How to Determine if Risk and Money Management is employed in Your Trading Methods
Previously, we discussed the characteristics that make up a good trading method. Furthermore, we discussed what the trading method should consist of in order for it even be considered a complete method, like the methods that are revealed in the Forex Income Engine 2.0.
This time, I wan to talk about risk management and how it should be used within trading methods. This is an area that 95% of forex traders seem to mess up and make mistakes that result in lost profits. By using trading strategies you can simultaneously manage your risk which will decrease your losses and protect your account balance.
So What does all this mean and why is it important to you as a forex trader?
First, simple trading mistakes seem to be made by the larger majority of forex traders. They take too large of a position and open themselves up to serious and steep losses if the markets move against them in the opposite direction. Secondly, some traders unknowingly put their entire account balance at risk due to one trade being placed that puts their entire funds on margin.
Let us go through an example to break this down even further:
In this scenario, our forex trader has an opening balance amount of $10,0000. The trader opens a 5 standard lot trad on the forex pair of EUR/USD. The forex trader now has at least $5,000 ‘margin’ at risk, which is 50% or more of the forex trader’s ENTIRE account balance.
In this example, for every 1 point that the market moves against the forex trader, the trader will lose 1/2% of the total account balance. Just looking at it, this may not seem like a lot at first. But if the market moves in the other direction by 50 pips, then the trader exits the position, they would recognize a hurrendous loss of $2,500! That is a whopping 25% of the entire account balance. This is a perfect example of poor risk management and surprisingly enough it happens frequently and often leads to a complete wipeout of a forex traders trading account.
Now lets take a look at the example above and break down how we calculated the loss amount.Ten dollars on a standard lot trade would equal to 1 pip for the EUR/USD pair. A 50 pip loss equals an actual loss of $500; and remember our example forex trader had traded 5 standard lots which would equal a whopping loss of $2,500!
On the other hand, every forex trade you open with any good type of method should include very clear identifiers for incorporating money and risk management.
Money Management should involve the distribution of a forex account among the various trades a forex trader opens. For example, on any one single trade you should never risk close to your entire account balance.To add to that, a forex trader should never have more than a few positions open at any one time. The trader is able to distribute the risk among different trades by using multiple positions.
Risk management involves the max risk you should expose yourself to for any single forex trade. It should also limit the impact of a losing Forex trade on the trader’s account balance.
To sum up, that when considering using a forex trading method, it should clearly identify its risk management rules and how they are used along with the trading method. If the trading method fails to explain this, or is unclear in any way, you should avoid this method and look for a new method to use.One which clearly identifies the risk management and money management.
To get further details on how Forex Income Engine 2.0 uses money and risk managment in conjuction with the 3 trading methods revealed, go to our Forex Income Engine 2.0 Review site for a complete breakdown.
