If you’re interested in trading gold or currencies on the global foreign exchange market (forex), you should definitely focus on creating a risk management plan. When you do so, you’ll be protecting yourself right from the very start. It’s never too late to add this element to a trading strategy, so there’s always value in understanding what this type of plan is and how to use it.
How much of your account balance should you risk?
In general, we advise that Forex traders avoid risking more than one percent of their account balances on particular trades. This convenient rule of thumb, when followed, will build risk management into your trading system, every single time! If you have a very small account balance (like $200), this will not give you enough to play with. In this case, your best option is to build up your account balance to at least $1,000 or more. Practice your strategies with a demo account until you have a sufficient account balance.
Can you risk more?
Of course, it’s tempting to risk more, especially when an opportunity seems really promising. However, forex is always a gamble, and using the “one percent rule” will help you to stay on solid financial ground as you test your mettle in the high-octane and exhilarating world of forex trading.
What do you know about risk/reward ratios?
As well, consider positive risk/reward ratios. You need to use these sorts of ratios in order to minimize risk, so avoid using any other forms of ratios.
Managing risk is ultimately about predicting outcomes as accurately as possible. Risk should be balanced with how much money we are poised to make if things work out. This principle is what the risk-reward ratio is all about. Risking a lot for a low possible return is not smart. It’s better to risk a lot when the possibility of high returns is present.
Once you understand this simple and practical way of thinking, you’ll be able to change the way that you trade forex, for the better.
There are lots of ways to manage risk as you trade forex. While it’s smart to employ as many risk management strategies as you can, it’s also wise to do research on prospective trades and to use market analysis tools in order to test the viability of predictions. When you combine proper research and analysis with careful risk management, you’ll be covering all of the bases!
What risk management plan is right for me?
As you might expect, this depends entirely on you. Every trader is different, and every trader is willing to handle different swings in the wins and loss column. Never put any money on the line that you’re not willing to lose. You can’t predict the future and you can never be guaranteed a win – all you can do is adopt a strategy that minimizes risk and maximizes the potential for profit. You need to determine the right balance for yourself.
