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Wednesday, February 24, 2010

Manage Risk

Manage Your FOREX Risks to Maximize Profits

One tip for managing FOREX risks is to never add to a losing trade. If a trade has started moving against you, adding to your position on that trade will be extremely risky. The likelihood of it suddenly turning around and becoming profitable is very slim. If you are convinced there is potential for profit in the position, wait until it shows some profit before adding to it.

If you do wait until a position has shown a profit before adding to it, you will soon notice that nearly every losing trade ends up hitting your stop loss and does not change direction. Sometimes the trade does turn around before it hits your stop and becomes a winner. You can consider yourself very lucky if that happens.

But sometimes the trade hits your stop loss and then turns around and becomes a winner and you’ve guessed wrong. However, this is even more rare. But whatever happens, it is never worth adding to a losing position, hoping that it will eventually be a winner. The odds of success are just too low to risk more capital on top of your initial risk.

Another tip for managing FOREX risks is to never risk too much capital on a single trade. You can’t trade without capital, so if you lose all your capital you are out of the game indefinitely. In poker, they say that going all-in works every time but once. It is the same in trading. If you risk all of your account on every trade it only takes one loss to wipe you out. You will be out of the game at some point, it’s only a matter of when

In general, you should keep your FOREX risks to 1-3% of your available capital on any individual trade. This percentage is calculated using the size of the position, the difference between your entry price and your maximum stop price, and your amount of capital. All trades that you make should seem almost inconsequential to your capital. If you are worried about the size of a trade it is too big, and you should reduce your position immediately.