Many currency traders find it hard to follow simple risk management rules. Many times, they will turn winning positions into losing ones. They will be surprised to find solid trading strategies result in losses instead of profit.
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Most forex traders lose money. They fail to understand and apply proper risk management rules in their trading. Risk management means knowing how much you are willing to risk and also knowing how much you are looking to gain in a trade.
Risk-reward ratio is very important for you to know and understand. As a trader you should calculate a risk-reward ratio for every trade that you make. In more simple words, you should have an idea of how much you are willing to lose if the trade goes against you. You should also know how much you are expecting to make in a trade. A general rule of thumb that you should apply is that your risk-reward ratio should not be less than 1/2. With a solid risk-reward ratio, you can eliminate a trade that is not worth the risk by not entering it.
There are two ways to place the stop loss order.
- Initially place the stop loss at a reasonable level.
- Trail the stop meaning move it forward towards profitability as the trade progresses.
There are two recommended ways of placing the stop loss order. One involves placing the stop loss order 10 pips below the two days low of the currency pair. For example, if the EUR/USD recent low was 1.1300 and the previous day low was 1.1200, then place the stop loss at 1.1190, 10 pips below the two day low if you want to go long.
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