The foreign exchange market is a huge industry but without engaging it with the elements required, it will be a pipe draining cash from you.
The triangle of a profitable forex trader is known as SDR:
R- Risk Management
Today we will be looking at risk management, though many persons are running up and down looking for the best strategy, that's like a holy grail to hit the market, but without discipline and proper risk management , with the best strategy you will blow your account.
Risk Management is exactly what it sounds like. Its the ability to control the risk you are taking with your trading capital.
There are 3 parts of Risk Management.
1. Risk Capital: This an amount of money that you would be comfortable losing and that if lost, would not greatly affect your current financial situation.
Its a completely personalized number that you decide on by asking yourself how much of your total networth would you be comfortable losing.
This is important because if the number is too high, it will be nearly impossible for you to stay discipline and consistent in trading.
If you are risking everything you have, then it is going to be very uncomfortable when you are going through the dreaded but inevitable drawdown that all trading strategies comes with.
So be sure to think very hard about this and make the appropriate decision.
2. Risk Per Trade: This is the amount of money that you are willing to risk each time you take a trade.
This again is completely personal. Some people have a high risk tolerance and others a very low one. This is going to affect your decision about risk per trade.
Personally, if was starting over, I would risk 1% maximum per trade. This is because this is another key factor in controlling your emotions and staying in the right mindset when trading.
If you are risking 5% per trade or even more, then you are truly setting yourself up for disaster.
3. Maximum Exposure: The overall amount of your account that you are willing to have at risk at any one time.
This is determined by the number of trades you can be in at once.
For example: If a trader decides to risk 1% per trade and then decides that is maximum exposure will be 5% of it's total account, then that means the trader can only be in five trades at a time.
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