The significance of Risk-Reward Management in Forex

Last modified date

what is risk management forex, how to do risk management in forex, how to calculate risk management forex, how to calculate risk management in forex trading, how to apply risk management in forex, how to use risk management in forex trading, why is forex risk management important, risk management forex strategy, risk management forex stop loss, risk management forex book, risk management forex factory, risk management forex lot size, risk management for forex traders, forex and risk management, best forex risk management strategies

Trading can give you quite the adrenaline rush and can be really rewarding and stimulating at times. However, never confuse it with a slot machine at the casino. There are plenty of instances of traders who are addicted to trading, stuck to their trading screen for the major part of the day. Funny thing is, some of them even have a decent strategy.

However, most traders are too casual while managing their capital and just go with the flow. Rather than thinking meticulously about it, most traders set their risk depending on their mood at that time. The traders risk too much capital in the market by adopting this kind of random lot placement behaviour. This is not the right way to trade and beckons unnecessary stress and anxiety.

When you are trading Forex, you need a proper money management plan. In this article, I am going to tell you how this simple step can exponentially improve your quality of trading.

Importance of Money Management

Every trade that you place in the market must have the strong foundation of a sound money management plan regardless of whether you are a day trader or a scalper (none of which are good ways to trade), a sucker for loads of indicators or like to have a clear chart.

The bottom line is each and every trading system, no matter the kind, must have a good money management plan. Otherwise, it is very easy to go down the wrong path.

  1. Regularity

Say goodbye to random lot placements. A good money management strategy would enable you to calculate the risk you are taking in each trade with a great deal of precision. You can even calculate your risk up to the decimal points. With a good money management plan, you don’t need to guesswork anymore. If you’re one of those place orders using random lot size numbers, you will end up having an odd equity curve.

Your trades will be much more stable with a consistent risk if you use your money management plan judiciously. When you have a plan in place, you know exactly how much money you are risking in case your stop loss is triggered. As a matter of fact, there is nothing to be ashamed of if your stop loss is activated. No matter how experienced the trader is, everyone loses once in a while. You need to have a good money management plan to ensure that your winning trades outperform your losses.

  1. Dial-Up Your Trade profit Potential

When you do not use a money management strategy, you cannot keep a track how much risk you are taking in each trade.

You can risk too much on the first trade and incurring a big loss while risking too little on the second one where you do hit the target but the profit is marginal.

The trade that you lost earlier might be having an overbearing effect on your profits. By adopting a good management plan, you can have a stable risk because you’d know exactly how much money you will be risking in each trade.

Here, we go back to having a consistent risk. A good trader would never risk $1000 dollar on the first trade and just $100 on the next trade. According to the money management plan, in this case, only $200 should be risked on each trade. This simple procedure will make your equity curve more stable and help you get a peaceful night’s sleep.

  1. Money Management Helps to Keep a Check on your Emotions

It can become a stressful situation if you try to trade without a money management plan. There is a need for a proper structure while trading and in the absence of it, you can come face to face with a full-blown anxiety attack if your trade fails to go in your favour.

When you place your lots and stop losses on a random basis, you never know how much you’re exactly risking. When you enter the trade, you have a positive outlook that the trade is going to work in your favour. However, what if it goes the opposite way? What would you do then?

This will bring forth a lot of negative emotions that never sits well with trading. You can be tempted to tweak the stop loss line further away to help your trade get some breathing room and wait for the market to turn around or you might remove the stop-loss completely, thus baring your whole account capital to the market. On the flipside, you may also close the trade a little too early that might have had hit the target if you had given it some more time or you might open a new trade in the hopes of bouncing back from the losses in the previous trades. Each one of these practices is extremely dangerous and can wreak havoc on your account as well as your mental health, prompting you to become more stressed and anxious.

When you use good money management, you will not place or interfere with your trades on an emotional basis. You will have stability in your trades as you will know exactly how much loss you will incur in case your stop loss is hit. You will be comfortable with the risk that you are taking and in turn, you will get good returns on your investment.

This is a far better way to trade than just placing your orders randomly. If trading is making you pop anxiety medication, then trust me, you’re not trading right.