How to Manage Risk while Forex Trading

Risk Management: How to avoid losing your shirt while trading Forex.

Ask not for whom the margin calls.Have you ever seen things like these on a website or in a review?
“I followed those trading signals, and my account dropped 70% in 3 days.”
“I tried this method and got margin called in less than a week.”

Let me put this simply. It doesn’t matter if some trading method, trading room, signals service, or anything else has a perfect reviews and a 5 year history showing that it never had a single losing trade. It doesn’t matter if it’s endorsed by Felix, Crazy Cat, Sir Pipsalot, me, and the heads of the IMF, ECB, and the US Treasury. Not matter what “proof” is offered, no matter how well endorsed it is, no matter what the guarantee is, DO NOT EVER RISK TOO MUCH OF YOUR ACCOUNT ON ANY ONE TRADE.

No human, no computer, no “perfect” signals or other trading method can be right 100% of the time. It’s possible to backtest and optimize something so that it’s “perfect” with old data, but the forex market is an unpredictable beast. Good systems and signals can be right much of the time, but NOTHING will ever be right 100% of the time if you let it run long enough.

Risk Management is the concept of having a plan that sets a maximum amount of risk that you will place on any one trade. How much risk is “too much” risk is the subject of much debate. I’ve seen numbers ranging from 1/2% to 5%. Some of this will depend on the forward tested success rate of your system, and some will depend on what you consider to be an acceptable level of risk.

“But if I don’t risk much, I can’t make much.” is a common complaint against risk management. To some extent, this is true. On the other hand, if you have nothing in your forex account to trade with, you won’t make any money at all. If you risk too much and there’s a big gap in price (or your broker gives you too much slippage), you can not only lose all the money in your account, but you can possibly even end up OWING money to your broker.

Let’s say you have $10,000 in your account. Then you decide to risk $5000 for the chance to make $5000 (a 1:1 ratio). If the trade goes your way, you have $15,000. That’s great, but what if it goes the other way? Then you only have $5000. Now, you need to double your $5000 to get back to where you started. If you risk half your account again and the “99% accurate” system fails you again, then you only have $2500 left. Now you would have to quadruple your account to get back to where you started. Fail one more trade like this and you have only $1250 left. You would have to have more than 5 perfect trades gaining 50% each time to get back to where you started. After 3 losses in a row wiping out over 85% of your account, would you really want to trust this trading method to work 5 or 6 times in a row now?

Let’s say you feel like using the highest end of typical risk management recommendations and risk 5% of your $10,000 account on each trade. Once again, we’ll use a 1:1 ratio just to keep the math simple. This means you’ll risk $500 on the first trade while hoping to make $500. If the first trade goes bad, you have $9500 left. You would have to lose many trades in a row to lose half of your account, and far more to go all the way down to $1250. It is true that you won’t be able to make money as fast, but what good is making huge sums of cash if you can lose most or all of your hard earned profits from a single bad trade.

I would NEVER risk more than 1/2 percent of my account per trade on something I hadn’t personally forward tested on a live account for an extended period. If I have confidence in a system that I have tested live over time, I slowly and carefully scale up the size of each trade. I’m not going to say exactly what my personal maximum risk is, since I want you to select your own, not just copy what I do.

If you want to try something new, first try it with a demo account, but remember that demo accounts get filled quicker and have little or no slippage. A real account is much more likely to have slippage and requotes, thus cutting into potential profits. If demo testing looks good, then move it to your live account and trade the smallest amounts possible, just to see how the trading works with your broker.

The Daily Trading Signals here at the FPA are a good example of how different demo and live accounts can be. It’s not that hard to catch a news spike (or to straddle the price with pending orders) on a demo account. With a live account, even the best broker won’t fill every order perfectly if you try to catch the news spike. Some brokers even go so far as to prohibit news trading. This means that if you make a profit trying to catch a news spike, they will confiscate it. Somehow, they never will give you a refund if you lose money on a news trade. Since I’m primarily a technical trader, this isn’t a problem for me. If you really want to try to catch news spikes, Felix strongly recommends MB Trading. I haven’t tried them out for news trading, so I can’t give a personal opinion on this.

If you are using forex signals or some other system and you have successfully traded it for long enough to be comfortable with it, ask the signals (or other product’s) support staff what the maximum risk they recommend is. They should be more familiar with the product than anyone else. Just remember to start small on any new system and never to exceed your own personal maximum risk per trade no matter what anyone else says.

Although a historic record of pip gains for a signals service, trading room, or trading method is a good thing to consider, the actual results you get will always be a little different. See where I’ve been reporting the results of my tests of Intelli4x’s signals. At the moment due to pure dumb luck, I’ve actually been doing a little better in total pips on the trades I’ve taken than the “official” record for the signals I’ve taken from them. Sometimes I’ve entered a little better, sometimes I’ve missed a close signal and something went on and hit the take profit number. If my schedule had been a little different, this could just as easily gone the other way and cut into the results.

Setting your risk is easy with most brokers. You just need to set a stoploss on each trade. Remember that xxxUSD pairs are worth $10 per pip for a full lot, $1 per pip for a minilot, 10 cents per pip for a microlot, and 1 cent per pip for a nanolots. For other pairs, it’s a very good idea to check a pip value calculator. If you wanted to take a maximum risk of $100 on a trade, then you can only set the stoploss to a mere 10 pips if you plan to trade a full lot of a xxxUSD pair. On the other hand, you can trade 5 minilots and with a 20 pip stoploss or 1 minilot and use a 100 pip stoploss. Usually, the stoploss is determined by your trading method and then you need calculate the maximum lot size of the trade that you can risk. If the smallest amount your broker will let you trade would exceed your maximum risk, skip the trade (or find a broker that lets you trade smaller amounts).

Remember, some brokers are better at closing your order exactly where you set the stoploss. Others frequently have very bad slippage and will fill your order at a price that is worse for you. If your broker does this too often, reduce your total risk per trade to compensate for the potential slippage loss and look for a better broker.

If you plan to leave an order open after the New York trading session ends on Friday afternoon, be aware that there might be a gap in price when the Tokyo market opens (Sunday evening in New York). If price gaps across your stoploss, you could lose a lot more than you planned. Alternatively, some brokers won’t observe the stoploss under these circumstances and the price could continue to move against you even more. Until you have a solid understanding of market dynamics, your broker’s methods, and understand all of the risks involved, you might want to close all positions on Friday before the market shuts down for the weekend and then re-open them when the market opens on Sunday.

My personal advice for ANY trading method you are considering would be to start with a combination of backtesting as well as forward testing on a demo account. Don’t base your decision to go live on 1 or 2 trades. Remember, coin tosses are accurate 1/2 the time, and getting heads or tails 3 or even 4 times in a row isn’t that hard to do. Once you have enough data to feel confident, trade TINY amounts of money live to make sure that the method can work under real world market conditions with your broker. If it’s still profitable, scale up at a reasonable pace, but NEVER exceed the maximum amount of risk per trade that you set for yourself. Even the best system in the world will still have an occasional losing streak.

Always remember this. You can’t make your fortune if you lose most of your account on a few bad trades. To get rich trading forex, you must first learn not to go broke.

I can’t promise that following this advice will absolutely save you from losing all of your money, but at least you’ll lose it slowly enough that you’ll have a chance to improve your trading technique before blowing your account.

Author Profile

Pharaoh

Pharaoh is one of the FPA's oldest members (he claims to be about 4000 years old, but we think he's exaggerating a little). He says he created the world's first trading pair (Cow/Goat) while ruling ancient Egypt. Although there are no archeological or historical records to support this claim, we can't find anything to disprove it. Although he's not as active at the FPA as he used to be, he still holds the highest post count of all FPA members.

We don't understand how he does it, but Pharaoh has an uncanny ability to spot scams faster than anyone else we've seen. He claims to have known a number of companies were HYIP scams just by their domain names and that each time an examination of the website proved him right. He's also famous inside Forex Peace Army for warning about Ponzi schemes, even ones run by large and well established companies. He's been in a number of threads trying to warn people away from active Ponzi schemes. In spite of the efforts of shills and those gullible enough to believe in free money to discredit his words, he keeps up the warnings. In each case, the company ended up either disappearing with all client money or being shut down by the authorities.

In addition to investigating scams, Pharaoh has written a number of articles on a wide rage of trading topics, including forex broker selection, risk management, and how to select a good account manager. He's also covered other items of interest to traders, such as protecting wealth and purchasing precious metals.

Pharaoh claims to be a business consultant, but says he makes most of his income by running a globe-spanning hamster smuggling operation. If we are to believe him, he's currently working on a network of hamster tunnels under southern Europe.

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Comments

drj

15 years ago,

Registered user

Too true

Great post Pharoah. I hope the newbs (and the oldsters) take it to heart. I could sure be in a diffent position today if I had followed this a year ago.

Cyclon

15 years ago,

Registered user

great advice

That is some very good advice for the majority.
I understand where you are coming from.

And for anyone who is not aware of these tools, there are
excellent online calculators which will put hard numbers on
whatever your plan is for your next trade.
You'll go in with eyes wide open.

Cheers,
Cyclon

bygolly

15 years ago,

Registered user

Doing the Math on Risk

Limit your risk (this was attributed to a posting by the Elliott Wave group, however, I was not able to confirm)

If you risk 50% – you will wipe out as soon as you have 2 consecutive losing trades – 1 chance in 4

If you risk 25% – you will wipe out as soon as you have 4 consecutive losing trades – 1 chance in 16

If you risk 10% – you will wipe out as soon as you have 10 consecutive losing trades – 1 chance in 1024

If you risk 5% – you will wipe out as soon as you have 20 consecutive losing trades – 1 chance in 1,048,576 (about a million)

If you risk 2% – you will wipe out as soon as you have 50 consecutive losing trades – 1 chance in 1,125,899,906,842,620 or about a BILLION!

Somewhere between 2-5% is the maximum amount you can risk

The average bank trader or hedge fund only risks 1% to 1 ½ % of the account.

If you can’t be successful trading a micro account, don’t go up to a mini account. Don’t go up to a standard account if you can’t make a micro or mini account work.

Pharaoh

15 years ago,

Registered user

Good math for a 1:1 success/failure, risk/reward ratio, and were you lock the risk amount to the original account balance instead of current balance. What can kill people is that some of them can decide that the new system they've created or purchased is going to be right 90% of the time with a 1:1 risk/reward ratio or better. Some systems can achieve this for short times, but I've never heard of one that could sustain it.

> Limit your risk (this was attributed to a posting by the Elliott Wave group, however, I was not able to confirm)
If you risk 50% – you will wipe out as soon as you have 2 consecutive losing trades �..

Radoslav Radev

15 years ago,

Registered user

I agree with you theories about the 50-10% trades. When I started trading, a few years ago, on several occations I ended up in such a situation due to being unexperienced, but thanks to the good broker back then I was able to exit with very small loses.
BUT!!! Since then I've been using a much different way of trading that is still working perfectly fine.
If i use the same example of the 10,000$ i would do the fallowing. I'd say that i can manage to lose 500$, therefore i will play with 95% of my account. This way if the trade goes my way i will win much more, if it goes against me i will lose only 500$. This of course does not work with ALL the trades. The small ones are better to keep safe, but trades that are known to be good have a very low chance to go againt you 10 times in a roll and lose 50% of your account. The example in the text above is that with 4 trades you can end up with -85% of your account. Well when playing with 95% of your account you need 10 trades to go against you to lose 50% of the account and 1 trade to double or triple the account. And yes i have twice tripled accounts work perfectly fine for me.

Pharaoh

15 years ago,

Registered user

Some have complained that there are brokers offering "too much leverage".

If you follow my advice, it doesn't matter if your broker allows 1:1 or 500:1. Calculate the amount that a 1 pip move will cost you on a pair. Then, based on your stoploss, account size, and maximum percent of your cash you wish to risk, you can determine the maximum number of lits/minilots/microlots that you can trade.

100:1 and 200:1 are very common amounts of leverage for retail forex brokers. Just because your broker lets you control tens of millions of dollars doesn't mean you have to use all that leverage.

Leverage is a big sledgehammer. Swing it slowly and carefully or you'll hurt yourself.

Sir Pipsalot

15 years ago,

Registered user

Leverage can be a very powerful tool as it can allow you to work with a large chunk of cash without having to deposit it all into your brokerage account. If you had $100,000 USD to put into an account planning to max it out at 50-1 leverage... you could trade the same volumes and risks depositing $50,000 into a 100-1 leveraged account and keeping the other $50k in the bank. Or on the high extreme, do 400-1 leverage with $12,500 exposed in the account and $87,500 in the bank. The great thing about this last setup is you're limiting yourself to about a 12% maximum loss before you're forced to reconsider your strategy and refund the account. Also, if your broker (God forbids) goes under, you're not stuck with all of your capital lost.

Leverage is a powerful, but potentially deadly tool. If wielded improperly or with inexperience, I agree it does MUCH more harm than good. However, I would much prefer to have access to higher leverage to have the flexibility to set my own agenda.

JeffNLisa

15 years ago,

Registered user

The leverage offered by a broker is has NOTHING to do with a trader wiping himself out. NOTHING. It has EVERYTHING to do with a trader understanding what it means to risk 3% of his account. The math is not hard to do, and a trader who does not know how to do it has no business trading.

Aside from that, I know of no broker that does less than 100:1 leverage except that they have a minimum opening deposit of something like $50,000 or more.

For bucket shops anyway, it is in the broker's best interest to get people to use higher leverage, as high as possible, and persuade traders to max out that leverage for the very reason that it's a stupid thing to do. It's profitable to a bucket shop, BECAUSE it takes all the trader's money!

100 pips only wipes out their account if they put too much on the trade. How much the broker would ALLOW them to put is irrelevant.

A trader should take responsibility for understanding what he's are doing before putting his entire account on a trade with a 100 pip stop loss.

pcindia

15 years ago,

Registered user

hi
- banks use nothing more than 2% margin. If you apply for a job as a trader and state that you use 4% margin, expect outright rejection.

- 10% margin utilization can bring in a drawdown of 60% in no time.

- Keeping a diversified portfolio where you spread your money over different pairs, is advisable, even though you might find lesser enteries. Examining less traded pairs also is a good idea .

- If you can't set stop loss mathematically, then consider using it on time. Let's say, after 48 hrs. you will close , whatever the result be.

best regards

acongfx

15 years ago,

Registered user

Good article dude... very informative. remind me when i had a margin call for the 1st trade:p

forextips

15 years ago,

Registered user

Good Advice

Thank you pharaoh for this thought provoking and expository thread.

If I have had this few months ago, I wouldn't have lost my hard earned dollars. Anyway, it is a great lesson and i thank God for everyone that has contributed to these thread.

Newbies like me will find it very useful.

kcgeorge

15 years ago,

Registered user

reply to your advice pharaoh

That was a nice advice,and am going to work towards that 'cos before now i dont put much of that into consideration myself.
Thanks.

piphog

15 years ago,

Registered user

That's ridiculous, you wonder why 99% of retail forex traders fail? Because they use 100:1 leverage and think they are the **** because they can make a $100,000 trade with $1,000. You should not even be trading unless you have $10,000 and can open a mini-lot position without leverage, these brokers are making crazy bucks off of you people who try to make a living or start a living by trading on insane leverage. Anything more than 10:1 is incredibly irresponsible and you will never succeed at such degrees of leverage. If you are with a broker that does NOT allow you to adjust your leverage, you most certainly have a short future in forex trading, or a long future with a lot of lost money.

realsbd

15 years ago,

Registered user

this is a great idea for people that are eager to make money

i read this article[pharaoh] and i really appreciate it because this is the right message, i advise one of my friend about the eager of making money which prompt him to put all is money in a news like non farm payroll. i have recommend him to read this article because it is very good.

christoify

15 years ago,

Registered user

A very good lesson indeed.

I have learnt a very good lesson from this. when I started using my strategy little did I know that I could sustain series of losses one after the other but having seen that I'm not the only person that is or that passed through the same. but can any one over there suggest to me the best risk ratio or percentage for a mini account of 1000 dollar?

Pharaoh

15 years ago,

Registered user

> That's ridiculous, you wonder why 99% of retail forex traders fail? Because they use 100:1 leverage and think they are the **** because they can make a $100,000 trade with $1,000.

Leverage controls how much of a position you can open. If you open as much as leverage permits, you will fail. Doing a few simple calculations can save you from risking more than a few percent of your account no matter what the leverage is. The only ridiculous part is that many brokerages don't allow traders to set lower leverage as an added safety measure against moments of "irrational exuberance."

Think of risk management like observing the speed limit in your forex account. Some accounts can go 100 mph, others 200, 300, or even 400 mph. The problem is that you are driving through hairpin turns on a mountain. If you push it to the edge, you will crash and burn. If you follow your self-set, reasonable speed limit, you will scrape the edges now and then and maybe knock off your mirrors, but your car will get a lot farther while you learn to drive it.

If you really feel you can't control your urge to push the accelerator to the floor, then you probably should try to find a broker that will let you set a very low leverage. If you can control yourself and do some simple math, then it shouldn't matter how high the maximum leverage is.

I had my risk management rules worked out before I really started looking for a broker, so the leverage offered wasn't even a factor that I considered.

guapo

15 years ago,

Registered user

Hi,
useful article of course. My compliments for that.
But what lot of traders face is the fact not being able to say goodbye to a losing trade.
They start a trade not levering to much, probably just a minilot.
Trade goes against them and...oops let's get a second lot.
It goes further against them, probably also facing a good opportunity in another pair....and before they know, and could have imagined, MARGIN CALL...
My opinion, only use more leverage if the initial trade is with you.
Never ,ever try to catch the falling knife by doubling,tripling your loosing position.
There's no guarantee at all there will be a reverse after entering your second, third or even fourth lot.
Think of this, would you risk half your money playing a one-bet game at a roulette table in a casino ??
That's exactly what you're doing if you lever too much because of doubling or tripling your position while trying to average your initial entry.
Besides, there's no free lunch.
Therefor, do your exercises and practice to get your odds.

Good trading and may the profits be with you.

Regards Guapo.

Pharaoh

15 years ago,

Registered user

Guapo,

That's a very good point. Believe me, I've faced to temptation to add to a loosing position because I could get in at a "discount" price. I think my success record at trying to do that was about 1 in 5, so I gave up the practice.

I've also experienced the thought of "it's going to go 20 pips past my stoploss before reversing, so I'll move my stop 25 pips farther out." After throwing away my money a few times on this, I have a firm rule. I only move stoplosses in my favor, never against. The only time I violate this rule is if I temporarily bring in stoplosses before a news event, I think it's ok to return them to their previous position afterwards.

Justin Jay

14 years ago,

Registered user

What kind of an idiot would risk 50% of his account on ONE trade??

Pharaoh

14 years ago,

Registered user

I can think of several kinds of people who could lose 50% or more of an account on a single trade.

1. Someone who doesn't understand their broker platform and enters too large of a trade.

2. The same kind of person who bets his monthly mortgage on a hunch. Compulsive gamblers should not trade forex.

3. Someone who trades with no stoploss (not even an emergency stoploss). "Hey, the market never moves over 100 pips in 2 minutes when there's no news release scheduled, right?"

4. The new trader who has no clue about risk management and can only think about how much profit the trade will make, especially if he's just bought some over-hyped "no lose" system.

I'm sure there are more.

Millionaire

14 years ago,

Registered user

You know what Pharoah, today I closed my evaluation for the month of Oct and here what I found,
60% of my trades were WIN, 40% LOSSES. and my account dropped 20% down, how is that happend ! because of poor reward to risk ration.
I'll start up in Nov with a very restrict plan for 2% - 3% maximum loss per each trade, that's will quranty to me to live longer trading live until I become more experience.

Regards,

murpheytrader

14 years ago,

Registered user

restrict plans

hi guys. I’m no sure if a very restrict plan as you say, 2 or 3% maximum loss per trade gives you the time to win on this market. Usually, the spread is a parameter to choose your order for stop losing or winning. What if the trade at that moment lows just 2.5%, suddenly it starts going up? You may be losing the spread friend. You should take some more strategies or check the scripts given by your metatrade4 platform if is that which you are using, you know it?

Pharaoh

14 years ago,

Registered user

Murphy, you need to look at a couple of factors.

If you get stopped out all the time on trade that would have gone well with a larger stoploss, try reducing your trade size and increase the stoploss. This will keep your risk the same.

Another alternative is to see if there's a way to improve your entry point. If your trade system almost always seems to have you entering a good trade just before a price pullback, then don't enter with a market order. Instead, place a limit order so that you get a better entry price. Yes, you will miss some entries on good trades this way, but you'll be saving pips on the trades where your limit is hit.

murpheytrader

14 years ago,

Registered user

Usually, I decide my entry point using some indicators, stop loose I’m used to avoid but I stop the order by myself before leaving the market. I don’t leave orders long. What you mean is to use some scripts that I find in my platform to choose instantly the moment to enter and maybe to close? It means I should use the system to works by itself? Murphey

Pharaoh

14 years ago,

Registered user

If you are manually entering based on your indicators, but the market usually goes against your direction of entry before heading in the "right" direction, try using a limit order.

I'm not sure what indicators you use or what trading platform you have, but I'll try to give an example anyway. (Never let lack of information stand in the way of wild speculation - ha ha!)

Let's say that MurpheySystem1 is good for predicting a 50 pip moves, but that 6 times out of 10, there's a 25-35 pip pullback in price before it moves in the predicted direction.

If so, then use limit orders with entry set to 20 pips against the direction you are trading. If MurpheySystem1 says to go long with a 50 pip target, then place a buy limit order 20 pips below the current price. This will have 1 disadvantage and 3 advantages. The disadvantage is that price might only fall 19 pips (or not fall at all), then would zoom off to hit that +50 take profit level leaving you out of the trade. The advantages are that you should be able to set your stoploss closer (reducing your risk), that if things to work in your favor, you'll gain 70 pips instead of 50, and that pending orders are much less likely to encounter slippage.

murpheytrader

14 years ago,

Registered user

awesome advices! I’ll try to find out that system but I couldn’t. Anyway I’m not that sure of using the stop limit, it makes me lose some pips, maybe the spread. Sometimes it starts going up and I prefer to stop watching how many pips I could have won. I’d think about stop limits. Kevin

Janethjack

14 years ago,

Registered user

that is what we call a scalping strategy. when a trader doesn’t place tp and sl, he needs to be in the front of the pc screen. Leaving an order without it, is too risky in high volatile times as these

murpheytrader

14 years ago,

Registered user

I just read about expert advisors and I guess it would be really useful placing tp, sl and tools you use to trade. Check your platform and usually you get some trials or examples. Check how it works

Pharaoh

14 years ago,

Registered user

No matter what your trading method, always place a stoploss. Even if you are glued to your screen, there's always a chance that you could lose your connection.

If you are worried about your broker stop hunting, place an "emergency stoploss" 50 pips or so below where you plan to exit manually. At least this way you won't get wiped out if price goes badly against you when you have to step away from your computer for a few moments to clean up where one of your psychotic cats just barfed up her breakfast again.
:D

J.B. Blank

14 years ago,

Registered user

> Limit your risk (this was attributed to a posting by the Elliott Wave group, however, I was not able to confirm)

If you risk 2% – you will wipe out as soon as you have 50 consecutive losing trade..

Uh, that's a LOT more than 1 chance in a billion! :) That's slightly better than 1 chance in a quadrillion. :)

moonstar

14 years ago,

Registered user

$25 -> $$$$$$$

So, I have a pip dream. (har har)

I want to make money on forex and start with a deposit of $25. Now I know, the road may be slow, but with $25, I can afford to start the road a few times and learn a few things along the way. (and yes, I can see you rolling your eyes)

Thanks Pharaoh for the great rundown on risk and money management, which put together a lot of things I had read into one coherent piece.

Anyway, I liked how Pharaoh translated it back into cash in margin account. That helped a lot to clarify things.

Now I'm looking at brokers where can I trade nanolots. And using a broker that supports MT or some programming API.

From my current poking around, it seems a stop loss of 25 is somewhat reasonable. Presuming $0.01 a pip, this is a $0.25 risk, or 1%. So, I *need* to trade nanolots, or else I am gambling. (and yes, I do know that with, say, a 10% monthly return, it will be 2 years before I make $250 and can trade bigger lots with less risk - but perhaps it takes that long to learn?)

Or is micro the only thing on offer? Meaning a $2.50 risk, or 10%. In this case, I would be wise to save up 10 $25s and deposit $250, thus keeping my risk at 1% of my account.

Or do I let caution fly, and let margin call by my risk management on a $25 account? (ie, keep $250 margin in a regular bank account) I'm guessing this is a bad idea because brokers love to grab your money on margin call and it is more brutal than pip drop (you just have to fall below the minimum margin % requirement).

Any ideas/opinions/pointers greatly appreciated!

elah024

14 years ago,

Registered user

hi there!

your advices in most of your posts are really great and helpful. I'm sure we can gain a lot of tips from it. thanks for that!

elah024

14 years ago,

Registered user

> I can think of several kinds of people who could lose 50% or more of an account on a single trade.

1. Someone who doesn't understand their broker platform and enters too large of a trade.

2. T..

i totally agree with that!

elah024

13 years ago,

Registered user

just don't lose more than what you risk!

salvador_

13 years ago,

Registered user

> That's ridiculous, you wonder why 99% of retail forex traders fail? Because they use 100:1 leverage and think they are the **** because they can make a $100,000 trade with $1,000. You should not even ..

lol it's not the broker that has to adjust leverage. The leverage is there... it's up to you if you want to use it or not.

Do you want a more transparent market than futures? They have leverages of 50:1 in some cases, but most is 25:1 ... anyways it's up to you if you use leverage or not. You can be at a 500:1 leverage house, but in a trade you can calculate to not even using leverage...

if you have a 50,000 account and put up as margin 50 USD, it's impossible for you to wipeout, since you're only exposed to 25,000 which is 50% of your account.

The danger in high leverage is that newbies don't know how to handle them or fall prey to greed and leverage themselves way up thinking of hitting a homerun

salvador_

13 years ago,

Registered user

> Limit your risk (this was attributed to a posting by the Elliott Wave group, however, I was not able to confirm)

If you risk 50% – you will wipe out as soon as you have 2 consecutive losing trade..

hmm most those figures are incorrect...

risk of ruin is given by ---> ((1 - Edge)/(1 + Edge)) ^ CapitalUnits a risk of 10 straight losses is actually way higher than 1 in 1024

anyways even the risk %'s you gave and the times you had to lose in order to go bust are incorrect...

a 10% risk won't wipe me out in 10 times, but a 10% risk 10 times straight is a drawdown of 65%

a 5% risk 20 times is a drawdown of 64%

a 2% risk over 50 times in a row is a drawdown of 62%.

This is because these are anti-martingale strategies. What you describred is if you base the risk % as equal to when you started with your initial capital, that makes no sense...

a 100,000 acount risks 2% so it's a 2,000 USD risk. if he has now 60,000 USD should he risk 2% of 100,000 USD of course not, he doesn't have 100,000 USD but 60,000 USD so he should trade accordingly.

In fact, it's impossible to reach 0 dollars in the account with these strategies. Mathematically impossible becase even 1 USD is easily divisible for 2% risk... and the same for a 0.10 USD.

A simple calculation if you risk 2% equity account even if you lose 100 times in a row, you'd still have 14% of your original account... sure in practical terms this to me is a wipeout :D

Pharaoh

13 years ago,

Registered user

Bygolly's math was done using fixed percentages of initial capital to simplify the math. Not everyone adjusts the actual amount of cash risked after each trade.

So, if you risk 50% and don't adjust positions size after the first loss, the second in a row loss wipes you out (100-50=50, 50-50=0). If you do adjust position size after the first loss, then the second loss leaves you with 25% of your original account size (100-50=50, 50-25=25).

We should ask the forum admins to build in spreadsheet ability to this thread. :D

Moonstar, I suggest opening a $25 account with a broker that accepts nanolots to get practice dealing with a live account. At the same time, start saving up more money. When your savings gets to $250-500 range, you can consider brokers with microlots.

elah024

13 years ago,

Registered user

oh math. i wish I'm good at it.:(

jhnsmith978

13 years ago,

Registered user

Risk Management:
How to avoid losing your shirt while trading forex.

Ask not for whom the margin calls.

Nice post man..I will surely gonna keep it in ma mind...
Thanks...

branmanfxtrader

13 years ago,

Registered user

Risk Management

Thank you for the post Pharoah,
I personally never risk more than 1 - 2% on any 1 trade. I wasn't always like that, when I first started off I just didn't set stops or use any risk management at all!!!. But after you blow up 3 accounts and you see the potential of what the FX market can do then you start to seek out good advise like the one given in your post.

If you stick to this one rule and work your system, you have a high probability of success. Always use your 3-4 reasons of why you are getting in the trade in the first place. For instance, what is the market flow, did you do your top down analysis ( don't dare spend all of your time on the lower time frames), where are the pivots for the day, where are the fib levels, what is the MACD doing at the time, where is the next level or previous support and resistance. You have a better chance of at least 3 or 4 of these reasons matching up and never risking more than 1-2% of what is in your account at the current time of trading. That means 1-2% on any one single trade as well. You will have more staying power and live another day to trade and if you loose on the trade, of which most likely you will sometimes, you can reevaluate your position and your analysis.

branmanfxtrader

VG5157

13 years ago,

Registered user

10% of the account is my cap

after i decide to follow your recomendations ,also i expose 10% in every order,so far, taken the last 14 orders ,my % of success has been 78% ,how about that ?....love you FPA brains !!

Pharaoh

13 years ago,

Registered user

I'm glad this is working for you, but even 10% is a little heavy in my opinion. If you do risk this much, make sure to withdraw some profits frequently. That way, if you hit 7 or 8 losers in a row (no matter how good the system, it's very likely going to happen sooner or later), you won't lose the bulk of your money.

cowmadagan

13 years ago,

Registered user

moonstar, if you're still with it..I mean us...Your arithmetic is dead on, and I fully recommend going for nanolots.

As for branman, your advice for finding three or four reasons before entering a trade is excellent.
One point I've found the hard way is that if you take the probabilities on their own, and the risk to yield ratio at the same time (risk, say ½ to one third of your anticipated profit as your stop loss and erm...your anticipated profit where you..um...anticipate it..um..hitting) the more often you make a bet, the more often you'll make money.

The fact is, trends do account for something, and that's why it's better to say that risk management and planned trades and knowledge from research (technicals and fundamentals) are the only way that the probabilities work out.
If you only rely on probability (which is only supposed to show itself to be indubitable when tested a huge number of times, like ten thousand, or hundreds of thousands, or more), it's quite similar to superstition.

Ahmed H

13 years ago,

Registered user

Thanks

Thanks Pharaoh that was helpful, specially for a newbie like me.. i just wish i would have read this 2 weeks ago..

ThePipBlader

13 years ago,

Registered user

Hey Pharaoh and all experienced trader on this forum,

Thank you very much for providing what according to my research is one of the only available reliable information forum on the web.

I am a scholar of mathematics and science, and until recently, was not exposed to the world of technical trading. I've previously been successful financially at other ventures and really appreciate the fact that most of you are giving honest answers with whatever degree of information you want to reveal.

Thanks again for the awesome advice pharaoh, i will use this gift responsibly :)

Soji4x

12 years ago,

Registered user

Wow... thanks for sharing this... i am already wondering how NOT to loose my shirt.

jacks

12 years ago,

Registered user

Risk management for each trader will be different because target of each trader and psychology conditoin of each trader will be different too. To manage our risk, it will depend on lot size that you used and also target point and loss tolerance in each condition. It will be different in different condition of market.

Giuliano

11 years ago,

Registered user

Forex wasn't invented to make you rich, but it can be employed in order to increase your capital faster than other investiments, if you're willing to take more risks and become a good trader.

Anyway, I have the opinion that a person can only risk what he can lose without affecting his health.

David Stelpman

11 years ago,

Registered user

Thanks for the info. I'm glad that I've read it before actually start trading "hard", but based on previous experience common sense, helpful advice and the will to win don't mix very well ...

Huge green point for branmanfxtrader also. :)

TradingTedi

11 years ago,

Registered user

Thank you all for the valuable information. I am still new to this and have been using a demo account to learn more. I have noticed that in this thread there is alot of talk about NANO lots. Who would anyone recommend, that does NANO lots, to get started with? I don't want to be like alot of traders and start out huge and loose my investment.

Pharaoh

11 years ago,

Registered user

Go ahead and reread my article on selecting a broker - there is no one perfect broker for everyone. There are also "cent accounts" at some brokers that let each penny in your account pretend to be a dollar. That allows you to trade live with very little risk.

There's also a thread for good broker experiences in the Company Comparisons and Competition folder.

bhops

11 years ago,

Registered user

Hi Pharaoh,

I must admit I haven't read all of the reply's to this thread but I read the 1st page and I couldn't agree more. Myself I am a Price Action fan and spot plenty of good/great set-ups but if I didn't have my money management side right and didn't know how to correctly position size I would be toast. It is the 'unsexy' side of trading that no-one wants to talk about in their flashy Forex courses but at the end of the day MM is at the heart of what will make you successful or unsuccessful in trading.

fxkaldi

11 years ago,

Registered user

A very important lesson but overlooked by so many beginners!
Being greedy can finish you quickly in Forex.

F0r3x123

11 years ago,

Registered user

Hi,
Thank you for sharing with us this great post!

F0r3x123

11 years ago,

Registered user

One simple rule is: "Plan the trade and trade the plan".

Do not get too excited when taking some money from market... this is the first step to try to get more money and change the rules of your trading system.

Pharaoh

11 years ago,

Registered user

One simple rule is: "Plan the trade and trade the plan".

I always went with "Don't Panic!" as the first rule. :p

Having a reasonable risk management plan makes not panicking much easier.

Joh

11 years ago,

Registered user

Thks Pharaoh -spot on!

duderex

11 years ago,

Registered user

to me, greed is a killer, and the risk management is the key to having better chances of success in Forex

navyseal

10 years ago,

Registered user

I have lost 2 accounts because the greeding. When I take profit a lot, I tried to trade with hight volume and I thought I had never lost but I got it in one trade and it burned my account with about 100 pips reverse.

So please think you can get lost everytrade and don't be greed or overloading.

Whitesnake

10 years ago,

Registered user

Irrespective of our speculation skills it is always very much good for the traders to manage their trading risk efficiently by implementing suitable money management policies such as stop loss or hedging so that they do not risk the entire money in their trading account.

pcbg007

10 years ago,

Registered user

> Limit your risk (this was attributed to a posting by the Elliott Wave group, however, I was not able to confirm)

If you risk 50% – you will wipe out as soon as you have 2 consecutive losing trade..

But this chance computation can only be true if every factor that's causing price movement is fair and not weighted(not manipulated).

Unfortunately, even the '1 chance in 1,048,576 to lose 20 consecutive trades' is happening to traders having accounts with some unscrupulous brokers using VDP and its equivalent.

Pharaoh

10 years ago,

Registered user

Those stats also assume a 50/50 chance of winning/losing each trade. That's a big assumption.

Also, even at 50/50, blowing out 25-50% of your account is enough to make many traders increase their risks in order to recoup their losses. Then the risk goes up and the success rate usually plummets.

Gennietrader

10 years ago,

Registered user

> That is some very good advice for the majority.
I understand where you are coming from.

And for anyone who is not aware of these tools, there are
excellent online calculators which will put hard numb..

Wow, I didn't know they have these kind of calculator out there!
Thanks for sharing though!

CahCuncun

9 years ago,

Registered user

An old article but very useful.
Thank you :)

Kristjan

9 years ago,

Registered user

As far as risk management is concerned, I use a Forex Risk Calculator before I start to trade. I also make use of the hard stop functions. Is there something else I should be doing?

Pharaoh

9 years ago,

Registered user

Kristjan, as long as your stops are keeping the risk % very low, you've got the most critical parts covered.

A couple of other things you can do to further protect yourself are:

1. Close trades based on technicals a couple of hours before major news events like NFP. If price moves too fast, your stops could experience significant slippage. You can always reopen the trades after the dust settles.

2. Close open trades before the weekend. Stops won't protect you if there is a big gap in the price when the market reopens.

John Sachman

9 years ago,

Registered user

Eye-opener! Thanks

Xandra123

9 years ago,

Registered user

Great thread. I learned a lot reading the posts. Thanks everyone.

ramizjilani

8 years ago,

Registered user

This one is really a great post. Thank you Pharoah for sharing the information.

Peter Neymovic

8 years ago,

Registered user

I read an article and try not to avoid this advice... Never risk more than 2% per trade. This is the most common - and yet also the most violated - rule in trading and goes a long way toward explaining why most traders lose money. Trading books are littered with stories of traders losing one, two, even five years' worth of profits in a single trade gone terribly wrong. This is the primary reason why the 2% stop-loss rule can never be violated.

NicholasM

8 years ago,

Registered user

> Kristjan, as long as your stops are keeping the risk % very low, you've got the most critical parts covered.

A couple of other things you can do to further protect yourself are:

1. Close trades..

Very useful information there on risk management. Stops are not immune to price gaps, which means if there is a price gap in the wrong direction, then you will definitely get burned. I got hit once and I have since employed this strategy of staying out before potential major price swings. It is unfortunate that the stop loss would be activated at the nearest price to the stop loss placed when opening the trade in the case of a price gap, so the bigger the gap the bigger the loss. Therefore, unless I am almost certain of the potential direction of the price after a major price swinging event, then I would rather stay out completely. Once again thank you Pharaoh for your insightful info.

orni308

8 years ago,

Registered user

> I read an article and try not to avoid this advice... Never risk more than 2% per trade. This is the most common - and yet also the most violated - rule in trading and goes a long way toward explainin..

Yes there are many resources where its has said how much to be risked, but in my view, there is a risk in trading and we tend to take risk accordingly, as per the requirement of that situation.

Whitesnake

8 years ago,

Registered user

> Yes there are many resources where its has said how much to be risked, but in my view, there is a risk in trading and we tend to take risk accordingly, as per the requirement of that situation.

It is a true fact that only ideal risk management can take up the trader to next level of profitability, its not the ideal trading system or magic pill which will give us profits. But its only the risk management in the forex trading business which can prove successful for the traders.

EURUSD

7 years ago,

Registered user

How to manage the risk while trading I think we need always consider with money management and risk management, if only use small capital hence we need use smallest lot size and keep strict use stop loss according our analysis, safe trade use low risk more enjoy than greedy.

zeaus

6 years ago,

Registered user

for managing risk you should strictly follow money management always use stop loss

OlaviFX

6 years ago,

Registered user

Oh man, i wish i found this thread 2 years ago :) Thanks for sharing all the experience you accumulated

alaska27

5 years ago,

Registered user

OlaviFX, I'm also sorry that I didn't find this article many years ago, when I just started doing forex and was a complete newbie. Nevertheless now I have my own priceless experience=)

Rizog

5 years ago,

Registered user

Risk management nicely explained..! Don’t get tempted by the trading signals and feel as if you are trading to lose. And you definitely won’t want to lose it all in just a few trades. They said, “Love me little. Love me long”. So, if you trade little, you can trade long..!