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Lesson 41

3. Loss Prevention and Risk Management

Before I enter a trade, how do I figure out what my maximum risk is?

A simple calculation and a stop-loss order are used to accomplish this. Suppose you want to have a 3:1 risk-reward ratio, and you follow the advice of risking only 2% per trade, and you are trading with a $1000 account. In that case, if you use fundamental analysis to predict that the EURUSD price will rise from 1.20000, you will be able to gain $60 for every $20 you lose.

With a lot size of 0.1 (1 pip = $1), your stop loss would be 20 pips in the selling direction, and your take profit would be 60 pips in the trade’s intended track path (the buy position).

As a result, the EUR USD price is 1.20000.

1.19800 is the stop-loss level (SL)

1.20600 is the take profit level (TP)

With this, you’ve used all of the risk management techniques that have been discussed. Keep in mind that there is no such thing as a risk-free trade; risk management simply provides you with a framework to better manage the risks that are unavoidable.

Finally, make sure you trade with a reputable forex broker who offers negative balance protection. This is also referred to as a margin call.

Protection from Negative Balance

Negative balance protection protects you from going into debt if you lose money as a trader. In essence, you are preventing your account from going into negative territory. Negative balance protection is offered by the vast majority of reputable forex brokers, but be aware of this when managing your trading risks and signing up with a forex broker.