Trading and Investing

Risk Management And Its Importance In Building An Fx Trading Plan

Risk management continues to be one of the common denominators between beginners and professional traders. Get-rich-quick approaches fall short in the financial industry, leaving traders only with the option to keep long-term goals in place and abide by a trading plan diligently.

EURUSD dropped below 1.20 again on the back of increased volatility in the FX market, making a discussion about risk management even more important.

Risk management for Forex trading

Why traders need risk management?

Acting as a safety net during drawdown periods, risk management is still ignored by beginners. Regardless if traders use a forex app, MetaTrader 4, or any other trusted platform, it is critical to place at least a stop loss on every open trade.

The past year had reiterated markets can behave unexpectedly numerous times and a volatility burst creates big damages for over-confident traders that have limited expertise in dealing with such conditions.

FX trading – a skill-based endeavor reliant on probabilities

Making a living out of FX trading is not easy and requires a combination of knowledge, skills, and flexibility to adapt to different circumstances. Relying on luck will be a critical mistake since only hard work and study can pay high dividends in the long run.

Thinking in probabilities is one of the skills beginners need to develop, considering they will need to overcome losses, regardless of the trading strategy. Not even professionals are able to trade with 100% accuracy and in such cases, risk management limits the downside.

Integrating risk management into a trading plan

Some traders continue to rely on moving averages, oscillators, Fibonacci levels, or pivot points as their main guidelines when looking after new trading setups. All these indicators had proven to work in the right context, and it will be important to keep a written trading plan, including all the rules.

On top of the actual trading setups, risk management should have a dedicated section, as well. More specifically, traders need to decide what is their maximum risk per trade (as a percentage of their account balance) in a day, week, month, etc., how many trades can be opened simultaneously, and what is the right ratio between stop loss and take profit, based on the risk of ruin metrics.

Risk of ruin calculators are now available online for free and will help customers see the probability of losing money based on a few important variables, like accuracy, risk per trade, and risk/reward ratio.

Risk management summary

Even though it is extremely challenging to resist the mirage of quick profits, all beginners in FX trading should understand this activity needs to be treated like a business. They invest their hard-earned money, take risks, and then can generate returns or face losses sometimes.

Risk management is the tool preventing large damages, considering the downside will be capped even when markets don’t perform as expected. Deciding to follow tight rules with regards to how one should get involved in FX represents a sign of responsibility and maturity.

About the author

Ashley Judd

My name is Ashley Judd, I’m 27 years old, I’m currently studying MA Accounting and Finance (yes I love numbers) at university in Nottingham. I write down all my thoughts and perceptions and to ramble on about anything and everything.