No matter how good you are at Forex trading, there will be times when the market just doesn’t go in your favour.
In the event of a losing streak, you want to keep your losses small and maintain enough equity to stay in the game.
To protect your account from getting wiped out by a series of bad trades, you need to have solid Forex risk management.
Let me share with you some life-saving risk management rules I personally use.
- 1 Never Risk More Than 3% of Your Capital Per Trade
- 2 Always Risk a Fixed Percentage of Your Capital
- 3 Always Use a Stop-Loss
- 4 Always Use a Take Profit Order
- 5 Ensure Your Risk-Reward Ratio Is At Least 1:1.5
- 6 Take No More Than 2 Trades at One Time
- 7 Concurrent Trades Should Not Be Correlated
- 8 Only Take High-Quality Trades
Never Risk More Than 3% of Your Capital Per Trade
If you are just starting out, I recommend fixing a 1% risk for all your trades. If you are an experienced trader, keep it to a maximum 3%.
See, when you risk 1% and you get 4 losses in a row, that is a 4% drawdown on your capital. At 3% risk per trade, with 4 losses in a row, you get a 12% drawdown on your capital.
Now, you may say, “Hey, if my trading strategy is good and I keep trading, I’ll make that money back.”
Yeah, that’s true, but for most people once they lose more than 20% of their money, their trading psychology gets affected.
Their finger starts to shake, their judgment goes haywire. “Should I take the next trade? What if I lose again?” They become anxious and stalk the charts obsessively.
So always risk a small percentage such that a series of losing trades will not affect you emotionally. Only then can you trade at your peak.
Always Risk a Fixed Percentage of Your Capital
Now, once you decide on your risk per trade, you must stick with it consistently over a period before you raise it.
You can’t say things like, “This is going to be a winner, I’m going to risk 3%.” “I’m not too confident with this other trade, so I’ll risk 1%.” No, it doesn’t work this way.
Always be consistent with your risk per trade because you can never predict the outcome of any single trade. Remember: On a trade-by-trade basis, every trade outcome is random.
But when you keep your Forex risk management consistent, you’ll be confident knowing that over many trades, your average wins will cover your average losses. I’ll talk more about this below.
Always Use a Stop-Loss
Never enter a trade without a predefined stop-loss. This allows us to control the amount that we can lose in a bad trade.
Here’s the difference between amateur traders and professionals:
When amateurs enter the market, they’ve got this gambling mentality. They dream of how much money they can make, they hope for a big win.
For professional traders, whenever we place a trade, the first thing we think about is not how much we’re going to make, it is, “how much am I prepared to lose if this trade goes awry?”
Because any trade that you go into could be a loser; you never know which one.
The only thing you can really control is how much you lose per trade, and you always keep that small with a stop-loss order.
Always Use a Take Profit Order
Remember that at the end of the day, you can only make money if your average win is more than your average loss.
You can’t control your win rate, but you can control how much you win when you win and how much you lose when you lose.
By having a predetermined profit target, you can ensure that you earn more than the 1R that you risk.
Ensure Your Risk-Reward Ratio Is At Least 1:1.5
Using my Forex trading strategy, I always aim for a risk-reward of 1:1.5.
Some people ask me, “Adam, why not just risk 1 to make 2 or risk 1 to make 3, isn’t that better?” Sure, who doesn’t like big wins?
But the moment your profit target is too far away, it gets harder to attain and your win rate goes down. If you risk 1 to make 5, your win rate might go down to only 30% or 40%. The better the risk-reward ratio, the lower your win rate.
So there’s always a trade-off and to me, 1:1.5 is the ultimate balance. I risk 1 to make 1.5 with a win rate of 60% to 70%, and the profits are pretty decent.
Remember: Trading success is a balance between win rate and risk-reward ratio.
Take No More Than 2 Trades at One Time
This is my own Forex risk management rule and I suggest you follow it if you want to be an intra-day Forex trader like me.
I never take more than two trades at the same time. In fact, most of the time, I only take one trade — I only take the next trade after the first trade closes. Why?
You see, I trade Forex on 15-minute candles, so my average trade lasts for 1 to 2 hours or less. In fact, I rarely hold a trade for more than 2 hours, so it’s a day trading scalping style.
Personally, when I take a trade, I risk 2% of my capital. If I take 2 trades, that’s a 4% risk. So to manage my overall Forex risk management, I don’t take more than 2 concurrent trades.
What do I mean by this? Let me give you an example.
Say I go long on EUR/USD. This means I’m bullish on the euro and bearish on the dollar.
Next, if I take a concurrent trade where I’m shorting the USD/JPY, it means I’m bearish on the dollar, bullish on the yen.
These two trades are correlated because I’m bearish on the dollar in both cases. Now, if the dollar goes up, I’ll lose both trades. That’s not a good idea for Forex risk management, right?
Only Take High-Quality Trades
On certain days, if there’s no clear trade setup, I don’t force a trade.
I can look at the chart the whole day, but if there’s no clear trade, I do not take it.
That’s the discipline — only take high quality trades and keep it to maximum 3 trades a day to care for your Forex risk management.