TradingTopTen Rules For Risk

Updated: Nov 15, 2021

Welcome back, Traders!

We are excited to see you here, ready for another lesson on Trading Top Ten that can help you become a better, more profitable trader! Today, we talk about one of the most fundamental concepts of trading – Risk Management and will give you our Top Ten tips to consider! Make sure to check our lessons on Risk Management here and here!

1. Only trade with money you can afford to lose

You have to remember that investing is not the same as saving. Trading on Foreign Exchange is a form of investing and should always be considered as such. You accept the risk of losing your capital (or portion of it) for the opportunity to yield higher annual returns. Due to that increased risk levels, you should only trade with money you can afford to lose! It allows you to better manage your emotions, determine your risk tolerance, use leverage correctly, trade with appropriate position size and reduce the chances of making mistakes! All of which (and more) will be discussed today!


2. Know your Risk Tolerance

We are all individuals and we all have different levels of risk tolerance that we’re comfortable with, whether in life or trading. As such, it is crucial that you find what works for you and don’t blindly follow or copy what others do. It may work for them but it is never a guarantee that it will work for you. Some suggest to never risk more than 5% of the account in any trading day, some would argue to only risk 1% per trade, some would recommend not to risk more than 2% on the same currency pair, etc. Each trader should have risk management in place that is suited to their personality and experience. It should always serve to preserve your trading capital, allow you to trade with more confidence and stop you from blowing your account if you were to lose a trade!

3. Use Correct Position Size

Your position size (usually expressed as ‘lot’) should be a realistic reflection of your experience, account size and risk management rules you have in place. It is very important to always trade the correct lot size, as it will allow you to survive any losing trades as well as will provide you with a fair picture of your trading strategy and its profitability in the long term. If you’re not sure what your lot size should be you can always try some of the Position Size Calculators that are free & available online! Try some and find one that works best for you! Correct Position Size will enable you to maximize the trading opportunities you see while minimising the losses that will inevitably happen!

4. Use Stop Loss

Correct Position Size used together with Stop Loss Orders will help protect you from sustaining any significant losses on a single trade. Stop Loss Order is a feature that you can and should be used when trading. It will close the position at a loss if the trade went against you and once a certain price level (selected by you) has been reached. Having a Stop Loss with your position means you don’t have to worry about this trade anymore – you did your analysis, you’ve identified a trading opportunity, you calculated your position size and you have entered a new position. If you’ve followed your plan and are confident about your execution the trade will either hit Take Profit level (well done!) or Stop Loss level. If it’s the latter, you should not worry. You respected your risk management, you’ve only lost what you were comfortable with and you have protected your account from significant losses!


5. Manage your Leverage

As you may already know, Leverage allows you to trade with more money than it was deposited into your trading account. This can increase both profits and losses you experience as a trader. For that reason, it is very important you fully understand how leverage works. Its impact on your positions and how can it be potentially fatal for your account if not managed correctly. With some brokers offering up to 1000:1 leverage, it is really important to always manage it correctly so you can avoid margin or stop-out calls due to adverse price movements on your positions.

6. Understand Currency Correlation

Currency Correlation is best defined as a way of measuring to what extent pairs are related to each other and whether changes to their value will move in the same direction. A positive correlation means that they tend to move in the same direction, while a negative correlation means that if one currency is getting stronger, the other one depreciates. It is important to be aware of these correlations to avoid opening positions that will eventually cancel each other out. It is also important to take commodities into account when looking at the correlations as prices of oil will affect the Canadian Dollar, prices of gold will affect the Australian Dollar while prices of the New Zealand Dollar would be affected by wool and dairy products.

7. Remember about the News

Make sure you are aware of the high impact news for any given week that you trade. News announcements such as employment, inflation reports, central bank decisions can have a massive impact on the price levels of the currency and turn your profitable positions into losers. Unless you are a news trader it’s best to stay out of the markets during these high impact announcements and wait for the price levels to settle down before opening new positions.


8. Control your Emotions

Ability to manage your emotions while trading will make you a successful trader. In this lesson, we have discussed various tips that should help you make better, more informed decisions when it comes to risk management. Which in turn, should allow you to be in control of any emotions that could cloud your judgement! Remember to always stick to your strategies and not your feelings. Test your strategy until you are 100% confident it can deliver the results you’re expecting so when you are risking your money you can limit stress and always follow your rules in a calm & composed way.

9. Secure & Withdraw your Profits

It is important to limit risk at all times – one of the best (& most enjoyable) ways to do it is to regularly withdraw your profits. At the end of the day, we are trading to make money and make use of the extra profits Forex can bring. Capital in your trading account is always subjected to any future trading decisions you make, meaning that if you do open a new trade it’s at risk again. Withdrawing profits regularly allows you to control the amount of the capital at risk as well as provides you with means to re-invest!

10. Diversify your Investment Portfolio

We all know the old saying of never putting all the eggs in one basket, this is also true with Forex. To truly manage your risks, you have to diversify your investment portfolio! By doing so, you protect yourself in case one market is underperforming or drops. There are many viable options for you to get into as an investor, including (but not limited to): bonds, shares, property, art, cryptocurrency, wine start-ups or whiskey!

Join us next week for another episode of Trading Top Ten!