Managing Trading Risk

Forex Trading Risk | Vantage FX Education

Importance of Risk Management

The ability to manage risk is ultimately what separates Forex traders. Those with poor risk management may have bouts of success here and there – however, this is not a viable long-term success plan.

Risk management is that understanding that your trading account should be treated like an investment. It is more so like a business rather than a casino game. The sudden or large loss of money is a very real occurrence. Risk management is essential.

What Is Risk Management?

Risk management is simply the understanding and balancing of potentially profitable risk against those that are not. Without taking on risk, one’s potential earnings will be miniscule. However, taking on too much could potentially deplete one’s entire funds. Subsequently, risk management is about limiting one’s risk exposure.

What can you do to manage risk?

There are several tools, approaches or processes that can help you manage your risk exposure. Some of these need to be done prior to starting trading and some whence orders are made.
The below are some steps you can take to manage your risk levels.

Step 1: Determine your level of trading risk

When trading, it is very easy to be distracted and driven simply by the potential gains alone. Traders need to be able to also look at the potential losses that could take place in their trading. A simple way to determine ideal levels of risk is by using a Risk: Reward Ratio.

What is a Risk: Reward Ratio
The Risk: Reward Ratio is used to compare expected returns on an investment against the amount of potential loss on those returns. It is calculated by dividing the amount of profit expected when the position closes (reward) by the amount the trader stands to lose if the price moves in an unexpected direction (risk).

What is a good risk-reward ratio?

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