Risk management in currency trading

Risk management 101

Risk management is the most important tool in forex trading. As I already told you before, trading is all about testing support levels using the support line we drew. So we have to risk a maximum of 10% of our capital on all open positions.

This way even if the short term support line is broken, we could still remain with 90% of our capital to test the median term support level and also if it is broken again we have to wait and test the long term support line. We will continue testing these support levels until they hold that is when we will start to make money as the price start to rise. ( bottom up approach).

Risk management can also be done by dividing up your capital in to 20 equal parts, in which you will risk 2 or 1 part at a time. That way it will take 20 support levels to be broken before your capital is finished.

Example. Let say I have $5000 capital. What I will do is divide it onto 20 parts which will be $250 each ($5000/20), so at every support level I will risk $250 only and will be left with $4750 in cash, and if it is broken I will wait to the median term support level with also $250 and with $4500. These means that my capital can test 20 support levels before it is finished which is impossible in most cases.

Remember that the $250 will vary some times , it can be less depending on the support line , the current price level and position size as well which will be small.

REMEMBER THAT RISK MANAGEMENT SHOULD GO ALONG WITH SMALL POSITIONS SIZE SO THAT, YOU CAN PLEASE A WIDE STOP LOSS BELOW THE SUPPORT LINE, ABLE TO TEST VARIES SUPPORT LEVELS AND WILL ALSO PREVENT YOU FROM BEING STOP OUT FROM MARKET NOISE(VOLATILE MOVEMENTS).