Risk is an inherent aspect of any business, including forex trading. Even when deciding to engage in this business, you are guaranteed to experience losses, but there is no guarantee of making profits. Your profits can only be obtained when you have a tested trading method, and even then, it depends on whether the amount of profit generated is greater than the losses incurred. Therefore, limiting risk in trading is absolutely necessary. This can significantly reduce your potential losses and ensure they are lower than the profits you can make.
Determining risk in trading is not the same as setting a stop-loss level. Although they are related, the distance of the stop-loss level ultimately does not change the percentage of risk you are using. The same applies to the target profit level you set. However, if you use a take-profit level that has a higher ratio than your trading risk, the profits you generate can be larger. Therefore, it is important to pay attention to your risk-to-reward ratio when conducting trades. This can greatly help you increase your profits and compensate for any shortcomings in the probability of your trading method.
Risk is typically determined based on a percentage of the total capital. The common recommendation is to set a risk limit of 3% to 5%. You can choose to set it lower, but increasing it should never be considered unless you enjoy losing money.
When you set the risk based on this percentage, regardless of the distance of your stop-loss level, the risk amount should remain the same. You should not adjust the stop-loss level to fit this percentage; instead, you should adjust the size of your position.
For example, if you have a $10,000 capital and your stop-loss distance is 100 pips, you should use a position size of 0.5 standard lots, assuming the pip value is $1. If you have a $1,000 capital, where 5% of it is $50, then the position size you should use is 0.05 standard lots. Or let's say you have a $10,000 capital and your stop-loss distance is only 20 pips, then your position size would be 2.5 standard lots. With this system, regardless of whether you are a scalper, intraday trader, swing trader, or even a position trader, your risk will remain the same, ranging from 3% to 5%.
So, that's how you determine risk in forex trading. This approach ensures that you have a consistent level of risk, regardless of changes in the average daily price range. Regardless of the distance of your stop-loss level, your risk will remain the same. This allows you to maintain discipline in managing trading risks and minimize financial losses that may affect you.
Edited 04 Jul 2023, 13:18
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