Knowing the importance of the use of risk management rules when your trade is just the first step to financial independence. Moreover, it is also important to analyze whether risk management is bad or not. Because when these rules get ignored in Forex Trading, the consequences of your actions are ought to follow.
If you are using risk management rules and your risk-reward ratio is at 1:2, there’s a huge possibility that you can grow your capital even during those times when losing trades are more dominant than the profitable ones.
For trades that are carried out with the risk-reward ratio of 1:1 and higher, expect more difficult trades as you are obliged to have more profitable trades than losses. For beginners, this might not be the best idea.
Several trading examples may help you handle this very high risk-reward ratio. Most of the time, these practices are common among those new traders as well as those times when average strategies are being applied.
The 99.3% Profit Probability
Let’s assume that the risk per trade is $500 while the profit for every trade is at $2. The risk-reward ratio is calculated at 250:1. In this case, losing trades become very rare. Is this kind of trading noteworthy? Imagine things like this: You have opened a position but as soon as the market turns to the direction you desired, the position gets closed. When the price goes against you, the trade is called outsat and should only be closed when the loss is already crucial.
Characteristics of a Bad Risk Management
- When you ignore the risk management rules, these things happen:
- The quick decrease in the capital for making unprofitable trades
- The slow growth of account even when profitable trades gets closed
- During the long run, the share of profitable trades can go up to 100%.
- The trader mostly focuses on the profitable trades and not its profitability or its risk-reward ratio.
- Risk management is mostly neglected.
- The responsibility gets neglected.
But if you trade with risk management rules, you will get a couple of benefits.
- When you encounter unprofitable trades, your capital will only slowly decrease, moderately and even predictably.
- When a profitable trade is closed, the trading account gets to grow rapidly.
- Employing a risk management rule means that traders are focusing more on the returns as well as the risk-reward ratio and not merely on the profitable trades.
It is widely known that a good number of traders tend to lose money while trading in the Forex market. This is because they don’t use or follow the money and risk management rules throughout their trading practice. Once you ignore trades that have a reward-risk ratio smaller than 2:1, this can become a powerful advantage because not all traders can follow this Forex trading principle. In the forex market, it is impossible to predict unprofitable trades, therefore, the only thing you can do is to protect your trading account against the uncertainties that can happen in the future. And you can only protect your account by using money and risk management rules.
