Risk management means controlling the potential losses of each trade with the aim of protecting capital and reducing the negative impact of losses on the account.
If your capital is $1,000, do not risk more than $10-20 on a single trade.
This does not mean the full trade size, but rather the amount of potential loss if the stop loss is hit.
🔸Determine the risk-reward ratio
The target of the trade must be greater than the expected loss.
The ideal ratio is 1:2 or more (i.e. you risk $10 to win $20).
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3. Steps for implementing risk management in practice
✅ Step 1: Calculate the risk ratio
Risk = (Risk Percentage in the Trade x Capital)
Example:
If your capital is $5,000 and you want to risk only 2%:
Risk = 5000 x 0.02 = $100
✅ Step 2: Determine the trade size based on the stop loss.
Example: Entry on a currency and the entry price is $100
Stop loss at $95 (i.e. $5 difference)
To calculate the quantity you can purchase:
Quantity = Risk ÷ Distance between Entry and Stop Loss
Quantity = 100 ÷ 5 = 20 units
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4. Golden Rules of Risk Management
The rule of explanation
❌ Don't chase the market. Don't enter a trade just because the price is moving strongly - wait for your calculated opportunity.
✅ Protect your capital. Staying in the market is more important than making a quick profit. Capital is your means of survival.
✅ Don't double up on losses. Don't double your trade size to make up for a loss – this could destroy your account.
✅ Control your emotions. Don't trade under the influence of fear or greed. Rational decisions are more important than momentary feelings.
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5. Tools to help you manage risks
Capital management calculators (easily found online)
Automated Stop Loss (SL) and Take Profit (TP) orders
Trading on a demo account to put risk management into practice
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📌 A complete application example:
Capital: $2,000
Risk ratio: 1%
Allowable loss = 2000 x 1% = $20
Price difference between entry and stop loss: $0.50
Quantity that can be purchased = 20 ÷ 0.50 = 40 units
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💡 The summary principle that should be traded on:
> "A professional trader does not focus on how much he will win, but on how much he can lose and how to protect his capital."
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