Risk Management - the recipe

Risk Management - only FOREX
For the newbies.

Many traders do not know what risk management is. Even experienced traders often got it wrong! And I seldom see it explained anywhere. This is for the newbies - and some experienzed.

You have often heard this: Never risk more then 1 % on a trade. Therefore some people think that they may not use more than 1 % of their money on a trade. That is wrong. The rule is: If your stop loss got hit, then you should not lose more than 1%.

You can use one of the Lotsize calculators on the Internet to calculate the number of lots that will fulfil that purpose on your trade.I don't use them so I cannot point in any direction.

Or you can make an Excel sheet. Here is how to do it. You have to find the number of lots that you must buy in order to lose the exact amount of money.

The formula is:
Lotsize = Account Balance / 100 X RiskPercent / Stoploss pips / Pipvalue.

Stoploss pips - that is of cause the number of pips from the price to your stoploss.
Account Balance / 100 X RiskPercent gives the amount that you will lose if the stoploss gets hit.
Pipvalue is the cost of 1 pip in 1 lot.

Find the pipvalue here: Pip Calculator | Myfxbook. Set the trade size to 1 and the pips to 1. You need to update the pipvalues once in a while.

I attach my Excel sheet. All pairs with the same second valuta do have the same pipvalue. So if you want to invest in EURUSD, you shall use the USD row in the Excel sheet.

If you want to be a robot coder, then the formula above is vital. Use it. It is easy.

Using this method you are also able to operate the risk/reward strategy. Because you now know how much you will lose at your stoploss. If you make the R/R 1:2 (Reward = 2 times the stoploss pips), then your profit will be the exact double of your loss.

So - what is the big issue here. Why should i care??? You must care because now you know exactly at each trade how much money you could lose. Now you know how many trades it will take to ruin your account! Now you know the profit on each winning trade. NOW - you can make plans for your trading life.

after a very long time got a perfect message about risk management, got more fine lines with exact facts . Thanks to you sir for nice post.

The theory still does not save from mistakes.

The ways through which risks of a trade is lowered is called risk management. Lowering lot size, trading with low-spread currency pairs, proper money management policy, using scalping strategy are some of the risk management policies. Risk management policy is an obligatiry thing to maintain.

Use the strategy in post #1. As a beginner only risk 1% of your account at any loss. Think about it - Losing 1% means that you can lose 100 - ONE HUNDRED trades before you are broke. This way you can trade and learn.

I risk 10-30% every day in multiple trades. But that is not for beginners. Use 1% and find the strategy that gives more winners than loosers, then you are on the right track.

Could you link your account to Myfxbook?

It's my belief that a trader should use fixed fractional lot-sizing strategies ... This makes the lot sizing a threat to your profitability and increases the chance of ruin.

Is it really working? It seems pretty superficial in my opinion.

Make risk-management policy your cardinal choice. Risk management and money management should be the part of one’s trading. The target of every risk management strategy is to save traders from sudden market crashes along with offering them profit on average.

As a newbie, i am learning the risk management systems and mindset behind it. And surprisingly most people find it boring but this is what counts the most. Everyone can trade but how one can manage the risk behind the trade. I think before jumping on a trade one should consider not looking how much they could make but how much they could potentially lose, because it is the game of not losing what you have. Once you learn to survive, you will stick longer.