Forex Trading Tips and Tricks - Risk Managment

(This is a mini-series of Forex Trading tips and tricks by Eric Lye in his Forex Trading Blog.  Our objective is to help traders learn how to trade Forex properly, be educated and excel in their career)

Risk management is a big topic and there are many ways traders manage their risks.  However, I would like to highlight an important mistake that many makes and share my own risk management.


There are many traders that would risk 5% of their equity for each trade and they claimed that they might have a trading system that yield a 60 to 80% win rate.  This is in reality not easy to achieve and in my opinion, not practical.  A consecutive of 5 losses would throw your mind out of control if you risk 5%, it's a good 20% draw down.

If you have been trading long enough, you would realize the average winning rate is about 50%, what makes this business work is the way we control the 50% losses.  i.e. if you could break even or take small losses and allow your winners to run at the appropriate moments, your P&L would look healthy and good.


For me, I would only put in around 1 to 1.5% for each trade, and increase the exposure but not exceeding 4% when the market has proved me right.  That is how I create my big winners.


And I would take small losses without hesitation when the market stall long enough and not giving enough evidence that my trade is going to go my way.


Like the old say "Let your winners run, and cut your losses small".  So, as a trader, you would need to ask yourself, how shall I do it.