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Day Trading Risk Management

January 15
02:18 2010

Day Trading Risk Management

Risk vs. Reward

Over the years I have seen traders come and go, traders ranging from those just learning the forex market to those that have been in the market for years. The common denominator or factor that lead up to their demise was risk management. You can have a very profitable forex trading strategy or system, yet without the proper risk management and the discipline to follow it, eventually it will be what turns what should be a good trader or strategy into one that loses.

To start lets examine proper risk management. Even with the best forex trading strategy you will at times have losing trades, losing weeks, and sometimes even losing months. So given this inevitable fact how do you manage these losses and the risk properly. Its really quite a simple answer only risk 2% of your account at the most for any one trade. That means if you have a $1000 account only risk $20 per trade at most. This may seem small but examine your goals as a trader. Are you in this market to make a career out of it or are you simple here to strike it rich? If you choose the latter your stay in this market will be short lived! If you are in the forex market to eventually make a living from it then you have to be smart and think long term. Small and steady is the only way to successfully day trade the forex market.

Next lets discuss risk reward. For any trade you take you will have a specific area that you are looking to close the trade and take your profit should the trade go in your direction. Should the trade go against you, you conversely have a specific area that you are looking to get out of the market to control your loss. When entering a trade you, at the very least, want to have a risk reward of 1/1. A quick example of this is if you risk 20 pips, you want to have a take profit of no less than 20 pips. Using this example you would need to win 50% of the time to remain at break even.

You can read article after article, have the best system there is and if you dont follow the simple 2% rule or something similar you will eventually wipe out your account. In addition to that, when first starting in the market having a risk reward on all your trades of 1/1 at the very least is equally important. I have taught this market live for a long time and though these 2 rules sound very simple, they are without a doubt the most important rules to learn, live, and trade by. For additional information you can visit our forex bank trading course and members forum.

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