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Forex Trading Risk – How to Think About Money - TradeLikeAnExpert

Forex Trading Risk – How to Think About Money

Forex Trading Risk – How to Think About Money

I'm sure by now that you've all heard the statement in relation to Forex trading risk: 'Only trade with the funds that you can afford to lose.'

I can tell you the first time I heard that statement. It was like my inner self said 'Yep, sure thing boss. No problem, only trade what you can afford to lose.' Hence I placed absolutely no thought to Forex trading risk.

Managing Forex trading risk makes perfect sense right? But the funny thing is, I immediately forgot that lesson the moment I started trading.

It is vital to pay attention to this as part of a traders education. Read on to understand why, and how you can avoid this especially relevant Forex trading risk mistake.

Forex Trading Risk

forex trading risk

When you begin trading start with a demo/practice account. It costs absolutely nothing. You can make as many mistakes as you like, and they cost you nothing either! Only once you have become comfortable with the platform and are confident enough to risk a small amount of money should you open a live account. 90% of traders never make a profit. Start smart, minimise Forex trading risk, get ahead of the game.

Paul Rosanoski 

Founder - TradeLikeAnExpert

There is something strange that happens when you start trading live money in the markets, no matter what the market is.

I've talked to many traders about Forex trading risk and the greater majority of them agree that this phenomena is a 'money disconnect'.

It boils down to the fact that when many of us trade, we don't see the physical stacks of money changing hands.

We only bars or lines on a chart and a readout much like an ATM.

Before You Begin Trading

Because we are not conditioned to think of the price movements as actual dollar bills and this presents a real hazard.

When you begin trading, you should always start with a demo account. Please, please...start with a demo account.

This will give you the opportunity to learn the art of Forex trading without the risk of losing money in the process.

You can practice and make mistakes as much as you like, completely nullifying Forex trading risk.

In addition, as you learn more about how to trade Forex, you can use a demo account to test different trading systems.

Let's face it, having a profitable trading system is essential in both managing risk in Forex trading and making money. Being able to test a variety of trading systems without the risk of losing money is very beneficial.

Test, Test and Test Some More

forex trading risk

There are two main ways to test your strategies.

Back testing (using historic data to test the profitability of your system).

And forward testing (testing live trades in the market).

There are many schools of thought on the inherent advantages and disadvantages of both. Suffice to say if your system proves profitable on neither, it may be time to test something else.

I tend to prefer forward testing. I believe it's more accurate testing against actual live data than historic data.

Testing against historic data can lead to curve fitting (where you discount some of the trades taken and attempt to make the system more profitable by fine tuning against the historic trades).

Besides ​the fact that past results are not a guarantee of future profits and there really is nothing as informative as live data.

Just bear in mind that you may need to test your system for a decent amount of time before drawing any real conclusions. This could be a matter of months or a few hundred/thousands of trades.

The more you test, the more confident you can be in the results and potential robustness of your system.​

So You've Made Monopoly Money?

forex trading risk

Should you have some success, perhaps you will move to a 'real money' account (hopefully a small account - read the upcoming post on account sizing to gain more insight).

Now, you have made the literal change from 'playing with fake money' to 'trading in the real world with hard-earned cash'.

Problem is, because you are not physically handing out or receiving dollar bills, you may miss the huge leap you have made into trading actual dollars.

Listen - no matter what anyone tells you - this is real money.

Hard earned, likely traded for many, many hours of effort.

Money that should under no circumstances be thrown away at the next great thing that is going to make you a fortune.

There are way too many of those 'sure-thing' opportunities in the Forex market. Ensure your money is not thrown away on them!

Throwing Money Away!?

forex trading risk

Now, I'm not saying that the answer to this issue is to stack a bunch of money on your trading desk and move it around as you win and lose trades.

But what I am saying is that you need to keep the real world connect between cash and your trading account.

Ask yourself - would you repeatedly throw $20 or $200 or $2000 out of your window in a moving vehicle? Time after time after time without consideration?

No!

Because you don't want to lose it all!

Personally - the way that I focus on the fact my trading account is 'real money' is by ensuring that I am always acutely aware of the balance of my account.

I also take regular withdrawals from my trading account and place those withdrawals into a trading 'savings account'. If I need to top my trading account up I do so from this 'savings' account.

I am simply not depositing and withdrawing from a large or unlimited pool of funds I have no logical connection to.

And therein lies the danger of the cash-disconnect.

When you deposit a sum of money to your trading account and (especially as you are starting out) lose funds from trading, the tendency to just deposit more funds is a real hazard. Let me give you an example from early on in my career.

Luck...and Losing It All

forex trading risk

When I first started trading, I was exceedingly lucky. I managed to win two or three trades in a row in a 'real money' account.

That was the worst thing that could happen as part of managing Forex trading risk. This was in no way a good new traders education.

All of a sudden my confidence sky rocketed. I felt a literal sense of invulnerability coursing through my veins, so I took more trades.

Only now, those trades lost - and because I am not 'connected' to the real cash in my trading account, I deposit more funds. The cycle then viciously repeats itself until your account is blown.

Always remember - your trading account is real $50 and $100 bills - not play money! Managing forex trading risk is a vital part of a traders education. It is truly a lifelong process.

Managing Risk The Smart Way

forex trading risk

Managing Forex trading risk can be a taxing issue for many traders. The hassles of manual risk calculation for your trades, taking into account your entry, stop loss and profit targets.

Most new traders (and many experienced traders) trade Forex using MetaTrader 4 (commonly referred to as MT4). Whilst MT4 does a great job of making it easy to analyse charts and place trades, there is no way to actually calculate risk on the fly.

Fortunately in the Forex market there is an easier way to place and manage trades. I personally use this platform and place all of my Forex trades with it. FX Synergy.

Software To Manage Your Risk

FX Synergy will directly link to your broker account (and it does not matter if the account is demo or a live account). One of the key features is the ability to set a risk percentage for your trade prior to entry. You can then set your entry, stop loss and take profit parameters and FX Synergy will ensure that the correct lot size is taken on the trade based on your risk percentage.

This is an incredible time saver, and means goodbye to manual calculation. FX Synergy does not stop there however, with many more features designed to ensure the safe and easy management of trades on up to 20 connected broker accounts.

I highly recommend this platform to anyone looking for an easy and effective way to take care of Forex trading risk.

How To Think About Money

forex trading risk

I can't stress enough the need to start Forex trading on a demo account.

I really wished I had someone who could have told me how important it was to just start practicing. Make loads of mistakes. Blow lots of trades. Win a few. Get experience. AT NO COST!

I blew a lot of cash because I was too eager to get right at it. I thought I could do this with relatively little experience. After all, I had made some winning trades and this seemed easy.

Boy...was I ever wrong!

Trading is not easy. Trading takes a lot of practice. Forex trading risk is such a critical part of the journey to what you will one day become as a profitable trader. It is one of the absolutely essential ingredients to becoming profitable.

Take your time to learn the art of trading. You will need to discover who you are as a trader. What your preferences are in terms of the types of trades and the time frames that you take them on (second, minute, hour, day, week or month). Scalper, swing or position trader?

How can you answer any of these questions until you have practiced and discovered for yourself what your preferences are.

I wish you all the absolute best. This journey can be a very pleasurable one. One that can bring you the essence of time freedom and money.

But you must exercise patience. Practice. Lose lots of free demo money. Risk little. Crawl first.

Then and only then should you risk a small amount of money. Things will change as the emotions come into play. But if you stick to your rules and manage your Forex trading risk, you will be one step ahead of the rest.

To everyone's trading success.

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Paul Rosanoski

About the Author

I've spent literally thousands of dollars on courses, tools, robots, expert advisors mentors and anything else that I thought might give me an advantage in the financial markets. I lost a whole lot of money because I was overconfident and thought I'd mastered trading when I simply hadn't. I write in the hopes that I might help others avoid the same pitfalls I and some of my trading buddies fell into.

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