Frederic Sealey On Forex Risk Management
Forex risk management is a mix of certain combinations. The combinations are suitable lot size, reliable use of leverage, accurate placement of a stop loss order and a rewarding risk/reward ratio. Each of these fixings is joined into a formula that doesn’t endanger more than 1-2 percent of your exchanging account when utilized accurately. At Frederic Sealey, we bring you ways to protect your trading account.
Now if we talk about leverage, it helps you utilize a small amount of in the trading account in order to control large amounts. For example, if a forex broker offered a leverage of 200:1, a collateral of $ 50 is accepted to control $10000 trade. Moreover, if a financier gave a leverage of 400:1, the same $50 deposit could control a $20,000 trade.
Forex leverage can work both ways it can work for you by enhancing your wins, or against you exacerbating your misfortunes. If a financer or a broker offer leverage of 200:1 or 400:1, make sure not to use it all the time. Instead, a better and fruitful leverage can 50:1 or 20:1 when you are new in the trading game.
Role of Lot size:
Lot sizes decide each pip dollar value. As per the lot dimensions: Micro accounts provide $1000 ($0.10 per pip), mini accounts offer $10,000 ($1 per pip) and regular accounts contribute $100,000 ($10 per pip). Now if we talk about the pip value, it is derived from trading USD/EUR currencies.
Stop loss Strategy:
Stop loss can be explained as a trading insurance. As you will not prefer driving your car without an insurance, likewise insurance against excessive losses should not be traded. Accurate stop loss placement is based on lots of assistance and resistance the trade entry as well as risk/reward ratio.
What is Risk/reward ratio?
Risk/reward ratio is explained briefly in the books of Commerce. Its ratio decides whether you need to go for a trade or wait for a better trading opportunity. The ratio in trading opportunity is 1:2. For example, if you have risked 20 pips, then the payoff will be double i.e.40 pips. But when we apply risk/reward ratio, then the ratio is 1:3. now in this situation, if you have a risk of 20 pips, then the reward will be of 60 pips. Remember, applying risk/reward ratio can be risky and can be inaccurate but you will still reap profits.
For instance, let’s take a trade using the EUR/USD. Not this kind of trade follows sound risk management. After this, you have decided that the overall trend is up, so you decide to go for a long shot. You decide that buying at 1.3500 is best for you. And you have confirmed that the last low point was at an area of support at 1.3480 that is 20 pips lower. Now you notice, the next area of resistance is 40 pips higher at 1.3540 which will work as your objective.
Now, you have a micro account balance of $10,000, and utilizing 50:1 leverage that would support a trade of 5 regular lots or a position size of $500,000. However, so you plan to risk 2% of trading accounts for this 24 and utilize risk management. Now as per the stop-loss strategy, you lose 20 pips in exchange of $5000- $5 per pip x 20 pips stop = $100. Placing a limit order to trigger at our target of 1.3540 that is 40 pips. As per risk/ reward ratio of 1:2 40 pips x $5 per pip = $200.
Trading forex does not come easy and comes along with a lot of risks. Using solid forex risk management can be beneficial. You can bare losses but maintaining a balance on priority basis can help your account balance at a steady pace with a limited loss.