Beforehand, we briefly discussed the make up of what a good trading method would have. Furthermore, we discussed what the trading method should consist of in order for it even be considered a complete method, like the methods that are revealed in the Forex Income Engine 2.0.
This time, I am going to add to our previous discussion and talk about risk management used in trading methods. I would say this is the area that 95% of forex traders make mistakes and lose their bank account. Managing risk is about minimizing your losses AND about shielding your trade reserves by employing specific strategies to achieve both of these at the same time.
So why is this important to you as a forex trader and what should this mean to you?
First, most forex traders seem to make the simplest of all trading mistakes.Forex traders open themselves up for large losses because they open too large of a position in comparison to their account balance. Secondly, some traders unknowingly put their entire account balance at risk due to one trade being placed that puts their entire funds on margin.
Now lets walk thru a scenario to show this:
In this scenario, our forex trader has an opening balance amount of $10,0000. Lets say our trader opens a 5 standar lot trade on the pair of EUR/USD. The trader now as $5,000 on the line at risk if the market turns against them, which is 50% of their entire account balance.
In this scendario, the trader loses 1/2% of the total account balance for every one point the market moves against the trader. Just looking at it, this may not seem like a lot at first. But if the market moves in the other direction by 50 pips, then the trader exits the position, they would recognize a hurrendous loss of $2,500! That is a quarter of the forex traders total account. This is a perfect example of poor risk management and surprisingly enough it happens frequently and often leads to a complete wipeout of a forex traders trading account.
So let us take a look at that example and breakdown how we came up with the loss amount.Ten dollars on a standard lot trade would equal to 1 pip for the EUR/USD pair. A 50 pip loss equals an actual loss of $500; and remember our example forex trader had traded 5 standard lots which would equal a whopping loss of $2,500!
On the other hand, every forex trade you open with any good type of method should include very clear identifiers for incorporating money and risk management.
Money management should include even distribution of an account among the multiple trades a forex trader has. For example, as a forex trader, you should never risk most of your account balance on any one single open position.Even more, a trader should rarely ever have more than a few positions open. The forex trader can use multiple positions in order to distribute the risk evenly between the open trades.
Risk management will be the maximum amount you may be willing to lose if the markets go against you. It should also limit the impact of a losing Forex trade on the trader’s account balance.
To sum up, that when considering using a forex trading method, it should clearly identify its risk management rules and how they are used along with the trading method.If you come across a method that is unclear on risk management in any way, you should probably avoid it as it may lead to a fast decline of your account balance.One which clearly identifies the risk management and money management.
To Find out how Forex Income Engine 2.0 uses money and risk managment in conjuction with the 3 trading methods revealed, go to our Forex Income Engine 2.0 Review site for a complete breakdown.
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