Risk management in the forex market remains one of the top priorities of a forex trader. By choosing to trade with proper risk management, traders can become more profitable in the long run. But when you do not use risk management, trading becomes a game of losses, and absolutely no one can save you from their financial doomsday. In this article, we will look at some of the top risk management tools that can help you with your risk management game.
Why do you Need a Proper Risk Management Strategy?
Risk management is a skill. You have to learn it to be fit for trading forex as a professional trader. Your success or failure depends on your risk management skills and how you take advantage of those skills. Risk management can be done by following certain rules and tips, like using emotional control and diversifying your portfolio. Another way is to use risk management tools, like stop loss, risk-per-trade, etc. You can use a trading calculator to calculate different aspects of the trade, including profit, pip, margin, position, and other parameters. . Using risk management helps you understand your overall condition better, and you tend to protect your capital at all costs. Your earnings are safe too.
Risk Management Tools
Here are some of the risk management tools that you can use in your trading journey.
1. The Maximum Drawdown
Max drawdown may be defined as the maximum amount of money you can afford to lose overall before you halt your overall trading process in all ways possible. You can adjust your max drawdown according to your financial situation. By doing so, you will change the course of your trading if your trading is not giving you the results you seek.
Let’s face it, even the best traders in the market lose. It is a fact, and everyone has to manage risks accordingly. When you set up the maximum drawdown, you are able to manage your money even on a “bad trading day”. A crucial tip that you can follow here is that you can consider the maximum amount of money in your account to set it as your max drawdown. It will help you manage your risks appropriately.
Risk-per-trade helps you assess your trading condition. It helps you determine your risk appetite, i.e. how many trades you can take without feeling that they are ‘pestering’ you. For this, you can take help of a position size calculator. It is something that helps you establish the number of trades you can afford to lose. Choose to keep it between 1 to 3%, and not more than that to avoid heavy risks.
3. The Daily Loss Limit or DLL
During trading, you may face and observe that there is a decrease in your account size. This could also be because of commissions and fees too. Now it is your duty to decide how much you can lose in a single day. That is what exactly your DLL is all about. Set it according to your previous experience when you win the most on average. Have a look at your average winning day. Also, closely observe your best winning day. Note them down and set daily loss accordingly.
4. Stop Orders
A stop order helps you stop an order from executing any further when it reaches a specified price. As the market is risky and using high leverage sizes makes it even riskier, it is crucial to use stop orders to manage risks appropriately. You can either enter a new position or exit an existing one by using a stop order.
By taking advantage of risk management tools, such as the above-mentioned tools, you can manage your risks effectively. You should know what they are and how to use them. By understanding them thoroughly, you can become a profitable trader.