One of the most important aspects of Forex Trading is protecting your trading capital from severe damage. Risk control and money management refers to what you do to manage your forex trading to reduce that risk of losing your money.
The best and simple method of money management and risk control that you can use is to simply risk the same small percentage of your account on every single deal that you do. This means that if you risk one percent of your account on every deal your account will comfortably be able to withstand more than one hundred and fifty negative deals before you lose your whole account. It is more than one hundred as the one percent risked per deal is based on a smaller account balance the lower your account balance goes.
Very few Forex traders use this type of risk control and money management.
The lower the percent the better it is for your Forex trading psychological health. It you are risking half a percent of your account on every deal you will sleep better and be more relaxed than if you were risking five percent of your account. Five percent only allows just over twenty negative deals before your account is wiped out. A half a percent allows you over three hundred deals before your account is wiped out.
Please bear in mind that you will not make money with an unsuccessful forex trading technique or system anyway but it is possible to lose a lot of money with a successful forex trading method if your risk control or money management is poor.
The challenge is that Forex traders are in a hurry. They want to double their account regularly and quickly. These low risk percent’s make it impossible to reach these heights in the short time. They do however keep you in the game to prosper in the long run.
Lets take an example of a the trader is starting with trading capital of ten thousand dollars and risking one percent per trade and making one and a half percent on winners. On average the traders success rate is sixty six percent and three trades are made a day. So on average two trades will be successful and he will have one loser on a daily basis. The following will be the results. One percent of the capital of ten thousand dollars is one hundred dollars. He would make one hundred and fifty dollars per winner so the account will go up by two hundred dollars a day initially. Two percent on capital initial capital. The next day however he will be risking one percent of ten thousand two hundred dollars so the daily gain will increase every day.
After a year of trading for two hundred days the trader will make over a half a million dollars. So don’t under estimate the power of risking a small percent of your trading account over the long run with a reasonably successful trading technique.
If the success rate was only fifty percent the earnings would drop to thirty four thousand, five hundred a year but it would still be nicely profitable. If the trader made as much on winners as on losers at a sixty six percent success rate the annual earning would be sixty three thousand. The above calculations are slightly flawed as they depend on the trader get exact position sizing for the amount of risk allowed.
Forex trading risk control and money management in trading contests
Now the problem is that in the Forex market there are adverts of traders doubling their trading account in a trading contest or in a trading software contest. So traders think they are doing something wrong if they don’t double their account every month. Doubling your account using one percent risk on every deal when forex trading is highly improbable and almost impossible over a month.
The traders who win contests or who show high account performance are risking huge percentages of their account on every trade more than ten percent. Success is often not sustainable but good enough to produce spectacular results in the short term. They ignore sound risk control and money management in order to achieve short term success.
We are more interested in creating a sustainable Forex trading income stream that will last for many, many years. That is why a conservative percentage approach is recommended.