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The forex market is filled not only with profit. It’s also full of perils. But if you’re smart about it, you might be able to use the forex market to raise money for funding your startup or expanding your small business. However, as a forex trader, you must first learn to safeguard your capital.
Most people who try the forex market lose their money within the first few months. That’s because they don’t have a clear idea about how much money they should invest.
They do a few things right. That is, they sometimes follow a rock star professional forex trader and watch as that trader wins big. They try to imitate the way their idol uses leverages and places trades only when they are certain of a trend.
The novice forex trader, however, often does not have as much money as the professionals have. In other words, they can’t afford the losses the rock stars can. Then, when they place a trade with whatever they have to spare, it really hurts when they lose.
So if you’re determined to be a forex trader, you should learn to calculate your own risks. This calculation should be based on the size of your account as well as the strategy you generally rely on.
In this post, we’ll explain how to go about determining the size of the risk you should take.
Know Your Risk Tolerance Level
Every forex trader is different. While it’s good to study the styles of the professionals, you need to develop your own style.
For example, you might be okay with losing $100 in a trade. However, this might not be the case for another forex trader.
So answer the question for yourself about how much you can comfortably afford to lose. Once you know that number, you can scale your lot size accordingly.
Managing your trades is the most important aspect of any currency trading profession. Especially if you’re new to forex trading, you should use a forex trading demo account. Learn to make a consistent profit with your demo accounts before you start trading for real.
Give yourself six months to learn the ropes. During that time, try to master three major types of market analysis. Develop a simple strategy for executing quality trades. Learn to manage your emotions so that you make all of your decisions with a clear head. Embrace the fact that you’re going to lose some trades. And practice waiting on the sidelines until the best trade setups appear.
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Don’t Base Your Risk on a Percentage
The first mistake that many novice forex traders make is that they base their risks on a percentage of their capital. However, risking a percentage won’t necessarily keep you safe.
For example, let’s say that you decide you’ll risk only 4% of your capital with each trade. That’s a small percentage, right? That doesn’t sound too risky. However, if you do the simple math, you’ll see that it will only take 25 trades to clean out your account.
So if you’re basing your risk tolerance on a percentage, stop that now. Instead, base your risk on the amount of money you would feel comfortable losing, if you lost. If you have $10 in your account, for example, risk $2 in a particular trade—but only if you’re pretty sure that you can make a profit of much more than that.
A Good Forex Trader Uses the Risk-to-Reward Ratio
Try using the risk-to-reward ratio as a forex trader. This ratio determines the risk exposure level of a trade for making a certain amount of profit. Professional traders always follow this ratio when they are trading.
When you’re using the risk-to-reward ratio that’s right for you, you will make more profits than losses. That’s because you’ll only risk the money that you can afford to lose.
