You will find a lot of forex market trading strategies on the internet but many times these apply only to one or two systems. Beginners will often pick up a system and try to run with it without understanding some of the most important strategies that apply to all forex trading systems. They are looking for the ‘holy grail’, the system that will ‘work’ for everybody in every situation. Unfortunately it does not exist.
Disappointment and often, heavy losses can result from assuming that your system is always going to make money for you. Professional traders understand this and plan to handle the losses instead of dreaming of huge wins. The truth is that there are some forex strategies that should be followed by just about everybody, and these are the strategies related to risk management.
1. Set Your Risk Per Trade And Stick To It
Risk management is about the most important skill that you can develop as a forex trader. It beats technical analysis or any other technical skill hollow. The reason is that you can succeed without understanding every mathematical indicator on your chart, but you cannot succeed without good risk management.
Letting your risk go too high will mean that sooner or later your funds will be wiped out. This is statistical fact, it is not a matter of luck. But how high is too high? That is the question.
As a general rule, 5% of your funds is the most that you should risk on any trade. In most cases you will want to go lower than that. 5% might work for small funds where you are prepared to take a chance that you might lose all of the money. Then you would gradually reduce the percentage risk as the fund grows.
Most professional traders are dealing with risk levels of 1% per trade or lower. This makes sense when you are dealing with large amounts of money. A lot of traders would not be devastated to lose a $500 balance when they first start out, so they might take a bigger risk with that. But when you have anything over $100,000 in your forex market trading account, protecting it must be your first priority.
2. One Trade At A Time
Another principle of good risk management is never to have more than one trade at risk at a time. This means that you would never open a second trade until your first trade is in profit and you have moved the stop loss to a position where that first trade cannot lose. This applies whether the second trade would be in the same currency pair or a different pair.
This means that if world war three suddenly breaks out and major spikes trigger your stop losses, you do not end up with multiple losing trades. It also means that if your second trade turns out not to be so simple you can give it your full concentration without also being stressed about the first one.
3. Risk Versus Reward
When you are evaluating a system, always consider the risk versus the reward. For example if your system requires you to set a stop loss at 60 pips and your profit goal is 30 pips per trade, you have a high risk and low reward. On paper this looks okay as long as you have more than 67% winning trades, but in practice you will find that it is possible to have several losses in a row and this could wipe you out. So unless you are very sure that you know what you are doing and can handle large losses both psychologically and financially, it is better to look for a forex market trading system with a profit goal that is equal to or higher than the stop loss.