It is very common for a beginner trader in Forex to blown their trading account.
Factors that can greatly affect someone's trade negatively is the lack of knowledge of a trader in Technical Analysis, Fundamental Analysis, Risk Management, and Trading Psychology.
In this section, we will be discussing risk management and how to do it properly.
Every profitable trader has good risk management and it helps them to stay in the Forex game in a very long time. A profitable trader who practice risk management is considered to be a defensive player since they are protecting their invested capital.
In order to be profitable with risk management, you should consider doing these things,
1. ONLY INVEST THE MONEY THAT YOU CAN AFFORD TO LOSE. In Forex, we do not invest our savings, emergency funds, money for the bills, or our weekly budget for the daily necessities, but instead, we invest the money that we do not need. In simpler terms, we only invest money that is not allocated to anything.
Many traders ignore this part of advice which is very common knowledge in trading. They think that they can earn easy money in Forex as easy as they can deposit their hard-earned money. Well if that is your mentality towards trading, you're basically gambling and most probably you are going to lose.
There are lot of emotional stress that can affect your trading decision. Here is a classic example,
As you win a small amount of profit during your trading journey, your confidence increases which can also lead to a decision of increasing your lot size hoping that the odds be on your favor (because guess what? You're feeling lucky!), and as you proceed on your trades, suddenly A LOSING STREAK HAPPENS! and all of your small profits gained earlier TURNS TO BIG LOSSES AND EVEN MORE!
then as you lose more money, your emotions start to fire up and the thing that will only come to your mind is to get your money back which will only result in a BIGGER LOSSES, even a blown account! So as a piece of friendly advice? 2. BE CONSISTENT ON YOUR LOT SIZE AND DO NOT TRADE WITH YOUR EMOTION!
In Forex, we do not gamble our money, instead, we manage it properly.
3. AVOID "ALL IN" WHEN INVESTING IN FOREX AND ONLY RISK 2% OF YOUR CAPITAL PER TRADE. If you have a big capital to start in Forex, For example ,$10,000, you should only risk 2% of it per trade which is $200. This is for you to stay in the Forex game!
Imagine if you use only 2% of your capital, you will have 50 trades, even if you lose 25 times, you still have 25 trades to win before your capital runs out.
Unlike if you risk greater than 2%, 20% for example, you're going to have a lesser number of trades or 5 trades only before your capital runs out. What if your first 5 trades are a loss, then, unfortunately, the next 5 trades together with your analysis is a win? CAN YOU PICTURE YOUR FACE AFTER THAT?
The trick of risking only 2% of your capital per trade is to stay in the Forex game so that when the winning time comes, you're still in! ALIVE AND KICK'n!
In trading, its like flipping a coin for beginners. Assuming you have a 50% winning rate and 10 Trades based on your capital, you will have 5 losses and 5 wins. Thus, giving you a break-even. You will only gain profit if you are an experienced trader in which your winning rate is greater than 50%. (see the table with 1:1 Risk Reward Ratio)
BUT BY APPLYING PROPER RISK REWARD RATIO (RRR), YOU WILL SEE THE DIFFERENCE. (when I say proper, I mean use greater than 1)
Basically, if you increase your RRR, you lower your winning rate. Thus, observing the table sample with 1:1.5 RRR.
Even if you lose 6 times and only wins 4 times, you still got a break even (Your wins cover your losses). But if you have a good analysis of your trade, it will or may result to profit even if you lose most of the time.
Another example RRR 1:2, even if you lose 6 times and wins only 4 times, if you have 1:2 RRR, you will gain +20.
Your Risk Reward Ratio may vary based on your analysis. It may be 4-6 times your risk or even 10 times or higher! 4. DO NOT STICK TO IDEAL 1:1.5, 1:2 RRR AND FOCUS ON IMPROVING YOUR TRADING ANALYSIS SO THAT EVEN IF YOU LOSE MORE FREQUENTLY, A SMALL NUMBER OF WINS WILL COVER YOUR LOSSES AND STILL BE PROFITABLE!
5. ALWAYS USE STOP LOSS AND TAKE PROFIT ORDER. Using stop loss will prevent you from losing more money when the market direction goes against your analysis. In addition, take profit order is also important to secure your profit because the market can be very volatile that it can reverse anytime.
If you have a correct analysis or if the market moves with your bias, you may move your stop loss beyond your order to the positive side so that if the market reverses, you trade will close with a profit.
6. BE CONSISTENT ON YOUR TRADING PLAN!
If you are winning consistently, it does not mean that you will increase your lot size.
If you are losing, you should take a break and have tea! So that you will calm yourself and you will not trade with your emotion. REMEMBER THAT THE MARKET IS OPENED 24/5. YOU ALWAYS HAVE THE TIME TO GET BACK TO YOUR TRADES.
Always use a stop loss. You should not forget placing a stop loss on your trades. This is very important to contain your risk.
Improve your trading analysis, continue learning the Forex market, and ALWAYS TRADE AT YOUR OWN RISK! 🔥🔥🔥