Risk management is a key concept: that all successful traders must learn. It is one of the most essential concepts in the Forex market. I would challenge you to find me a successful trader who does not use risk management of some form. The simple truth is that without using a form of risk management it will not be long before you blow an account. There are multiple forms of risk management, a few of these include: Stop Losses, withdrawals, and a set draw down percentage.
Stop loss: is the most common form of risk management that you will come across as you further your education in Forex. This piece of code/technology is one of brilliance. It allows one to trade with a set risk. If price attempts to push through your stop loss your account will automatically remove your trade from the market (on the conditions that your terminal is running). The Stop Loss brings a peace of mind to the trader. It allows for one to trade without the constant guessing on when price will go back the way you thought it would.
Trading when real money is on the line is justly stressful. When you look at your equity and just see it diminishing it is an awful feeling. It is a situation that no one desires to be in; yet everyone at some point or another has had to face. It is because of this that the SL (stop loss) is such a vital part of the majority of peoples trading plans. There is sufficient intensity trading, do not make it more difficult on yourself attempting to trade without one.
Withdrawal system: is an additional form of managing risk. This form can be counterproductive to building your Forex account. However, it minimizes risk. This form is for the most part self-explanatory. An example of this would be that you have a $10,000 account and you decide to withdraw any money you make after the $10,000 this allows you to begin minimizing your risk. Once you have taken out $10,000 you would essentially be trading with free money. There are many variations of this. If you choose to use this method; use whatever fits in with your personal needs.
Set drawdown or equity percentage: is perhaps the least used risk management strategy. This is a strategy that one uses to close out loosing trades based on a preset percentage. An illustration of this would be the following: You have a $10,000 account. Whenever your equity drops below 10% or $9000 you choose to close out all your trades (or hedge which we will be discussed in a future article).
Many people differ on which risk management strategy they prefer. Each individual trader has a different method of trading. I would recommend that you choose which one or a combination that fits your personal trading style the best.
As always feedback is appreciated, have a great rest of the day.