Why Should Forex Traders Employ Risk & Money Management with Every Trading Method?
Prior to this, we determined the characteristics of what makes up a solid trading method. Furthermore, we discussed what the trading method should consist of in order for it even be considered a complete method, like the methods that are revealed in the Forex Income Engine 2.0.
This time, I wan to talk about risk management and how it should be used within trading methods. This is probably the one part of trading where 95% of Forex traders make mistakes and lose money. When you protect your account balance and minimize your losses with each trade you can effective manage risk.
Now what does all this mean? Why is it important?
First, simple trading mistakes seem to be made by the larger majority of forex traders.Forex traders open themselves up for large losses because they open too large of a position in comparison to their account balance. Secondly, some traders unknowingly put their entire account balance at risk due to one trade being placed that puts their entire funds on margin.
How about we walk thru an example to show this even further:
For our example, we’ll say a forex deposits $10.000 to start trading forex. The forex trader takes a 5 standard lot forex trade on the EUR/USD pair. The forex trader now has at least $5,000 ‘margin’ at risk, which is 50% or more of the forex trader’s ENTIRE account balance.
In this scendario, the trader loses 1/2% of the total account balance for every one point the market moves against the trader. At first, this may not seem like whole lot. On the contrary, if the market moves 50 pips in the other direction, then the trader exits his position, they would see a whopping loss of $2,500! That is 25% of the account balance already. Now this is a perfect example of what not to do. This is very poor risk management. But surprisingly, it happens quite often and leads to huge losses or account balances being wiped out completely.
Now lets take a look at the example above and break down how we calculated the loss amount.Ten dollars on a standard lot trade would equal to 1 pip for the EUR/USD pair. A 50 pip loss equals an actual loss of $500; and remember our example forex trader had traded 5 standard lots which would equal a whopping loss of $2,500!
Instead, any good trading method should teach you very precise guidelines for incorporating money and risk management into every forex trade that you open.
Money management should include even distribution of an account among the multiple trades a forex trader has. For example, forex traders should never trade their entire account or even close to it, on a single trade. In addition, they should rarely have more than a few open positions. The forex trader can use multiple positions in order to distribute the risk evenly between the open trades.
Risk management will be the maximum amount you may be willing to lose if the markets go against you. It should also limit the impact of a losing Forex trade on the trader’s account balance.
We can accurately sum up that any forex trading method that you are considering to use should clearly explain risk managment and how it is used in conjunction with the trading method.If a trading method is unclear on their risk management rules or just fails to explain it, then you should avoid using the method.One which clearly identifies the risk management and money management.
To get further details on how Forex Income Engine 2.0 uses money and risk managment in conjuction with the 3 trading methods revealed, go to our Forex Income Engine 2.0 Review site for a complete breakdown.
Related posts:
- Additional Forex Trading Systems~What Makes a Trading Method “Good”? Continued
- Money Management in Trading Forex
- Currency Trading Methods
- Risk and Your Forex Trading Style
- The Important of Forex Money Management
Tags: forex income engine 2, forex income engine 2.0, forex income engine 2.0 review, forex traders, forex trading, forex trading methods
