[asiaforexmentor]

Forex Risk Management – Whats your Risk % per trade?

Forex Risk Management
FOREX RISK MANAGEMENT

Whats your risk % per trade?
Or should i say, what’s your risk appetite?
To be a successful forex trader. You will need to have a proper money management system.
It starts with identifying what level of risk % per trade will you risk.
As a guide, a safe and good risk percentage will be from 1% – 3%.
Anything higher than 3% will be relatively risky.
Why is this so.
If you understand, the forex market can do anything.
Even if you are sure this is the MOST perfect setup.
It MAY NOT end up the way you expected it to be.
Why?
Forex Risk Management – Whats your Risk % per trade?

Forex Risk Management
First, you must understand that anything can happen in the forex market.
Just for example, even if it is the most perfect setup. If a major institution pumps in a large sum of money at that period of time. It can change the direction of the market for a short time frame.
And when the retail investors see the market moving in the direction stipulated by the major institution, they will then follow suit and enter the same way.
WHICH causes the movements in the market.
But of course, this doesn’t happen always.
What i’m saying is, anything can happen in the forex market.
So even if you are the best forex trader in the world. You will not have a 100% winning rate as well.
You will still lose as the market can do anything.
Which is why, it is not wise to have a high risk per trade.
Forex Risk Management – For example, if a trader risk 10% per trade.
And a series of unfortunate events happen to him, (maybe it’s a distraction, maybe there’s an earthquake etc)
As a result, he made a series of 5 losing trades.
He would have wipe of 50% +- of his trading capital because he risked 10% per trade.
And with just 50% left, it will be hard for him to make back his loss.
So if you see what i meant.
Forex Risk Management – For example, if you risk 2% per trade.
With a series of 5 losing trades. You would only lose 10%+- of your capital.
Which is not to bad.
With a good trading system, we can easily make back the money loss.
Forex Risk Management – Whats your Risk % per trade?

Forex Risk Management
But here comes the big question.
What is your risk appetite?
You see, there is absolutely no point into asking you to risk 1% per trade.
Forex Risk Management – Eg. Capital $5000
Risk of 1% = $50 per trade.
If at the back of your mind, you do feel that $50 per trade is too little.
Then you will most likely find and trade even more trades that you usually should – in order to make more money. Right?
Therefore, the correct way to set your risk % per trade varies with different individuals.
You must ask yourself.
Forex Risk Management – Eg. Will you be satisfied with
$50 per trade or
$100 per trade or
$150 per trade
based on the capital of $5000
Once you got an answer, you got your risk percentage.
Forex Risk Management – Whats your Risk % per trade?

Forex Risk Management
Remember,
1) Your risk percentage cannot be too high. As mention a good gauge is 1% – 3%.
2) Your risk percentage must meet your risk appetite. There is no point in risking 1% if you find the amount too little and does not satisfy your hunger.
So there you go.
Once you have set and decided on your risk % per trade.
STICK FIRMLY TO IT!
For example, in a series of trades. You cannot have eg. 1% on 5 trades, then 3% on 5 trades etc.
Because if you play it this way, and what if you make money on the 5 trades with 1% risked, and lose money on the 5 trades with 3% risked. (which usually happens!)
YOU WILL LOSE MONEY!
Therefore, stick firmly to the risk percentage per trade which you have set.
Eg. If you set 2% risk per trade.
From now on, every trade you take – You will risk 2% per trade.
NOTHING MORE, NOTHING LESS.
This way, you will be consistent and you are on the right track to success.
This is part 1 of the 2 series of Forex Risk Management.
Stay tuned for the 2nd part.

See you on the other side my friend,
Asia Forex Mentor
Ezekiel Chew

Moderated Message:

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[TheNegotiator]

It's actually quite interesting that most people are aware of money management and the idea of only risking 1-3% of their starting capital, yet they don't try especially hard to incorporate it thoroughly into their trading until they have a bad patch.

The suggestion I would have to make is that a new trader should open a small account early on. Learn and formulate a strategy you can then become comfortable with on a good simulator(or at the very least in a live market where the size is extremely small). Once you have a the experience and a strategy, work out what your capital should be based on the strategy. Many do everything the wrong way round. They have some cash saved up as they want to trade, lump it into an account and then start trading. Not such a great plan in many cases if you were to break down the risk they were taking.

[MightyMouse]

2% is far to much per trade if you take multiple trades per day. Trading size that coincides with losing 2% or less in a day is far more prudent.

However, when you do get a winning trade, it is really nice when the traders you are trading against have a lot of money to lose.

[BlowFish]

The important metric is actually the RoR (risk of ruin). Talking about risk as a fixed percent serves no real useful purpose though it can be OK as a 'rule of thumb'. To determine your 'risk appetite' (in any sort of meaningful way) you will need to know your RoR. Quite a naive question coming from a 'mentor'.

[TheNegotiator]

Here's the thread for Risk of Ruin for anyone interested:-

RoR

[zdo]

Therefore, the correct way to set your risk % per trade varies with different individuals… You must ask yourself…Will you be satisfied with
$50 per trade or
$100 per trade or
$150 per trade
based on the capital of $5000
Once you got an answer, you got your risk percentage...

Blowfish is right. RoR is better way to come at it because…
Actually, "The correct way to set your risk % per trade" (and sizing) varies with different systems.
In risk management, most developing traders are no where near ready to access and utilize the type of 'data' coming from “Will you be satisfied with” questions.
At first (and for most, for quite a while) it is much better to establish real stats, then learn how to ask the right questions that will lead to learning how to use those stats properly … which is conservatively (most of the time) ...

[4EverMaAT]

Originally Posted by zdo »

Blowfish is right. RoR is better way to come at it because…
Actually, "The correct way to set your risk % per trade" (and sizing) varies with different systems.
In risk management, most developing traders are no where near ready to access and utilize the type of 'data' coming from “Will you be satisfied with” questions.
At first (and for most, for quite a while) it is much better to establish real stats, then learn how to ask the right questions that will lead to learning how to use those stats properly … which is conservatively (most of the time) ...

Originally Posted by BlowFish »

The important metric is actually the RoR (risk of ruin). Talking about risk as a fixed percent serves no real useful purpose though it can be OK as a 'rule of thumb'. To determine your 'risk appetite' (in any sort of meaningful way) you will need to know your RoR. Quite a naive question coming from a 'mentor'.

This is correct actually. Trying to micro-manage each individual trade is self-defeating because you are artifically attempting to limit your risk. You may not be able to predict exactly where market will go, but by placing a basket of trades, you are much more likely to profit or breakeven when market turns around. I have posted a cost averaging spreadsheet here. that does a good job of allowing you to see for yourself.

Personally I'd much rather risk 5-20% of my account or more to facilitate doubling it or breaking even on a group of trades vs managing individual trades, which will not push your overall win position enough.

[henryduncan12]

Risk management is an important part of forex trading and due to this I put more emphasis on it. It protects trader from big loss. I only go far 1to 3 percent risk per trade.