Maybe it’s all about the technical setups, unlocking macro insights, or setting up complex algorithms that find an edge. Still, when it comes down to it, the difference between short-term speculators and long-term gainers is much less alluring: risk management. In practice, those who churn out consistent profits typically share one key characteristic more than anything else, an uncanny talent for preserving capital before making money.

Risk management in trading serves two primary purposes: acting as broad protection and a guiding framework. It can stop devastating losses, keep performance relatively stable over time, and give traders the mental reassurance they need to run their strategy to fruition without worrying about losing everything.

Position sizing: The most important risk redeemer

The best risk management trick in the book is also the easiest to implement. And yet, many people ignore it in favor of flashier, more tactical moves. Position sizing is the art of never taking on a risk that’s too big to bear. Instead of slapping down huge bets on individual trades, successful traders commit to some small percentage of their account in exchange for a single position. In most cases, that percentage is 1%–3%.

This limits the downside for any single trade. This provides a sufficient runway so that a strategy can command authority over the largest possible trade size and play out over many iterations. However, more trades per system typically lead to more opportunities for the edge to balance out, yielding a predictable outcome relative to the percent profit over time.

Stop-loss discipline and trade execution plans

When used appropriately, stop-losses help maintain an environment of rational decision-making. They can cut out emotional exhaustion, prevent a string of losses from running wild, and ensure that the modeled thesis is properly executed. For discretionary traders, that means placing stops at technical levels that make sense. For algorithms, they act as a backstop and a minder in case data goes haywire.

Similarly, trade execution plans can help to ensure the structure of a trade stays in place. Before taking on risk via execution, seasoned traders should outline:

  • The reason for entry
  • Where the trade should be taken off
  • How much capital can be put at risk
  • Downside invalidation signals

By taking on new trades to fit that format, trading can jump from a complete grab-bag of speculation to an environment where risk is allocated on a risk-adjusted basis. Websites like https://www.trading.com are especially beneficial in such cases.

Also, diversification can help prevent system fragility

There are two sides to risk, especially for those who are new to trading. The first thing you have to manage is your own risk propensity. I’m guessing that you are more of a risk-taker than the average person, or you wouldn’t be interested in this blog or on this site.

Buying a currency is a risk

The second risk that you have to manage is associated with the actual transactions that you make in the forex market. And buying (or selling) a financial product is a risk; it’s not a certainty. If you do a search on the risks associated with trading forex, you will be bombarded with all kinds of risks, including interest rate risk, transaction risk, leverage risk, counterparty risk, liquidity risk, model risk, settlement risk, and execution risk, to name a few.

You can limit almost all of these risks when you have a solid trading plan. Trading.com has various trading tutorials to help you build a plan.

The tough part Of Trading

The bad news is that you can’t eliminate all risks associated with trading. Why is that? It’s because we can’t control everything that happens within the forex market. And unpredictability is what makes things really tough.

So the two ways that you can manage risk in your forex trades are to have a trading plan along with the risk controls that fit that plan. This would include the use of stops and possibly limits with every trade, adhering to the plan, and not revenge trading when the inevitable bad trade comes your way. This would also include good record keeping and making the learning process never-ending. You can use our article “Second to Die Policy” to help you expand on your plan.

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