Risk management
Let your profits run and control losses early


As you know 90% of traders will lose, the primary reason for this is lack of strategy and risk management. The potential for adrenaline after a big win can push people off course and make them make bets rather than trades. The difference between a bet and a trade is risk management.


riskrewardThe actual rules for risk management are very simple, and I’ll explain them in just a moment. First I want to drill it in to you, that the biggest problem with risk management is not the rules (they are simple) it’s the traders mindset and lack of ability to stick to the plan. If you get complacent, deflated, exited, or get in to any other emotional state before or after a trade your odds of being profitable decline by orders of magnitude.


If you just had a big win, it’s too easy to be over confident and risk much higher stakes on the next trade in the hope of making even more (greed), the same is true after a loss, you want to get your money back so make higher risk trades (fear). All this does is worsen your risk to levels so your trading account in real danger of going bust. If you feel your self getting fearful, greedy, exited or depressed at any stage in your trading carer I recommend meditating (clearing your mind of all thought) for a short time. I have written a full article available about mediation for Forex traders and how it can boost your profits.


Stay and calm and stick to these very simple risk management rules:


1. Only risk 1-2% of your account per trade – If you are of very high confidence, you can risk up to 2% of your account but ideally less than 1% if you have the capital. Anything over 1% is not recommenced for every trade or for beginners. The reason for this risk level is it gives you 25 – 50 losing trades in a row while only suffering a 50% draw down. If you follow all the rules in this whole guide, it’s highly unlikely that even 5 trades in a row will lose. This will protect your account, and your future as a successful trader. Ignore this rule at your peril.


2. Ensure you know your risk reward radio – You need to figure out using a simple method what your risk reward ratio is going to be. This way, once you know your own correct prediction ratio (the number of trades you get right) you can calculate the exact risk reward ratio (RR) you need to make the profit levels you desire, download our trading log that automatically calculates your RR. For example if you only get 50% of your trades correct, you can still make breakeven by ensuring you have at least a 2:1 risk reward on the winning trades, anything more than 2:1 and your in profit. The average trader in the market gets about 60% of trades correct, but the average win is 60 pips, and the average loss is 140 pips. This is all purely bad risk management and can be avoided by simply knowing your numbers and not backing out of profitable trades to early because of fear, and cutting losing trades early.


3. Have a properly funded account. The ‘average’ profitable Forex trader will make around 20% per year in net profit, so having a correctly funded account for your expected gains is essential. Remember if you can prove you can trade over time, there are many opportunities to secure large sums of funding. Small steady accounts grow in large accounts over time, there is no rush to riches. A common mistake people make when they are very new to the market, is believing they can grab a few lucky trades to start to get their account going. This will almost certainly result in blown account, if your going to be a good trader, you will be good for life. Take it easy.


A common mindset mistake I see is traders thinking they have to ‘take advantage now’ before the market changes and the opportunity is lost. This type of mindset is one of the most deadly, and if that’s you now then please only use a demo account (which of course you wont because you really believe you have to take advantage now). The reason this is deadly and wrong, is that trading is a skill not an opportunity. The way the markets are traded now will be this way until the last human breathes his last. Even if all the stock markets crashed tomorrow, and we were left in a dystopian world you could still apply these price action strategies to anything tradeable remaining. Probably gold and food commodities. As gold gets more valuable and food more sparse you will be able to plot the price in a trend, find pin bars of price rejection to buy at those levels and so on. People have been trading markets from the 14th century, so do your self a massive favor and learn a proper skill to set your self up in life. Forget about get rich tomorrow, and think about get rich for life.


Risk a maximum of 1-2% of your account, cut losing trades early and let your winners fly!


It’s amazing how simple this sounds but how many people get it wrong.


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