How to manage losses in forex trading?
The first reason that leads to the failure of many traders is the unbridled desire to make fabulous profits and calculate their size while the transaction is still in progress. Professional traders say that you should never think about the amount of potential income. It would help if you focused on managing your losses.
Why Traders Lose Money in Forex?
One of the basic rules of Forex trading is to keep your losses small. With small losses, you can wait out periods when the market moves against you and be able to position at a reasonable price when the trend reverses.
The time-tested money management method sets your maximum loss level before you even open a trade position on any currency pair.
The maximum loss is based on the most significant amount of capital you can afford to lose on any single trade.
Provided that your maximum losses are only a tiny percentage of your trading account, then a streak of losses will not knock you out of the market.
Unlike 95% of forex traders who lose money because they do not apply proper money management rules in their trading system, you can go a long way towards success.
Let’s take a $ 1,000 trading account and start trading $ 250 positions. After just three losses in a row, we would have lost $ 750, and our capital will be reduced to $ 250.
We have to make a 300% profit on subsequent trades to get our initial capital back.
The failure was that the trader was taking too much risk without applying the appropriate money management rules. Remember, the goal of money management is to keep losses as small as possible while making sure we are trading enough volume to generate acceptable returns. With proper risk management rules in your trading system, you can always do this.
Risk Management Tips in Trading
Risk management is the calculation and control of the possibility of losses. Calculation and control of risks, increasing or decreasing positions is the main activity of risk managers (the main task of a trader).
A conservative approach to risk is that 1-2% of your deposit is put on one trade. With this approach, even 5-10 losing trades in a row will not bring you a severe drawdown of the deposit, and you will be able to continue trading. This means, for example, that with a $ 2,000 deposit, your risk should not exceed $ 40 in each of the transactions. But the probability that all ten trades in a row will be unprofitable is relatively small and, accordingly, the loss of the deposit is the same. In general, for a novice trader, the priority should be to maintain a deposit and, on the second, to make a profit.
For novice traders, the best trading option is to trade one position. After gaining specific skills and experience in controlling the situation and risks, you can trade several currency pairs.
When opening several deals for one currency pair or several financial instruments, remember that the total amount of risk for all open positions should not exceed 5-10% of the size of the deposit.
In classic trend trading, each specific transaction’s “risk-reward” ratio must be at least 2: 1–3: 1. This rule does not apply to high-frequency trading (scalping and some types of intraday).
Bottom line
The foundation of trading is loss management. It is impossible to avoid losses, but it is possible to make the losses bite off a small part of our deposit. Thus, we still have money left to continue making transactions and recoup in the future.
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