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Why Risk Management is Your Key to Success as a Prop Trader

Why Risk Management is Your Key to Success as a Prop Trader

Risk Management as the Key to Success in your Forex Trading Career

Prior to entering a trade, there’s a whole lot of talk about indicators, tools, analysis, and all the other components that we like to combine in order to make a perfect entry. And while these are all key to our success in the market, there’s only one crucial element that will determine whether we succeed or fail in the market. The essential piece of the puzzle that sits at the center of any successful trading career is risk management. 

Though it is not often the most talked about and stressed element of trading, money management is the most important and vital tool when it comes to making money in the market environment.

  Why Risk Management is Your Key to Success as a Prop Trader

7 points for managing your risk in forex trading

  1. Manage your position

Once you’re ready to start trading, it’s important that you employ the service of stop losses to make sure trades will not spiral out of control and wipe your entire account out. Know the price you’re willing to pay and the price you’re willing to sell out. Don’t put yourself in a position of figuring this out as the trade develops. 

Use calculators to calculate pip value, or to calculate the stop loss value. 

If you happen to enter a trade without knowing where you want it to go, or where you’re comfortable letting it go, it’s easy to fall into a gambling mentality. You might win a bit, so you decide to stay in longer and let it ride, or conversely, you might lose and decide to hang on longer in order to win your money back. Trading is not gambling and this is a surefire way to a short career and the end of any trader’s guide. 

  1. Control leverage and keep it to a minimum

In forex, it’s common to give away huge leverage in exchange for the money an investor invests. In many countries, it’s easy to receive 50 to 1 with a security deposit to cover the potential loss that may incur in your investments. It’s not actually for the holding of the assets (we’re buying contracts, not actually owning assets remember?).

It’s very easy to get very high leverage and the numbers can vary from 25 to 1, all the way to 4000 to 1.

For example, if you’re leveraged 100 to 1, it means that every 1/10 of percent change in price is actually 10% in money value worth of change. This can make very fast and high profits but at the same time, it’s 100% risk for loss.

Using high leverage involves taking a lot of risks. Because it’s available and easy to receive in the forex, people tend to take it and losses are unavoidable and incidentally happen very fast.

It’s important to understand that in the 8 major currencies, they are all stable in relation to each other. If you’re trading a combo, it’s a balanced and stable environment. Changes between the values of two pairs of any combos are usually very low. Less than 1% in a day.

If you don’t use leverage in forex and work consistently to take the bread and butter trades, you can add up daily wins into long term profits.

If you know how to protect yourself by working with a regulated broker and not using leverage, you’re well protected in the most stable financial market possible.

  1. Beware From Gaps in The Forex Market

The Forex market has an edge on other markets regarding risk because of its status as a continuous market. Since it’s open 24 hours/5 days a week, there is rarely a time that you cannot go in and execute your trading plan. If you want to add, lower, modify your risk, whatever, you can do this 24 hours a day.

Unlike the stock market, The Forex market has no off-market hours during the week. While the weekend still presents gaps (times where trading is limited or prohibited), the near-constant available access to the forex market makes it a more consistent, risk-averse trading experience.

  1. Watch the News

Before the days of seismic presidential tweets, the news was the main source of information which disrupted markets. Often, it was simply unexpected sentences in planned speeches. 

While you can’t know the exact content of a speech when you see an important figurehead is scheduled to speak on the markets, be prepared. There are few people whose words can move the market and their speeches are often planned up to a month ahead of time.

Big financial names will also use public speaking engagements to move and correct markets. Paying attention when someone expresses that markets hadn’t moved in the way they expected would be part of any risk management strategy. It is likely they will come out soon after and drop “headline bombs” which are designed to intentionally for a market to move.

In what will sound contradictory, it’s also important to step back from the news from time to time. 

By not trading during news release times, you can set yourself up to avoid the turmoil of high amplitude volatility that follows a major news event. This volatility can hit your stop orders, extend you spread which will cause unwanted execution of orders, and execute trades with slippage.

  1. Only invest money you don’t need

This is actually part of managing your position. As you take consistent profits out of the market, what you should be left with is capital that you are free to trade with, in that if you lose it, you wouldn’t suffer a devastating exit from the market. 

All the money that you are investing, while not extra money, should be money that you could move on from if you were to lose it. 

Determining what is to be considered the money you don’t need means fine-tuning your risk management strategy to determine the safe levels of capital you can invest and risk in each trade you make. You don’t want to risk a significant portion of your total capital in every trade. If you lose a trade and can’t recover, you’re risking too much. Losses are natural and you should be ready to accept them and recover from them.

  1. Set your risk

In addition to closely following the plans on paper, don’t forget about the intangibles that your mental and emotional state brings to the table. Don’t trade when circumstances aren’t letting you get into the trading zone. If you’re tired, sad, feeling a bit off, don’t fight it. Accept that it’s not your day and get back at it when you’re back in balance. 

You need to know yourself very well in order to listen and understand what the mind tells you. Avoid risks that come from trading in a state of poor judgment.

If you’re already in a trade when you notice your mood taking a change for the worse, do everything necessary to minimize exposure in order to keep risk under control with a final, tolerable loss. 

As for an appropriate risk-reward ratio, the conventional wisdom regarding RRR is to try to do work at a higher than 1:2 RRR. Of course, if you’re going to be a successful trader, you should do much better than retaining an even break. This article is here to help you achieve this by showing you how to measure stats and optimize your trading based on the accuracy of the entry/exit and also help you tweak the RRR to get you over the break-even, into the profit zone.

  1. Use software programs for help

The internet is full of programs and courses that promise to make you a master trader if you’re just willing to stick with the routine and in many cases, pony up some cash. A lot of these programs come with a hefty price tag and originate from questionable sources. This can make deciding on where to invest your resources painstakingly difficult.

We’ve gone through all of the best, free money management tools and compiled them here, free money management tools in this useful guide. 


Risk Management Success The Bottom Line

use those points to manage your Forex Trading, avoid making beginner mistakes.
You need to be disciplined and work under a defined plan

Any reputable prop firm that you go to work for will have a risk management framework that should not be exceeded.

These guidelines and rules impart disciplined trading habits and train the trader to trade in a well-calculated and disciplined manner under a defined risk management framework. This guarantees that your loss and exposure are always limited. While it may seem to confine at first, training yourself to work within these parameters is crucial for any level of success in the market.

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