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Lesson 39

  1. Risk Assessment and Risk Management

Today we will look at how money and risk management can help you improve your forex trading, how money and risk management can and will affect your trading, as well as how money and risk management techniques can help you along your trading path.

Have you ever noticed that, despite having a sound trading strategy, your account appears to be steadily losing money over time?

Or have you ever noticed that you make a profit on the majority of your trades, only to lose it all on a few bad ones?

If this is the case, It is possible that you are not adhering to risk and money management principles. Do not worry; we will go over these topics in depth with real-world examples to ensure that you are fully prepared to manage your trading correctly.

What is the purpose of risk management, or why does anyone require or need risk management?

When trading in the forex market, It is easy to overlook this question. Let us take a look at the underlying cause of poor risk management by posing the polar opposite question. Consider the following scenario.

Imagine for a moment that you had a 100 percent success rate in forex trading.

Do you think you will need risk management?

No, not at all. Of course not.

What is the reason for this?

There is no danger of losing your money. In fact, if you used the maximum lot size for every trade you made, you could quickly grow your account into millions of dollars.

BUT, let us return to reality.

Any trader with even a rudimentary understanding of the market will quickly recognize the fallibility of the above statement. Guess what happens if you lose just once at the maximum lot size?

Your entire account has been deleted. That is, one bad trade multiplied by the maximum lot size equals a 100 percent loss of account capital, resulting in a blown account.

Can you see why risk management is essential? If you know you might get to lose your trade choice at some point; you need to plan for it.

The following are some of the advantages of risk management in forex trading:

  • Risk management ensures longevity – The less money you lose on bad trades, the longer you can stay in the market.
  • Maintaining emotional control – The fewer trades you risk, the less emotionally affected you will be when a trade does not go your way.

How can risk management techniques be used in forex trading?

Risk management techniques can be implemented in a variety of ways in forex trading. We will go over the most important ones, such as:

  • Risks onto reward ratio
  • Stop losses
  • Negative balance protection with a reputable broker