Forex Risk Management | SigmaForex

Money management, also referred to as risk management, is totally critical in developing a successful trading plan. Many traders look upon it as the single most important aspect of trading. The lack of discipline in money management is a major cause of failure among new traders. Traders need to train control over how much capital they risk per trade and on trading in general. A currency trading plan should define risk per trade and maximum losses per month and year. Following strict risk management rules can help the new trader overcome the emotional aspect of trading.

One of the main ideas behind money management is to protect capital so that a trader can live to trade another day. Before a trader enters a trade, the first thing they should ask themselves is how much money they are willing to risk and can they afford to lose it? One of the most common mistakes new traders make is they often risk a large percentage of their account on one or two trades. By risking your account on one trade, you are exposed to possible destruction. Attempting to get the big gain may be thrilling, but failure in the trade can wipe out the entire online forex trading account.

There is an old investing adage about cutting losses and letting profits run. What this means is that a trader should strive to manage his/her losses, in order to make sure that a single trade doesn’t incur too much damage both financially and spiritually. The good reason here is that if traders keep their losses small, the profits will take care of themselves. In the case of profits, a trader can exit the position once they have determined that they have gained a sufficiently "large" profit. Now, what exactly is a small loss, or a large enough profit? There is no one answer. What is right for one trader will not necessarily be right for another.

There is a so-called "rule of thumb" in the trading world which states that one should never risk more than 2% of their total forex trading capital on any one trade. By limiting risk to 2%, a trader can endure several bad trades. It is absolutely critical to maintain a low level of risk. The idea here is that one trade is not going to significantly affect the trader if it results in a loss. If a trade goes against them, they are not going to go broke, or have to sell their house, car, and internal organs in order to continue trading. The way to define risk, for purposes of the 2% rule, is by determining the loss the trade will experience if the price moves against them. For example, if a trader buys 1 contract of May corn at $4.00 with a 6 cent risk, your risk is defined as 6 cents * $50 = $300. A trader needs to have cash amounting to at least $15,000 in their trading account for the 2% rule.

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