RISK MANAGEMENT
Why is it important?

Forex is a Business of making money and in order to make money we have to
learn how to manage risk (Potential losses).

When you trade without risk management, you are in fact gambling (you are
not looking for long term results).

Drawdowns or losses are part of trading, the key to being a successful trader
is coming up with a trading plan that enables you to withstand large losses
and be able to keep growing your account.

Your focus must be on how much do you get when you are right and how
much do you lose when you are wrong, in other words you must know how to
determine your Risk vs Reward, which will be explained as you read through
the book …
Use small positions (small Lot size)

The reason why you should risk a small percentage of your account in each
trade is so that you can survive your losing streak (risk 1% - 2% of your
account but not a tight Stop loss).

Most beginners will increase their lot size of their positions as soon as they
are making profits. Do not become over-confident just because you’ve made a
few winning trades, doesn’t mean that the next one is going to be profitable,
so in other words keep your lot size small all the time atleast use 0.01 to 0.10
but only use 0.10 when you see a high probability setup.

Trade smaller, keep reducing risk to your comfort level, and slowly work your
way up.
How to set a stop loss

Your stop loss should be the INVALIDATION POINT (Stop loss) of your
trading setups, when price hits your stop loss it should mean your analysis is
incorrect.

You should always set your stop loss according to the environment or your
trading plans (setups) and not how much you willing to lose, you should
decide where to place your stop loss first before calculating your account size
(avoid tight stop losses I repeat) ….
Types of Stop losses

Volatility stop

Percentage stop

Chart stop

Time stop

But we only use one type of stop loss which is a Chart stop loss.
How to use a Chart Stop

When you using it, you place your stop loss above your Resistance level
when you Sell and below your Support level when you Buy (e.g. when going
for short (sell) you can find out where the resistance level above your entry is
and put your stop loss around there. Illustrations of how to use chart stop
will be explained in the video clip…
Understanding leverage

The forex market is a leveraged market, because of its liquidity.

Leverage means that you can invest more money than initial deposit, when
you leverage, your profits can be magnified quickly, but remember that it’s
same applies to your losses. This is why you need to understand how
leverage and margin trading work, as well as how they impact your overall
performance and trading.

Forex traders are often tempted to use high leverage to make significant
profits, but if you’re over-leveraged one quick change in the market could
easily wipe you out.

The ideal leverage ratio is determined by a number of factors: your risk-pertrade, your typical stop-loss distance, and your trading account size.
MONEY MAGEMENT
Introduction

When trading forex, getting the right direction of the trade is only one side of
the coin. Money management is on the other side, even the best traders and
the most profitable strategies won’t do much if you don’t have strict money
management rules in place to protect your winning trades, cut your losses and
grow your account.

One of the wealthiest traders in the world like ‘George Soros, Ed Seykota,
Michael Marcus” etc. apply strict money management rules and ‘Geoge soros’
is also known as the Man who left the bank of England vulnerable.
What is money management?

Money management refers to the set of rules that help you maximise your
profits and minimise your losses and grow your trading account.

Without proper money management rules, you can’t become a profitable
trader.
No money management = No money

E.g. let’s take two traders, the first one has the best trading strategy that is
profitable 90% of the time, but doesn’t manage risk at all and the second
trader has an average trading strategy that is profitable 50% of the time, but
utilises proper money management rules, the second trader will be the most
profitable trader, because the first trader might easily blow his/her trading
account with only a single losing trade.
Money management rules
 1.Cut your losses short & let the profits run

This refers to a straight forward principle when a trade is losing close the
trade before the losses accumulate, and when a trade is performing good,
leave the trade open and put a stop loss above your entry and let it hit your
take profit.

Inexperienced traders do it the other way around, they leave trades open in
the hope that they will eventually reverse, and they close a profitable trade too
soon on fears that the trade will turn against them & become a losing one.
Fear & greed are one of the most disasters emotions in trading, & you need to
learn how to control them early in your trading career. The most profitable
traders do it the professional way ……. Illustration of cutting losses will be
fully explained in the video clip …
 2.Don’t chase the market

New traders in the forex market usually chase the market for trading
opportunities & trade even low probability setups, ultimately ending up with
many losses. Excited by the market & their first trading account, Beginners
will open multiple trades in a single hour, hoping for a great profit by the
end of the day, but end up blowing the entire capital, unfortunately his
resembles more of a gambler than a trader.

The market doesn’t owe you anything, with experience, you will learn that
patience is key psychological trial that you a great trader, you do not have
to open new trades every hour, or even everyday if there are no trading
opportunities, I step aside and let the market come to me in the next few
days when a high probability setup arises.
 3.Risk per trade (risk management)

Risk per trade refers to the maximum amount of risk you’re taking per
trade, Risk per trade is usually determined on the percentage of trading
account size.

Let’s say that you have $10,000 account, you open a trade with a potential
loss of $2000 as the maximum loss if your trades hit your stop loss, then
that means your risk per trade would be equal to 20%. This example
shows you how not to trade, that is the bad way of trading, you should
never risk 20% of your account especially if it’s that big. Taking a 20% risk
per trade is a way too much risk, as a strike of 5 losing trades would wipe
out your entire account, even 2 losing trades will leave you with 60% of
your initial account size & guess what, it takes much more than 40% to
return to your initial account size of $10,000

The golden rule is to have a risk per trade not larger than 2% - 3% of your
trading account size, & also not 1% because that is too low of risk and is
too tight, you must let the market breath, hence it likes to form stop hunts
before it go to your anticipation.
Conclusion

Review your trades on a regular basis with a trading journal (or take
screenshots) that will help you understand what you did right and what you
can improve.

Learn from your mistakes, and accept responsibility of your losses.

Regardless of the timeframes you use, always follow your trading plan, control
your emotions and be patient enough to wait for your trading seups to be
confirmed before opening/closing a position/trade.
Author: Mxhamli Yamkela (Ceo at Forex Babiez)
For inquiries Contact: 0744899404
E-mail address: Forexbabiez@gmail.com