Allocate capital

At first every trader should define the part from overall available funds to allocate for trading. Among the professionals it is called risk capital – i.e. the money that you can afford to lose. The main goal is to define which amount is comfortable for you and will suit your expectations on the front of returned investments and allow to diversify the assets.

Some people are happy to have a $1000 account and to make 10% per month which is equal to $100 while others tend to have a balance around $20,000, i.e making $2,000 monthly and their 5% risk amount will be equal to the balance of the first example. The stated above is the main part of risk-management that a trader should start with.

Smart money Diversification

risk profile

Define risk profile

The trader should choose how much to risk on a single trade. Most common variants are 1%, 2% or 5% of the total account size. If you’re new to trading then try to keep this percentage low till you fill confident in your trading strategy but do not exceed the 5% because no one is secured from the series of losses.

For example, if you are risking 10% of your balance on each trade, it would take 10 straight losing trades to cut account by half. Even very experienced traders do not usually overcome the 2% level to keep their trading under control.

Controlled Risk Position Management

Use leverage wisely

The main feature of margin trading on FX markets is an ability to use high leverage. XBroker offers up to 1:100 leverage though the trader’s goal is to understand that high leverage increases the chance to win more but as well enlarges the risks.

To keep your risks under control you should maintain the leverage wisely and not to overcome the allowed value according to your strategy. In your risk-management strategy tend to use it for hedging rather than enlarging dramatacally the position size that could lead to enormous losses.

Smart Leverage Hedging Benefit

Keep Risk:Reward ratio

To have your expectation on a high level you should always estimate your potential trades from the point of suitable risk:reward ratio. A single loss should not put you out of track on the long distance of trading activity.

In the majority of cases it is adviced to have at least a 1:3 ratio which means that for 30 pips profit you have a 10 pips stop loss. So even if you have a 50% successful win rate of your trades then on the consistent basis you will keep adding profits to your account.

High Risk:Reward Risk under control