First of all, you might be wondering WHAT is risk management?
Just like the word itself, it means managing your risk. In Forex trading, it means making sure you are not taking too much risk when you are trading and you can handle the losses when the outcome is not in your favor. It is one of the most important aspects you need to take care and survive as a Forex trader, as important as having a good strategy in trading.
In a world of everything can be accessed through a single click and the speed of a transaction to take place is getting faster and faster, risk can be out of control in a sudden. The instant gratification and adrenaline rush caused by the speed of transaction can often lead to gambling instinct instead of trading. If you trade without having a risk management rule to obey, you are in fact gambling.
Second, how to minimize risk and hopefully maximize profit?
One of the risk management you can try is ‘cutting losses’ by controlling your loss and know when to exit a trade. Set a stop loss for your trading account by calculating the loss you can take before the trade hits rock bottom. This is to cut the loss from growing too big until you can’t handle it. Let’s be honest, we all know figuring out where to set our stop loss is difficult so you have to make sure the stop loss you set is reasonable and makes good sense to you.
Another method you can try on managing your trading risk is picking the correct lot sizes. There is no perfect formula to start trading but try your best to start everything small. Keeping your lot small allows you to stay flexible and manage your trade more rationally without being affected by your emotions. It is tempting to choose a bigger lot size and gain faster but the bigger lot size you pick can be the death of your trading career as well. Always hold your horses.
We understand that every trader wants to maximize their gains and minimize their risk. The proper implementation of risk-reward can make this possible. Always make sure the rate of risk compared to reward is always lower, preferably 1:2 or larger with a high-probability trading edge like price action. This allows you to manage your risk better and stay away from risking too much. Unfortunately, most traders do not care about managing their risk, they often get blinded when they are confident and greed creeps in.
So, why do we need to manage our risk?
The answer is simple, we are in the business of making money and risk is inevitable. If you fail to handle it well, it might blow out your trading account but ironically, many trades always overlooked this imperative aspect in trading, even big names such as Bruce Kovner learned a tough lesson on risk management too. A little risk is good for traders to generate good rewards but remember, only trade when the potential reward outweighs the potential risks. Come out with a robust risk management plan, don’t say we didn’t tell you.