How to have a good risk management

 

When talking about trading in the foreign exchange markets, there are multiple factors to talk about, with enormous importance for your results. Some of them are technical analysis, fundamental analysis, risk management, and risk reward.

Risk management is a crucial part of trading. Every time you execute a trade, you must have placed a Stop Loss (SL) and a Take Profit (TP) before. Stop Loss is an essential tool that protects your capital from sudden unexpected price changes, which can happen due to not predictable Fundamental News or another external factor. With a Stop loss setup, you can have some protection against these price changes.

Now that your stop loss is set up, you need to consider the percentage of your capital that you want to risk. My advice is to risk only 1% per trade (this is the percentage I risk), but you could risk up to 3% per trade, but never more than that per trade. Summing up, you must always put a Stop Loss. The size of your Stop Loss will define your volume in that trade.

 

How do I calculate my risk per trade?

 

Attention!!: You should always try this first in a demo account to be certain that everything is correct, different leverages will have different results. Always try first in the demo account.

Let’s study an example: I have an account of 1000 euros and I risk 1% per trade, which means that per trade I am allowed to lose a maximum of 10 euros.

Now, let’s show you how to do it. You have an account with 1 and you open the chart EUR/USD. With some fundamental and technical analysis, you see what seems like an opportunity to trade. The first thing you have to do is set a Stop Loss. I will show you an example using the platform trading view: https://www.tradingview.com/

 

Here we have a picture of the EUR/USD chart that we will use as an example.

Imagine you want to buy this pair. You set up a stop loss and a take profit. Your stop loss is at the price of 1.18296 and your take profit is at 1.27011. Now you want to know how much volume you need to risk 1%. Many different websites calculate this, but the one I use (and will be using for this demonstration) is Myfxbook. This well-known site is used for various purposes, like calculating your risk, following your portfolio, and chatting with a huge community about your trade ideas. It is a website worth being explored.

Here is the link for the Position Size Calculator on MyfxBook: https://www.myfxbook.com/forex-calculators/position-size

 

You will find this page with all the boxes blank. Now let’s fill these boxes:

• Currency pair: Pair that you want to trade (in this case EUR/USD)
• Account Currency: Currency that you have in your account (in this case Euro)
• Account Size: Your account size (in this case 1000 euros)
• Risk Ratio%: How much you want to risk (in this case 1%) (Be careful, is in percentage)
• Stop-Loss, pips: How many pips your stop-loss has (in this case it has 61.2 Pips)
• Contract Size: What one lot corresponds to (in this case 1 lot corresponds to 100000)

Now you just need to press the button that says Calculate and you will get your results:

• Money, Eur: The capital you are risking (in this case 10 euros)
• Lots: The position size you will use to risk 1% (in this case 0.019)

Now you just go to your broker and introduce these values (Stop Loss, Take Profit, and Volume/Lots).

Attention!!: You should always try this first in a demo account to be certain that everything is correct, different leverages will have different results. Always try first in the demo account.

If you want to follow my trades and other information about the foreign exchange market: https://digitalmoneypt.com/