and of course, you do not want to lose the money that you wanted to invest in Forex, you also free to choose between commitment to Risk management or not.
Example of Risk management
| Account balance | The maximum allowed lot of the day | The number of Trades allowed per day | Lot size per trade | the maximum risk that can be reached |
|---|---|---|---|---|
| $100 | 0.01 | 1 | 0.01 | 5% |
| $1000 | 0.20 | 4 | 0.05 | 10% |
| $10000 | 1 | 5 | 0.2 | 15% |
| $30000 | 2 | 5 | 0.4 | 15% |
I think that this example has clarified the idea of managing capital, and of course, you do not have to stick to these numbers entirely. It is possible to do less or higher Risk management if you want over time, and also you will realize how to manage your account and work with Risk management; you will be able to do it well, and then you can improve your style and skills, of course.
Please note: When you open a new trade, it will be negative, and this is called the spread, so be sure always to add the spread points when calculating the lots and the level of risk when you enter the Trade so that your calculations are correct and do not fall into losses more than expected
Top 7 steps to implementing proper Risk management
1 – Determining the appropriate risk ratio
How to calculate RR
For example, Your account balance is $10,000, and you saw an excellent opportunity to enter the EUR/USD, and you wanted to risk 0.5% of the account and win 1%; the exit area (take profit) will be after 50 pips from the entry area.
Calculation of Stop Loss = $10,000 x 0.5% = $50 (25 pip)
Calculation of Take Profit = $10,000 x 1% = $100 (50 pip)
How to calculate the size of the Trade = $50 / 25 pips = $2 per pip, and you will open 0.2 lot on the standard account type.
Please note: this method can’t be used to calculate the Lot size on JPY Pairs or Gold. Instead, use our Lot size calculator tool for an easy calculation.
2 – Types of Risk management
Types of Risk management
There are 3 types of Risk management; many traders are experimenting with anything that may occur to your mind, including Risk management. Some want to take a low, medium, or high risk, and we can say that this is also considered Risk management, but the risk ratios differ, as mentioned. In the previous table.
You can get 3 different Risk accounts with Low, Medium, and High Risk, so you can seize the different opportunities
Low risk
For example, the risk is 1% to 5%. Most successful traders use this type of Risk management because it is the most secure and provides them with comfort and reassurance, and also to stay in the market for the most extended possible period to take advantage of the opportunities when they occur and this is considered a goal among the goals Basic Risk management.
Medium risk
There is a slightly higher risk, ranging from 5% to 30%, and this level requires higher experience, as these percentages can be worked out in the long term. Still, there will be turmoil in trading because you will be sad that a large part of the account has been lost, so it is always preferable to think carefully before entering a trade.
High risk
The balance of this type of account does not exceed 20% of the balance of your other accounts because this type of risk needs a person who is an expert in trading and has enough knowledge about economics and believe me, you will not reach this level until you pass the two previous levels.
We are talking about a risk that reaches 100% of the account, meaning You can lose your entire account in one Trade! This is not a mistake if you have other accounts supporting you if you lose work on them (2 accounts with low and medium risk). In this case, you will not be sad about losing an account in pursuing a significant profit (but without greed) because the big profit is real in Forex, and many Traders make considerable profits in Forex, but very few.
Which is better?
All these types of Risk management are suitable and I advise everyone to work with them all, but each type has a level of education, and if you are seeking success in Forex, I advise you to start from the lowest risk and then gradually rise until you reach the maximum possible risk,
But not recklessly and in the same time, you keep the primary account that you work with at the lowest risk, and there is an additional account with a small balance that you will not be sad if you lose it, but there are also opportunities in the market that are considered golden and over time you will define yourself these opportunities and you will be able to see them very clearly here comes the Importance of the account with high risk you can specify the entry and exit areas and the risk ratio, if it is not 100%.
(Please note that these levels are not for all traders; each risk level requires a higher level of experience than the one before it.) So, having three or two accounts in itself is considered risk management.
3 – Account balance
Account balance
Of course, we are talking about percentages of Risk management. It is not required that the risk percentage be $10 or $100, but calculate it in percentage terms such as 1% to 5%, for example, and in this case, it does not matter what the amount of the capital is, so if you deposit $100 the risk management is like an account with a value of one million dollars if you follow the same trading style. Still, there is a significant factor in the account balance, which is (the psychological factor).
So, your commitment to anything you say or intend to do is the psychological factor. The psychological factor manages everything around you, and to maintain this balance, the account capital must be suitable for the profits that you will make. We are talking about an account with $1000 as the lowest deposit amount. If you do not have this amount, I do not advise you to start trading, but you can learn on a demo account until this amount is available.
Best 7 ways to get money to start in Forex
4 – Are you a scalping trader or investor?
To determine the appropriate risk management, you must answer the following questions: Are you a scalper or an investor? There is a big difference between a scalping trader and an investor trader in Risk management.
Scalper
He opens fast trades during the Day, and the risk ratios are set based on a single trade; the risk ratio of the Trade may be 1%. The Number of his trades is significant because he can enter 5 to 20 trades daily. This type of trader is very Risky because very few Traders can handle this Number of trades, according to his psychological factors.
Investor
The investor has long-term Trades that may last a month and a year, and the risk ratio is high because the success rate of the Trade is higher than the scalping trader
Because it is a long-term analysis, and he analyzes the market in general from the 4-hour Time frame to the weekly Time frame so that he can see the direction of the market in the long term, and this helps him in deciding the long-term Trend, and he does not look at the loss or profits in the short-term, but he always looks at the profit in the long term, and the risk ratio for the investor may reach 5% – 15% and the profit will be 2x To 5x
5 – Entry and exit areas
This part is essential to preserve profits and reduce losses as much as possible. The profit-to-loss ratio determines whether you are committed to managing your risk and whether the Strategy you follow is commensurate with Risk management. The number of target pips and stop loss is according to the opportunity that you may see on the chart, as there are opportunities that need an exit area of 20 pips away from the entry area. There are opportunities that you may reap 100 points from and more.
But which opportunity can you exploit?
This applies to your Strategy whether you are a scalper or an investor. All of these factors affect decision-making and exit times.
Compensation for losses
You will encounter many losing trades during your trading journey, which is very normal. However, the question here is, can Risk management reduce these losses so that you can try again and make profits?
In fact, this is the basic feature of Risk management, and for this to happen, you should know some simple information (take profit—stop loss); there are specific ratios that traders put in place to reduce losses and increase profits (Risk Reward Ratio)
Take profit is equal to Stop Loss = 1: 1
The profit is double, and the stop loss = 2:1
Take profit is triple the Stop Loss = 3:1
Take profit is 4x the stop loss= 4:1
Some traders set a take profit half a stop loss, but I do not recommend this method, as it is considered high risk and requires extensive experience to achieve profits.
Trailing stop
Trailing stops are essential in preserving the profit you have made so as not to lose it in the event of a price reversal. It is preferable to place the stop loss in Reverse areas because if the price does not rebound from this area, the price is highly likely to reflect its direction. In this case, if you are not placing a trailing stop or a stop loss at the entry area, You will lose after you see the profits that you made a short while ago, and this affects your psyche significantly.
6 – Stop Loss
Stop loss
This word expresses itself; you say to Loss, it’s enough. I do not want to lose more money, and most of us know this definition, but does everyone use it? Stop-loss orders are considered a treasure for every successful trader in Forex. Stop loss orders, prevent any losses to the account, and save your account in the event of your absence from the chart or in violent news …. Etc. Unfortunately, some do not use this treasure, thinking that the Trade may reach the goal at any time
But all of these are daydreams and will not happen with wishfulness. Such traders (and I was one of them) do not stick to stop Loss, nobody wants to lose his money, but losing this Trade or losing the entire account? Think about it well: after a long time of Loss, placing a stop loss order gives me a second chance. Maybe I lost now, but I lost the amount that I want to lose, not the amount that the market wants, and this is what intelligent people do: get a second chance to compensate for their losses because they are still in the market, and they remain in the market to Fight for the next Day.
Is it possible to work without a stop loss?
However, managing the account and controlling the trades will be very difficult. In this case, you need a large account balance to make hedging trades, open opposite trades, and wait for the price to move significant points to your target. That will make you a winner in the end, and you will close all deals. It is better not to work in this way because it requires high experience in Forex, and its profits are not significant compared to using a stop loss.
In the Second scenario, if you use a hedge, the price might be consolidated for a long time, and you will open buy and sell orders repeatedly, forgetting the reason you opened the first order. Not safe at all, right?
(If you want to try it, open a demo account first)
Leverage
Leverage is a type of hidden stop loss that limits the Number of lots you can open because you do not have enough money to open a high lot with low leverage.
Example: You want to open a trade at EURUSD pair with leverage of 1:100 for a balance of $1000.
100 x 1000 = 100,000$. This is your balance, and the lot is equal to 100,000$, meaning that your maximum allowed lot is 1 lot on the EURUSD pair (high risk)
If you want to open more than 1 lot, you will not be able to because there is insufficient money. Therefore, choosing the appropriate leverage for the account is essential when you create the account and make a deposit. You can also choose high leverage if you adhere to a stop loss order and are strict with risk management.
7 – Strategy
What is important in the strategy that you will follow is to add Risk management to it because many strategies recommend entering frequently throughout the day, and of course, these strategies are more suitable for traders scalpers, But if you adhere to the entry and exit conditions of the strategy and ignore the most important factor, which is Risk management, you will end up losing all your money, right?
If you are a scalping trader, it is always recommended that you follow Risk management for each Trade and a maximum loss limit during the day because if you lose more than 10% of the capital, your psychological state will be bad. You will not be able to continue trading with Reasonable decisions, Of course, you should set a limit for multiple losses because if you lose many consecutive trades, this means that something is wrong and that your analysis may be wrong.
Risk management becomes less complicated for the investor trader because he does not enter many trades during the day or even during the week. Because of his vision of long-term trades, he may enter three trades in a month or even a year, and he calculates his Risk management based on each trade he enters.
Are traders committed to Risk management?
Some are committed, and some are not, but the vast majority are not committed to managing capital because it is a simple calculation. Think with me: Are the successful people more than the losers? To gain something you must give up on something else in return, such as peace of mind or relaxation to get what you want, this is the nature of life and the strongest is the one who wins in the end, the decision is up to you. Are you ready to start?
Do you want to become one of the 90% losers in the trading field because of the illusion that Forex is a great treasure? In fact, you can become rich by trading Forex, but if you want to become rich overnight without knowing the conditions and how to become rich, you will fall into many losses that have no meaning. but instead, you must be patient and learn about the main factors that make traders lose, the most important of which is capital management
<<< why Traders lose in the forex market >>>
Summary
Risk management maintains your account and makes you stay in the market for as long as possible to achieve profits. Seizing golden opportunities and applying them is very easy. Still, if you seek quick profit, this does not apply to Risk management thoroughly, so controlling the love of money is one of the most critical factors for success. In any field, the psychological factor dominates you if you are unaware of the consequences of what you do.
This is also linked to greed, so it is better than the capital that you start with. Forex is extra money you have. You do not need it to be able to manage the account with your mind, not your feelings; the distribution of risk to more than A pair is not wrong, but do not distract yourself with a large number of pairs, as working on one or two pairs will be much better.
