Lesson 9: Money and Risk Management.

The Forex market is very volatile which means despite doing the right thing, you can still stack up a quite few losses before you make good. Most profitable traders lose approx 60% of the time but still make a good return, but only because they know how to manage money. Firstly divide your capital into 100 even lots, to ensure your maximum loss on any one trade will only be 1% of your account. This also aids you emotionally as it allows you to be wrong quite a few times without having a major effect on your capital. To figure out what 1% of your account is, divide your capital by 100. So if our account was £500 our Max Risk per trade/bet would be £5 (£500 / 100 = 5). In each trade our risk is the point difference between our Entry and Stop price, we call this the “Stop Size”. If our entry price on a EURUSD trade was 1.30000 and our stop was 1.29990  our Stop Size would be 10 points (1.30000 - 1.29990 = 0.0010). We need to ensure that our Stop Size (entry price - stop price) does not exceed our max risk per trade (1% of our capital), or we will have lost more than 1% of our account on 1 bet/trade. To do this we divide Max risk per trade (1% of our capital) by our Stop size (Entry - Stop price), to get our Bet Size. In this case £5 (1% of our capital) / 10 (stop size) = £0.5 (bet size). A lot of traders spend their time counting pips, thinking that they've had a marvellous day if they make 100 points. But of course it all depends on what you were risking! if you only risked 50 pips that would be fine (a RRR of 1:2), doubling your money for a return 2%. But if you risked 200 pips (a RRR of 1: 0.5), it’s crap as you’re only getting half your risk back, a 0.5% return. As you can see measuring risk is far more important than measuring any other unit.