The importance of risk management cannot be overstated. Risk management is the difference between gambling and trading. Proper risk management can mark the difference between the survival or the death of a forex account.
You could have the best trading system in the world, but without good risk management the chances of the account being profitable would be down to luck. You would be a gambler.
What exactly is risk management?
This is a combination of applying controls to your trading risk. It can come in multiple formats. For example, it could be limiting your trade size, it could be hedging your risk, trading only certain hours within a day or applying a stop loss.
This is any easy concept to grasp and is key to survive as a forex trader, however it is slightly harder to apply.
Whilst using leverage is one of the benefits of trading forex, it is also one of the drawbacks. Trading with leverage makes trading much riskier. Whilst on the demo account trading leverage seems so easy. However, as soon as you take the step across onto a real account, real emotions and real money are in play everything changes, and this is when risk management is essential.
Controlling your losses
Stop losses are very effective risk management tools. There are two main types of stops – hard stops and mental stops. A hard stop is when you actually set your stop loss at a particular level, this is the most recommended type of stop. The second stop the mental stop this just exists in your mind. The problem with the stop is that it is open to your emotions. You may or may not close the trade at your mental stop level, depending on how you are feeling towards the trade at the time.
Figuring out where to set the stop loss is also a science in itself. There are many different methods to consider. The best way to set a stop is by using the market structure rather than just wanting a stop an arbitrary number of points away. But equally an arbitrary stop is still better than no stop as far as risk management is concerned.
Other forms of risk management
Here we have just touched briefly on controlling losses. As we mentioned earlier, there are many ways of controlling your risk such as keeping an eye on lot sizes and trade exposure. Looking after the risk on your account will ensure that when a trade does go against you (and it will) that this doesn’t mean the end of your trading account.
Vantage FX offers its clients a comprehensive educational programme through which they can learn to trade. This includes numerous articles discussing stop losses, the different types and how to place them. The platforms offer clients stop losses and trailing stop losses to help them stay in control of their trades.
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