Best Highly Effective Forex Risk Management and position sizing strategy – This post is going to be one of the most important Forex trading strategies you’ll ever read.
Because if you apply the Forex risk management and position sizing strategies, I can guarantee you’ll NEVER BLOW UP your trading account — and you might even BECOME A PROFITABLE TRADER.
For most novice traders, managing foreign exchange risk may seem too complex and time-consuming.
Forex risk management can make the difference between your survival or sudden death with Forex trading.
You can have THE BEST TRADING SYSTEM in the world and still fail without proper risk management.
Forex Risk Management is a combination of multiple ideas to control your trading risk.
It can be limiting your trade lot size, hedging, trading only during certain hours or days, or knowing when to take losses.
If you have a $100,000 trading account, would you risk $50,000 on each trade?…
Of course not.
When you have a $10,000 trading account, and you risk $5,000 on each trade, it means you risk 50% of your account
…or only take 2 losses in a row and you’ll lose everything.
Even you have THE BEST TRADING SYSTEM in the world, I can guarantee you’ll still fail.
I’ll prove it to you…
My friend Jeff is an aggressive grid trader and he risks 50% of his account on each trade.
His wife Lenny is an aggressive trader too and he risks 20% of his account on each trade.
…As a conservative trader, I risk 1% of my account on each trade. (My golden Money Management rule is Never Risk More Than 1% Per Trade).
We adopt a Super High Accuracy trading system & strategy that wins 50% of the time with an average of 1:2 risk to reward.
Over the next 10 trades, the outcomes are Lose Lose Lose Lose Lose Win Win Win Win Win.
- Here’s the result of Jeff’s trading:
- -50% -50% = MARGIN CALL
- The result of Lenny’s trading:
- -20% -20% -20% -20% -20% = MARGIN CALL
- And the result of my trading:
- -1% -1% -1% -1% -1% +2% +2% +2% +2% +2% = +5% PROFIT
Very simple and easy to understand, isn’t it?…
Now you can see how powerful “Risk management” for your trading success.
Risk management is all about keeping your risk under control.
By limiting your risk, you ensure that you will be able to continue to trade when things do not go as planned and you will always be ready.
Using proper risk management can be the difference between becoming a Forex professional, or being a quick blip on the chart.
Risk Management could be a deciding factor whether you’re a consistently PROFITABLE TRADER or, a bad luck LOSING TRADER.
How do I apply proper risk management?…
The answer is…
Position Sizing is “the GLUE” that holds risk to reward scenarios together.
A technique that determines how many units you should trade to achieve your desired level of risk.
And this is the closest thing you can get to the “holy grail”.
Say you are risking $100 per trade and you see a really good Pin Bar trade setup.
The only problem is that the most logical spot to place your stop loss is 200 pips away.
This is a critical juncture where many traders make a mistake; if you need to place your stop 200 pips away to give your trade the best shot at working out, then you simply reduce your position size down to meet this stop loss size.
Here’s the formula:
- Position size = Amount you’re risking / Stop Loss pip
The amount you’re risking = 1% of $10,000 = $100
Stop Loss pips = 200 pips
Plug and play the numbers into the formula and you get:
Position Size = 100 / 200 Pips
Position Size = 0.5 lot
So if you were trading 1$ a pip before, now you will trade .50 cents a pip, .50 x 200 = $100.
It really is as simple as that.
So, how do you apply this concept to your trading?…
By being PATIENT and LETTING THE MARKET COME TO YOU.