Managing the risk exposure in the Forex market is a very tough task. Naïve traders get excited about the lucrative profit factors and they start using the high leverage trading account. But leverage is more like a double edge sword. It can magnify the profit as well as the loss.
Unless a trader learns to deal with the risk exposure like a pro trader, he is bound to blow up the account in a short period. For this reason, some of the experts often consider money management plans as the Holy Grail in the Forex market.
In this article, we are going to discuss 4 essential factors that you must include in your risk management plan. These 4 factors are –
- Win rate
- The risk to reward ratio
- Risk per trade
- Recovery factor
Contents
Win rate
Win rate plays a very crucial role in your success. To make a consistent profit, you must have a win rate of at least 60%. This rule is applicable for those who trade with at least 1:2+ risk to reward ratio. So, how can improve the win rate at trading? Though there are many technical factors, we will highlight a few important ones. For instance, you should only trade the higher time frame because the noise is filtered in the price data.
Secondly, you must trade in favor of the trend since the price of a certain asset tends to favor the trend most of the time. Even the major breakouts also take place in the direction of the long term trend.
The risk to reward ratio
Managing the risk to reward ratio is not all tough. Once you learn to deal with the higher time frame you can easily manage the risk exposure. Higher time frame analysis is a little bit boring since the traders have to wait for a long period. However, without having patience you can’t become a successful trader. Make sure the trades which you execute have at least 1:2+ risk to reward ratio. Being a naive trader it might be hard but if you manage to deal with the candlestick patterns, you can easily find a 1:3+ risk-reward ratio. Does that mean you need to learn a price action trading strategy? Well, this is not a thumb rule but by doing so you can greatly improve the trading skills.
Those who are thinking about the low risk management policy must read some articles on the reputed broker websites like Saxo. Visit their website here and find out the reasons behind the importance of a high risk to reward ratio in real life trading.
Risk per trade
The risk per trade greatly depends on the trader’s skills. The professionals usually take risk of 3-5% but the naïve traders should take less than 2% risk. However, you can protect your trading capital by using the famous 2% risk management rule. For instance, if you execute 10 trades at the time, and risk 2% in each trade, you are going to risk 20% of your account balance at that instant. To be precise, the overall risk factors for all the running trades should never exceed more than 2%. As you gain more experience slowly increase the risk to earn more money but make sure you are risking more than 3% in any trade.
Recovery factor
The recovery factor is one of the main arsenals of the pro traders. They can deal with the losing trades since they know the perfect way to find great trades. To become good at recovery, you must follow the above three rules. Never try to recover the loss right after losing a trade. Take a small break so that you don’t place the trade with aggression. Always remember that without having a stable mindset you can’t become a successful trader.
I am Arjun Kumar. I am the owner and administrator of Finance Gradeup. I have completed my education in Arts & Technology. Arjun Kumar usually has interests in playing games, reading and writing. He was a brilliant student during his college days. He also works for many private companies, but the main interest of Arjun Kumar is digital marketing. He thinks that reading is a must before providing any quality information to his readers. You can find Arjun Kumar on much social media handles online, or you can learn more about him in about us page.