How Much Should You Risk In Forex Trading
Consider a forex trader who blew out three trading accounts before he ever made any consistent forex profits. That was me. It took me losing my hard earned trading capital three times before I learned that controlling risk in my forex trading is just as important as my forex trading system.
Even an automated forex system could not save me from my high risk trading. I consider the management of risk sometimes to be more important than the forex system that one is using. Some of the things I ask myself when thinking about setting up a forex trade are very simple but they work all the time
1. I?m I trading in the Trend?
The trend is really your friend. If my forex trading robot has identified a good trend, I am more likely to increase my risk capital. On the other hand if I am automated trading signal is against the trend, I tend to decrease my risk capital.
It is a very simple method to program and the results have been amazing. It has translated in me not fearing to place a trade even when the automated signal is against the trend. I just increase my trading risk with the trend and reduce it when against the major trend.
2. How Close is the Signal to Major Indicators?
It is true that if the forex market is far from a trendline or a moving average, the market might be over extended. The best forex trades with a high chance of success are those where the trading signals occur near a trendline or a moving average.
In such situations, I increase my trading risk to take advantage of the high probability trade. When the market prices are further from the major trendline or moving average, I am more likely to reduce my trading risk.
3. How Much can You Lose or Make?
A good trading robot should enable you to know how much you are likely to lose or make even before you place your trade. Most automated forex trading systems have set stops allowing the forex trader to know how much he is bound to lose.
If I find that I am likely to make more than I am likely to lose, I would consider increasing my risk in the trade. Hand in hand with this is how far the current market price might be from a stop. There are times when the market moves very fast and even automated forex trading software are late in placing the trade. If the stop is too far from the current price, I would consider reducing my trading risk.
The concept of risk management is very simple. If you feel that the risk is too great, other than just abandoning the trade all together, one can reduce their exposure to the market and trade fewer lots. Getting the right lot sizes to trade is not easy but with practice and consistency, it becomes an essential part of your forex trading experience. It is not only discretionary traders who should trade using risk management techniques. Automated forex system traders should also incorporate that in their forex trading.
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