29/11/2021

Top 2 Examples of Risk Management, Explained!

You can’t always be right in trading. There will come a time when your beliefs will disappoint you. Your trading plan will go awry and the market will turn its back from you. These like these are possible in Forex trading. But that is how risk management rules come in handy.

The development of risk management is part of the development of a trading plan. If you ignore these points, you will only go into the path of rapid loss. A proper risk management plan involves a better understanding of when to enter the market or when to exit the market with profit at hand. The main purpose of applying a risk management plan is for increasing stability on your trading account as well as reducing the drawdowns while maximizing the profits acquired.

Risk Management Example No. 1 – Losing Trades at 60 Percent

Let’s say that you have a trading capital worth $10,000. The allocated risk for every trade should be $200. Your profit-loss ratio should be at 2:1. This means that your average profit for every trade you make is $400. If your profit-loss ratio is equal or higher to 2, you get the opportunity to be wrong more frequently than be correct.

 

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The idea of focusing on the consequences when making a decision rather than its probability is the main idea of uncertainty.

Risk Management Example No. 2: Losing Trade at 70 Percent

The trading capital once again is set at $10,000. The risk amount for every trade will be $200, so the risk-reward ratio is at 1:4. This means that your average profit for every trade is $800.

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This is actually a very difficult form of trading from a psychological viewpoint. For this strategy, the trader will have to skip 8 out of 10 entry points while the missed signals are then carried out. This makes it difficult to control temptation and start trading with the ratio 1:1 or much higher.

With this strategy, you don’t have to be right in 50% or more to make your account grow. The probability for this cannot be predicted because there are varying results in every trade. What’s important here is to follow the necessary risk management rules and never to trade signals which have a low reward-risk ratio.

Summary

As stated above, the trader should follow the risk management rules in forex and the profit should be 2:1 so that they can afford to make wrong decisions more often than the right ones. But if the trader follows a reward to risk ratio of 1:1, the trader will be forced to profit more often than lose. If you are trading in such a ratio, you will have to make two good trades for your account to obtain profit. But with a risk-reward ratio of 3:1, you will only have to focus on raising one profitable trade to be able to raise capital even if you acquire two unprofitable trades that were previously closed.



The idea of risk management is quite simple. However, it seems like traders are more focused on the trading process despite having a low profit-loss ratio.

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jack

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