Truly Understanding and Applying Risk Controls in Forex
Here's the best piece of advice I could ever give an aspiring trader: In trading any kind of financial instrument, once you actually enter a trade you are now totally and 100% at the mercy of the market. You have no control over what price does next. You don't know what price is going to do next and anybody who tells you otherwise is kidding themselves and should be avoided at all costs.
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This is a very difficult but vitally necessary part of trading for people to understand and embrace in order to develop the correct mindset for consistently profitable results. If we accept that we can never know for sure what will happen after we get into a trade, you have to ask yourself what it is that causes traders to make mistakes like over-leveraging, averaging down, moving stops further away (thereby taking on even more risk), etc. Well, there are lots of reasons for this but basically it's to avoid a loss, otherwise knows as pain.
However, if we are willing to undergo a shift in our psychology, our attitude, our ego, and our need to be right, then we can begin to approach the market from a different perspective. Instead of the "right versus wrong" mentality, we can take on a mindset that says "I don't know what's going to happen next, but if it goes against me it's OK because I won't let it hurt me". And now it's a whole new ballgame.
This is a major step in the development of a successful trader, because it's a recognition and an admission that you cannot control the market but you can control your own inputs and how you will react to price movement and you do this through risk management.
When you start to truly limit risk when you're wrong and you are willing to let profits run to your targets when you're right and you employ proper trade management while you're in the trade, you are then aligning yourself with the will of the market and not the will of you. What you want to have happen doesn't matter. The market will do whatever it's going to do.
So the question is, "how much of our account should we risk on a trade?" Well, I'll tell you what I've learned from over 30 years of trading. If you don't keep risk super low, you won't last in the long run. I have never, ever, seen anyone who ignores prudent risk management go on to become a successful trader in the long term. Oh sure, they may get lucky for a time, but eventually their account will blow up. I was a futures broker for over 5 ½ years and I've coached well over a thousand aspiring traders, so I do know what I'm talking about here.
If you want a really good rule of thumb, don't risk more than 1% of your account on a trade - ever. Don't be "afraid" to risk even less than that, maybe ½%. And in case you're wondering, you can get exceptional returns even using such small risk. But that's another story.
If you're just starting out trading, in my humble opinion, this article is the best advice you'll ever get and it will instantly put you miles ahead of most other traders.
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