How to Manage Risk and Make Money in Forex Trading

Trading is an activity that is naturally risky; hence if you trade without risk management, chances are that you will end up facing huge losses. Forex market, works on the same principles as most other investment markets. Trading without proper money management rules is equivalent to gambling and can end up in putting you in debt. Money management rules will not only protect you, but they help you in the long run to be profitable. It is seen most often, quite unfortunately, that new traders don’t attach sufficient weight to risk management that they should have. It has been observed that risk management and the size of the positions are what make the differences in performances of two traders who make the same exit and entries. Read on to know more about the different types of risk management strategies in details.

Fixed Risk Ratio

In this risk management strategy, you are asked to buy a given amount of units per amount of capital that you hold. This concept was popularized by the famous bet between Richard Dennis and William Eckhardt in the 1980s, more popularly known as “Turtles”. A key component of their success was this strategy.

• The calculation method is straight forward and simple.
• This is a mechanical method in which the beginners don’t need to worry about position sizing and risk management questions.
• The exposure will increase only with the increase in the size of the account. The risk level always remains the same as it is predefined.

• This strategy will not allow you to increase your exposure as per outcome probability. Thus your exposure to a high probability trade is the same as your exposure for a medium probability trade.
• In case you have small accounts, it will take quite some time before you are able to add a unit and it is true even for high levels of profit.

Risk as Percentage

This strategy is based on the amount of risk that is to be tolerated per trade. For instance, if you are using a technical configuration which requires you to have a large stop, you would have to reduce the number of positions so that you can maintain the same level of exposure. But then, if you come across a configuration that is technical and requires a tight stop from you, you can increase the number of positions but keeping the exposure levels same.

• In this method you can have a set amount of risk that is expressed as percentage if spite of having a large stop.
• This process is easy to calculate.
• In this method, you can increase the number of your positions gradually while you retain a risk level that is set and expressed as percentage of your account.

• You won’t be able to maximize your exposure as per the probability of an outcome occurring.

Risk According to Volatility

You can define volatility with the help of Average True Range. The Average True Range (ATR) is the moving average of the absolute range of a given period. Generally, it is calculated over 14 given periods. You can define the risk level according to the historical volatility of the currency pair over the unit of time which you would be working on.

• You have the certainty of being in a position of advantage when the market sets out on trend.
• As per the words of Van K. Tharp, in this method of money management you can make money even if you make 100% random entries.

• The stops here are quite large.
• There is a psychological pressure created due to the distance of the stops.

Thus you can see that by using these risk management techniques you can manage your money well in forex market.

Author’s Bio: EHM is a guest writer for various finance related Communities including CDFA, FCB, Debt Consolidation Care (http://www.debtconsolidationcare.com/) etc. She is a PG degree holder in Marketing and Finance and right now working in a reputed bank as a relationship manager. She is well equipped to write articles on debt consolidation , debt settlement, frugality, savings, economies of states etc.