Manage Your Risk First, Then the Reward Will Follow in Forex 1



 

Once you seriously get into forex trading, you might be surprised to learn that most of your time will be spent preparing to trade by managing your risk. Of course, you will spend a lot of time and effort looking for trading opportunities, but once you’ve located them, you will have to ask yourself the important question: is the risk that I will have to assume worth the possible reward? Traders who do not do this end up losing money on their trading activities because they are ultimately treating their trades as if they were gambling. It is important to remember that your main job is to preserve your trading capital and make it work for you, not treat it as if it were a gambling bankroll.

 

One important concept that you need to learn to become a good risk manager is position sizing. Position sizing refers to the number of lots that you will trade. A lot of traders who are starting out are not aware that they can manage the amount of risk they are taking on through position sizing if they want to trade using charts that have a longer time frame. It is not even that difficult to adjust your position size based on the size of your trading account and the dollar amount per pip that you want since there are online position size calculators that you can use.

 

Another important principle that you need to follow to become a successful trader is to not be afraid to accept small losses. One of the biggest mistakes a lot of traders make is to chase losses in the hope that conditions reverse and they can make back the money they’ve lost. When a trade starts to go against you, you should immediately close it out before the losses you have to absorb get bigger. Accept the small loss and be thankful that it is not bigger. If you feel it is appropriate, you can try again later.

 

On the other hand, when a trade is making money, you should let it run. Don’t be nervous and close the trade, reasoning that it is better to accept a smaller profit than risk losing the profit you’ve already gained. Keep in mind that your main purpose in becoming a trader is to be profitable.

 

References http://en.wikipedia.org/wiki/Foreign_exchange_risk
http://www.mtrading.in/education/

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