Risk Management In Forex Trading | How To Be Profitable

Today we take a good look at risk management in forex trading. This is going to be different from what you might have seen or read from other portals and the reason is simple, everything I will share with you here is based of personal experience.

Now, if you want to treat trading in general as a business, then you need to have a plan. And for whatever reasons it may be, you must have a risk management plan. If you don’t then you’re just prone to losing money each and every time you place a trade. 

If you do not have a trading account yet or you’re looking for the best broker to trade with, then I’ll recommend you sign up for an Exness account. It’s free and gives you the best leverage deals which is very beginner friendly. It’s is the broker I use until now and I can testify that it’s the best, and I want the best for you. 

So, make sure you use the Exness link to sign up so you don’t miss out on these goodies. Back to business, risk management in forex trading is very necessary in all types of trades, scalping, day trading, swing trading and any type of trading

As a trader, you must know the amount of money you are going to loss per trade, it’s important than focusing on all the dreamy things like the amount you’re going to earn per trades. Here are things to consider when it comes to risk management in forex trading.

Lot Size

There ate three categories of lot sizing and these are the micro, the mini and the standard lot size. A micro lot size ranges from 0.01 to 0.09. With this, it simply means your risking cents per a pip. 

For instance, if you choose to go with a micro lot size of 0.05 on a trade, you’re risking 50 cents per pip movement. So if the trade goes a pip in your favour, you win 50 cents and you lose 50 cents when it goes against you.

The next category of lot sizing is the mini lot sizes ranging from 0.1 to 0.9. With this, a pip per movement is equivalent to $1 if you’re using a lot size of 0.1. If you’re using a lot size of 0.4, it’s simply gaining or losing $4 per pip movement. 

The next category of lot sizing is the standard lot size. And this is trading in big numbers. This ranges from using lot sizes from 1 to infinity or unlimited lot sizes. 

Why is lot size very important with regard to risk management in forex? Well, lot size lets you determine the amount of money you are willing to risk per trade. 

If you have an account of $100, you can’t be entering trades with a standard lot size. It’s going to blow your account. For a standard lot size of 1, it means you lose $10 per pip movement. So what it means is that 10 pip drawdown will blow your account. 

But if you use a lot size of 0.01, you only lose $1 per pip movement against you on a trade. That saves you 90% of your fatal amount. Ideally, what I recommend is that you risk just 1% to 2% of your account per trade. 

This is going to help you be on the safe side in every trade you go for. Knowing the amount of money you’re going to lose lowers the fear of taking trades. The worst that can happen is price hitting your stop loss and you lose an amount you can afford to lose. 

Have a trading plan. (Risk management)

Everything has been explained already, before you take a trade, you must know where your stop loss is. With this, you can determine on the type of lot size you want to use based off your account size. 

If you enter a trade where the stop loss is 20 pips away from your entry level, if your account is $100, it’s best that you risk in micro lot sizes. Let’s say for a lot size of 0.01 on a $100 account, you only lose $2 when the trade hits your stop loss. 

Here’s an illustration of how I calculate the pips and lot size I want to risk per trade using trading view. It’s that simple and you should do same. Know how much you’re going to be risking per trade, decided on the lot size that suits 1% to 2% of your account I terms of the money you’re willing to lose. 

It’s not rocket science, you must just know the amount you’re willing to lose in each trade. Have it in mine that it’s possible to use bigger lot sizes regardless of your account size. It can work, it has in fact worked before. 

You can flip your account and you’ll be good to go but nothing is guaranteed in the forex trading market. We are all speculators trying to predict what will happen in the market after seeing some confluences. 

With that said, if you are willing to flip your account, you do so with by funding your account with an amount that you can afford to lose. If it’s $100, you must have the capacity to refund $100 when the initial deposit is blown. 

If you depend on forex trading solely as your source of income, I’m afraid your chances of success is very low. Get yourself  stable job that feeds you, a job that puts food on the table if you’re off the chart. 

There is this famous saying in forex trading that the higher your stop loss, the lower your lot size and the lower your stop loss, the higher your stop loss. Depending on where your top loss is, you can adjust your lot size to meet the 1% risk target. 

In some trades, due to where your top loss find your stop loss, a lot size of 0.01 is perfect to fulfill the 1% risk target while in some cases, you’ll need a lot size of 0.05 to fulfill the same target. I hope you get this right?

That’s it, it is my hope that this piece of information on risk management on forex trading has been of good help to you. If you’re new to forex trading, I recommend you take this free text based course: Forex for beginners

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