Speculation is a strict no-no in Forex trading. It can make you anxious and frustrated if a few traders don’t go your way. Trading by speculation is similar to playing slots in a casino. You are blindly following your luck. That’s never the way forward in Forex trading. Forex Academy, the largest online news and research source of the Forex industry believes that a few consecutive winning streaks don’t determine whether you are a good trader or not. Unless you understand risk management and its importance, you will never become a successful Forex trader. Want to know why?
Importance of risk management
There are three aspects of a good Forex trader:
- The technical ability that includes price action trading, chart reading, and any other strategy that you may use.
- Money management that includes capital preservation. It means what risk percentage you can afford per trade, stop loss placements, profit targets, and position sizing.
- Trading psychology that includes your technical ability and money management skills.
Among these three, experts from Forex Academy believe that money management is the most crucial part of Forex trading. They also explain why each of these three aspects is crucial for different traders. But when it comes to money management, you should know that there are risks involved here.
If you don’t focus on risk and money management, you will fast become an emotional trader. You may go through tons of technical charts, but they would be useless if you don’t have risk management.
- Defending your trading account
Going broke is easy. It hardly takes a few trades to make you a beggar. But defending your trading account takes time, experience, and patience. So, what do the analysts from Forex Academy mean by defending your trading account? Simple; until you develop a comprehensive trading plan, you shouldn’t start with live trading. Ideally, your trading plan should include answers to questions like what is your risk percentage per trade, approximately how much money you can afford to lose on a trade, what type of trading edge you follow, and so on.
- Becoming the ideal trader
Reading different trading charts and predicting their move is definitely a commendable skill, but that does not make you an ideal trader. An ideal trader is someone who knows how to control their risk capital, manage market exposure, and follows these two rules on every trade. Capital preservation is a crucial part of Forex trading. If you have zero capital preservation skills, you may soon lose your trading account.
How to make money consistently in Forex trading?
This is probably the question that every newbie trader has in mind. Well, there are two tricks that you can follow, and both of them have risk management at their core:
- Limit your losses to a specific amount. This should be your risk threshold. You shouldn’t trade anymore if you hit your risk zone.
- Let your trading edge play over time. This will allow you to win big instead of losing small.
There are probably tons of Forex trading techniques that you may come across on Forex Academy. But they would all have capital and risk management as the primary learning point.