Simply put Risk Management in ForEx trading is knowing how much money you can lose with each trade. Your capital represent your most important asset which you need to protect. Keeping amount you are willing to risk in each trade at minimum will keep your cool and you will not get involved emotionally with the trade. If you have opened multiple positions you should spread your risk among them.
Importance of Risk Management in Fx Trading
First, lets make something clear. No ForEx trading strategy will work (be successful) in 100% of the cases. For example, let us assume your trading strategy is successful 80% of the times. In theory this means that for every 4 successful trades you will have 1 unsuccessful trade. In theory. In practice things are not that clear. Instead of 4 successful and 1 unsuccessful trade you might have a losing streak. You need to calculate your losses.
For example, you have $1000 account balance and you are risking 6% of your balance with every trade. Losing 6 positions in a row will almost cut your account in half. And those losing streaks will happen.
When you are risking 2% of your account with each trade you can allow those drawbacks to happen and to cushion their impact.
When you lose the trade, accept you had a bad day and walk away from trading platform. You can re-think your strategy, check if it has any holes in it and improve it if possible.
So, next time when you enter the market, you will have your stop loss in place, your take profit in place and you will not touch that trade again. Biggest mistake to make is to mess with the position mid-trade, unless that is to move stop loss to break even point or to take multiple take profits on the way.
Always know how many positions you have open at any given moment and how much you are risking with every trade. Every trade MUST BE calculated decision in order to cut losses.
If you are trading once per day, you can risk up to 2% of your balance with the trade. The more often you trade the less percent of your balance should be put at risk with every trade. If you are trading once per month or even less, you can risk 5% of your balance with each trade.
Everything more than numbers stated above will make it difficult to deal with your drawbacks, and represents high level risk for your Fx trading account.
How to Decide on Order Volume Based on Risk Management?
Simply, when you have done your analysis and decided on your entry point, you should already know at what point (how many pips) will your stop loss be. In market order you will check how much money is that with particular volume and set your volume accordingly.