Controlling Risk In Forex

Controlling risk is one of the most important ingredients of successful trading. While we enjoy and focus on the profits to be made from Forex trading, we should know precisely how much we are willing to lose on each trade before cutting losses, and how much we are willing to lose on our account before stopping

trading and re-evaluating where we are going.

We can control risk in several ways:

by exiting our trades before losing too much
by controlling our trade size

Cutting Our Losses

The most popular method of cutting our losses is with a "stop loss"... a trigger point where we exit the trade at an acceptable loss.

Now, I'm of the opinion that there are NO acceptable losses in , however the majority of new traders are obsessed over having losing trades. What usually happens is that we let a losing trade blow out in the hope that it will "turn around" and return in our favor. What often follows is a 50 - 100 pip blowout, at which point our emotions are out of control and we freak out and close the trade, incurring a large loss.

Limit your trade size

The other key to controlling your risk is limiting the size of your trades. First you must know how much you are willing to lose on a given trade or series of trades. If you're going to use a 30 pip stop loss, then you'll lose $300 on a standard account trading $10 a pip. Experience 4 losing trades in a row, and you've lost $1,200 of your account. It's certainly not unusual to lose 4 in a row with a 30 pip stop.

I don't think you should need to use a stop loss in forex trading. I feel a stop is a guarantee that you are going to lose a set percentage of your trades. The brokers know this, and they encourage you to use a stop.

So What Is The Solution?

Trade small... VERY small. Never risk more than .05% of your capital in a trade. That means if your account is $10,000, the largest trade you would make is $5

The price can go 500 pips against you, and you are still only risking $1,500 (15%) of your capital of $10,000. The point is that price will always come back at some stage, and if you don't have a stop in place, you can't lose... as long as your trades are small enough. All you need to do then is take enough trades to show a profit each session that you trade. Learn to make small profitable trades. Take 1 to 10 pips profit per trade. Don't try and win enough to buy a Porsche Carrera each time you enter a trade. There's a saying about fishing that "Small fish are sweet"... same with Forex trading, be happy with small gains. If you make ½ a dozen small winning trades with no losses, you can easily get 25 to 30 pips in a session. On a $10,000 account making $5 trades, that is a daily profit of $150 ... a 1.5% profit (30% a month)

Whether you decide to trade with a stop loss or not, you must have a clear plan of action BEFORE you place your first trade. You must know where you will exit a losing trade if using too much margin. If you're not using a stop, you must be sure to trade very small trades, so you eliminate the risk of a margin call.

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