Risk Management in Forex Trading.

Aug 25, 2011
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Risk Management in Forex Trading

Risk Management in Forex Trading is a term that is very important in trading world and at the same time is a major point which mostly gets out of focus when traders start real time trading. The first and foremost difference in trading a demo and a real account is the human psychology. The point is here that how to overcome this problem?
The best way to go is to practice hard and I strongly recommend to practice for at least 3 months as this time period will cover up learning the different time frames as well during that time; a trader can experience all effects of fundamental news and attributes.
Devise and test a risk management strategy over that period without changing it, no matter it is not providing any profits, just keep using it and analyze your strategy after 3 months of so that you can average out all the good and bad runs you had during that time.
Now coming to other part, i.e., devising a good risk management strategy. Originally the market used to not be for the small traders as brokers only allow standard lots or micro lots. Therefore if you are trading a small account, you are risking too much for a trade. In the recent years, there are introduction of new brokers that allows you to trade even 1 unit. This way, you can still apply the same proper risk management strategy or else your account will be blown before you know it.
To devise a risk management plan, first of all figure out what is the risk percentage per trade? For example, how much percentage of the account can be lost in the worst case of a trade?
Usually good traders make 1-2% as a mark to risk per trade. Next you have to set a percentage % of how much can you lose in your forex account (your maximum drawdown). For example, if you lose 30% – 50% of your account using a system. You should stop trading altogether and reflect back on your system. Find out why is it not working and where to tweak it to improve your future trades.
Once the maximum drawdown and the risk percentage per trade is defined, Always keep your stop fix and don’t extend it while you are winning trades.
I have seen traders extending their stops in hope that the market will come back and they won’t have to face loss in that trade. Believe me, often I have seen traders getting them into this situation and loosing out all account. There will also be times when you will be just stopped out and market will reverse, even in those cases don’t get disappointed and keep following the same strategy.
Therefore, even before any one starts trading, one has to devise a proper risk management. With a proper risk management system and combined with a good trading system, you are on the right track to success in forex trading.
Ezekiel Chew
Asia #1 Forex Mentor
 

Haley12

Trader
Sep 21, 2011
34
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www.avafx.com
Risk Management in Forex Trading is an important tool to reduce loss. Therefore all most all traders go for it. Even some traders follow their own risk management strategies while some go for prepared strategies.
 

khawarj

Trader
May 16, 2012
4
0
12
Without a doubt forex market is something which can earn you thousands of dollars in minutes but also it can blow all your funds with in seconds ... I have seen many people who lost all their income and are now struggling to pay their bills
 

H P Fife

Trader
May 25, 2012
2
0
12
Risk management also helps you to deal with the emotional and psychological effects of trading. If you are employing risk management well, then a loss is less likely to hit you as hard as if you ignore it and over leverage. Thus a loss is not the end of the world and something to learn from rather than the end of the world.
 

Exness Support

Active Trader
Apr 21, 2014
572
0
32
I would say risk management is the most important aspect of forex trading. One needs to know what lot size to use, how much leverage to use and where to set the stop loss. If someone can manage his risk effectively over long period of time then success will follow.
 

Aby123

Active Trader
Mar 17, 2014
113
0
27
Risk management are just one of the most important substance in trading forex. If we can manage our risk effectively and shows persistent, the more likely we could make a good profit.
 

readyforex

Official Advertiser
Jun 5, 2014
30
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I agree with all of you.

Risk management is important but it is just one part of your trading plan.

If you have a losing trading method then you will lose money overall no matter what kind of risk management and money management you use.

Due to this reason, in all of my Forex trading courses I always teach about creating a complete Business plan to trade the market.
 

JimFXtrader

Active Trader
Jul 12, 2014
266
0
27
The management of risk, allows us to protect our capital, reducing losses, maintaining the highest winning positions to the losers, and so our profits accumulate over time
 

Rambo35

Confirmed PaxForex Representative
Apr 22, 2013
909
22
32
Canada
The risk-reward ratio is an important risk management and trading tool. It is important for new traders to take the extra time to perform this task because it can help to minimize risk in every trade. Waiting for the right risk-reward ratio can take a long time. However, the benefits of waiting for a higher risk-reward ratio are worth the effort and patience.
 

angle13

Banned
Jun 17, 2013
84
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we nee risky manager plan. becuase we need keep money in balance. we can make more money with better chance.
 

fxapex

Active Trader
Jun 7, 2013
258
12
29
Risk management is something you learn with experience, you can refer web site called forex camping, you might find some interesting read outs there.
 

triplet

Active Trader
Oct 7, 2014
101
4
27
Risk management is an important part of forex that every trader need to follow in order to reduce risk and loss. It can bring great benefit if properly manage and followed.
 

GazFx

Banned
Nov 13, 2012
478
64
74
60
Melbourne, Australia
www.youtube.com
Practical Risk Management

Never risk more than 2% equity on a single trade

Cut your losses short and let your profits run

Only trade positions with a 1:3 risk/reward ratio or better



Golden rules abound in this industry, and everyone seems to know the rules. But who knows how to apply them?

How do you determine in advance if a trade will, in fact, deliver a 1:3 risk/reward ratio? At what point should you cut a loss short?

Unless you know how your strategy is performing, you can’t answer these questions. So may I suggest that instead of focusing on what you want your account to do, you should focus on what your account is doing?

Proper account analysis, performed on a trade-by-trade basis, has the power to reveal all. It will answer these questions:

What is the win/lose ratio for your strategy?

What is your risk/reward ratio?

What is your Longest Losing Streak (LLS)?

What is your Largest Losing Trade (LLT)?

The answers to these questions will put you in control.

I am assuming at this point that you have back-tested your strategy over at least the past 12-month period, and that you have historical account data for the back-test period. If not, guess what you’re doing next? Back-testing!

Calculations

Win/Lose Ratio: Number of Winning Trades / Total Number of Trades x 100 calculates your win (Win%) percentage. 100 – Win% calculates your lose (Lose%) percentage. Win% / Lose% calculates the number of winning trades per losing trade, the win/lose ratio. A 2:1 win/lose ratio means 2 winning trades for each losing trade.

Risk/Reward Ratio: Total Profit on Winning Trades / Total Loss on Losing Trades calculates your risk/reward ratio. A 1:3 risk/reward ratio means you earned $3.00 for each $1.00 lost.

Longest Losing Streak (LLS): Largest Number of Losing Trades in a row over the historical trading period. Total value of these losing trades tells you the dollar amount of risk your trading capital must be able to absorb to survive.

Largest Losing Trade (LLT): Largest Losing Trade over the historical trading period. Like your LLS, the value of the LLT tells you the dollar amount of risk your trading must be able to absorb to survive.

Application

I let my account performance tell me if I am doing it right, or doing it wrong. I use the results to tell me what to do next. It’s not complicated.

If I want to achieve a 1:3 risk/reward ratio, but I am getting only 1:2, then either my risk is too high, or my reward is too low. Either way, I need to review my strategy and amend it accordingly. If I am getting 1:3 or better I can do nothing, or I can consider lifting my risk a little to optimize future earnings performance.

If I want a 2:1 win/lose ratio, but I am getting only 1:1, then there is a problem with my entry/exit timing. I need to review my strategy and amend it accordingly. If I am getting 2:1 or better I can do nothing, or I can sharpen my entry/exit standards to optimize future earnings performance.

If I want to know how much capital I need to survive over a period of adverse trading conditions, I can use the combined value of the Longest Losing Streak (LLS) and the Largest Losing Trade (LLT) to give me a reasonably precise answer.

Case Study

In 2014, starting with $10,000 capital and trading 1 x Standard Lot ($100,000 USD), the MYFXPT Trading Strategy made 65 trades. Of these there were 42 winners (64%), 21 losers (32%), and 2 breakeven trades(4%). This gives the strategy a 2:1 win/lose ratio, so on average, for every 3 trades we win on 2 and lose on 1, which is a reasonable batting average. More enlightening, however, is the dollar value of winning and losing trades. (view results)

Losing trades totaled $11,996, an average $571 loss per losing trade, or a 5.71% risk factor. Our 42 winning trades produced a profit of $104,965, or an average $2,499 profit per winning trade. Hence, the strategy generated a risk/reward ratio of 1:4.87, which is above average.

We could conclude from these results that our strategy offers excellent potential, but these results tell us nothing about long-term survivability.

The number one objective of risk management is to survive a period of adverse trading conditions. For example, whilst a 1:4.87 risk/reward ratio and a 2:1 win/lose ratio look good in theory, would the account have survived if it had suffered those 21 losing trades in a row, starting with the very first trade? The answer is a resounding NO. We started with $10,000 and lost $11,996...we're gone!

Knowing the Longest Losing Streak (LLS) of your strategy is critical to survival planning. In our case the LLS is 3 losing trades in a row between 20th August and 8th September 2014. Those 3 losing trades generated a $2,252 total loss, or an average $750 per losing trade. Hence, in our case $10,000 start capital is more than adequate to absorb the LLS without blowing the account. Drawdown was 22.52% over the historical trading period.

This is important. If our objective is to limit account drawdown to 50% of account funds, and our LLS is $2,252, then we need $4,504 minimum start capital ($4,504 x 50% = $2,252). If we don't have $4,504 in start capital, but we are comfortable accepting 75% drawdown, we can reduce start capital to $3,002 ($3,002 x 75% = $2,252). At the other end of the scale, if we want to be extra safe and accept no more than 20% drawdown, we will need to increase start capital to $11,260 ($11,260 x 20% = $2,252). So knowing the LLS puts you in control of managing capital needed to survive adverse conditions ahead of time.

There is one final piece of information that is critical to survival, and that is the Largest Losing Trade (LLT) that occurred over the historical trading period. In our case we had a $2,310 LLT on 18th February 2014, and of course, we can employ the same drawdown analysis to ensure account survival, but the question remains: what would have happened if we experienced this LLT within the LLS, or worse still, what if we had 3 of these LLT's in a row? Suddenly we are faced with the potential for a combined losing streak of $6,930 in total, or 69.3% drawdown.

What is the statistical probability?

We completed 65 trades over the historical trading period, incurring an LLS of $2,252 and an LLT of $2,310, so there is currently a 1 in 65 chance of this occurring again. That is, over the next 65 trades there is the chance of an approximate $2,300 loss occurring either from an LLS or LLT. If these were to occur together, our risk is $4,562 over the next 65 trades.

If we combine the two, and use this as the basis of our analysis, the probable risk is that the account would need to withstand a potential loss of $4,562 over 65 trades.

If we want to limit drawdown to 50% we need $9,124 start capital ($9,124 x 50% = $4,562). If we accept 75% drawdown we need $6,082 start capital ($6,082 x 75% = $4,562), but if we want to limit drawdown to 20% we need $22,810 start capital ($22,810 x 20% = $4,562). What if you don't have $22,810 capital? You can always reduce your lot size from Standard Lots ($100,000 USD contract) to Mini Lots ($10,000 USD contract), in which case $2,281 capital would be required, or trade in Micro Lots ($1,000 USD contract) with $228 capital. See how all this account analysis stuff puts you in control?

All you have to remember is this:

Account analysis is dynamic, and the results will change with each closed trade. It is important, then, that you conduct regular account analysis to keep your trading performance data up to date. The risk factor, win/lose ratio, risk/reward ratio, LLS, and LLT, can all change with each completed trade, so it is in your best interests to update data accordingly.

As you can appreciate, this brief outline is far from being a complete study of risk management. My purpose here is only to highlight to you the work that needs to be done behind the scenes to ensure that funds are kept as safe as possible, whilst maximising potential returns. This is a risky business we are in, and we will only ever have statistical probabilities to work with. Attention to detail and routine account analysis will ensure that the odds are always stacked in your favour.
 

koyl

Trader
May 25, 2015
71
1
7
Forex trading is risky and it important to minimize risk so as to reduce losses in trading. There are several ways to reduce risk like use of reduce leverage and also understanding the market.
 

saji11

Newbie
Jun 3, 2015
1
0
2
no dout risk managment is very important factor of any business.when u take high risk then lot of chance u will gain high profit
 

Ary Barroso

Active Trader
Jul 9, 2017
907
67
39
33
Yes, risk management is very much important here! Without following proper risk management policies it’s really hard to make regular profit from this financial market! For the reason that, there is no guarantee, so using high risk reward ratio is too much risky!