Risk management is one of the most key concepts to surviving as a forex trader. Risk management is a combination of multiple ideas to control your risk of losing all at once during trading forex. Without good risk management an exceptionally gifted trader will lose just as much as a bad trader. While a good risk management system may not fully rescue a losing strategy an earning strategy cannot possibly succeed without good risk management.
You should know that all traders sometimes find themselves on the wrong side of a trade. Different traders might handle the situation in different ways but they all have to maintain discipline and strive to overcome emotion in their trade. Most inexperienced traders would emotionally prefer to stay in a losing trade hoping that the market will turn around and prove that they were right which not the case with successful traders is.
One form of risk management is controlling your losses. Stops are important in trading to guard against losses or extreme price moves. Putting a stop order into the market at a certain level means that if your trade hits that level it will be stopped out for a loss. This may sound bad but what it does is guarantee that trade cannot drop any further and cause a much bigger loss. However good stops are for protecting capital and they should be used with care.
Brokers in the industry like to talk about the benefits of using leverage and keep the focus off of the drawbacks. This causes traders to come to the trading platform with the mindset that they should be taking large risk and aim for the big bucks. It seems all too easy for those that have done it with a demo account, but once real money and emotions come in, things change. This is where true risk management is important.
Bottom line, risk management is all about keeping your risk under control; the more controlled your risk is the more flexible you can be when you need to be. By limiting your risk you insure that you will be able to continue trading when things do not go as planned and you will always be ready. One of the biggest differences between successful and unsuccessful forex traders is using proper risk management.
