More on Risk Management

More on Risk Management

Risk management is the foundation of successful forex trading. It goes beyond instinctive thought. It

involves strategy, understanding, and calculations. In this chapter, I am going to explain the risk to

reward ratio and give you a few risk management strategies that are sure to help you gain profit in

your forex trading.

Risk to reward ratio

The forex market is continuously changing. One minute it is going up before suddenly the currency

pair you are trading turns negative and drops. What happened? How do you trade with this volatility?

This is the nature of the forex market.

Calculating your risk to reward ratio will help you to trade within the volatility of the market and still

make a profit. To calculate this ratio, you need to work out how much risk you are prepared to take

for the profit you want. You take your net profit (or potential profit) and divide it by the amount you

are prepared to risk. The result is your ratio.

For example, you are prepared to risk $30 to make a profit of $100. Thus 30/100 = 3.33:1 this is a

profitable ratio.

Risk management strategies

While these strategies may seem more basic than advanced they apply to any trader, beginner or

expert. Risk management strategies focus on keeping your risks to a minimum while you wait for your

profit.

1. Know when to close a trade. Traders make the common mistake of holding onto a trade

too long. This often results from a desire to see their profits meet their expectations. The

forex market does not always meet our expectations. It sometimes comes close. As a trader,

you need to know when to cut your losses and go.

2. Ride the trend. In the world of forex, you often hear the saying The trend is your friend

until it ends. This means that you need to ride a trend until you see it end. This helps traders

to reap the rewards of their hard work.

3. Watch your emotions. When you find yourself getting emotional for any reason, be it an

emotional situation in your personal life, a desire to make back your losses, or the desire to

hold onto your profits, you may want to consider taking a step back to recompose yourself.

Trading with emotions is never successful. Most of the time traders who trade with emotion

incur more losses than profits.

4. Limit your leverage. Yes, as a trader you have access to leverage. This does not mean

that you use large amounts of leverage in your trading. The higher the leverage the more risk

you have. Scalp trading requires a higher leverage than other trading strategies and you need

to be aware of the risk. How much risk are you prepared to take? It only takes a change in the

market trends for you to incur a string of losses or a sudden loss before you have no more

capital to trade.

5. Currency correlation. For traders who are trading frequently or are more advanced,

currency correlation is a great risk management strategy. Currency correlation is all about

finding those currency pairs that follow the same trends. You are looking for pairs that do not

have strong correlations with each other.

Think of currency correlation as a see saw, one currency pair goes down making a loss, but

the other goes up for profit. Thus your loss is neutralized by the profit with the hopes that the

profit exceeds the loss.

Another correlation tip is to look for correlation on times. You want your currency pairs to

correlate on the exact time.

6. Practice. Practice reading the market. Practice self-discipline. Practice your trading

strategies. The more you practice the more you understand and the more experienced you

become.

7. Keep learning. Research all the time. Keep up to date with economic and political news.

Research more into your analysis and trading strategies. Learn more about yourself.

Throughout your trading journey, have an attitude of a protégé learning from the master. This

attitude of desiring understanding and knowledge will go a long way in helping you become

the best possible trader you can be.