Forex Risk Management - Learn to trade Forex with cTrader - Episode 5 - YouTube

hello guys today we'll talk about risk management

risk management is maybe the most important video that we're going to do

in this series

so what is risk management exactly? Risk management is knowing exactly how much

money

you can lose at any particular time because you have pre-calculated this

number

why is risk management important?

when you are trading you are your capital

your capital is your most important asset

if you don't know how to protect your capital you'll never make any money in

this business

you have to think of trading as some kind of business

and your account balance as the money you have invested in that business

you woudln't like to be unaware of

your total risk and how possible it is to lose you your investment amount you

need to keep track of these numbers

another important reason is that if you

keep good track of your risk management and you minimize the amount of

that you going to risk per trade, it'is a lot easier to

keep your psychology in where you want it to be, because

if each trade doesn't play a huge amount

in your overall performance then you will be relaxed when you're trading

because it doesn't matter, the whole

trades matter. Which brings us to the general principle of risk management

I will demonstrate this principle with an example it easier for you to

understand this way

if you want to make a specific amount of money for example you have one

thousand in your account and you want to make 500 euros

its a lot better to spread that PnL

500 euros to many trades and make

for example 100 trades of five euro

each, than spreading these five hundred euros to two trades

that's going to make 250 euros each because each of these two trades

is risking a lot of money to make this 250

euros so the more you spread your risk

to a lot of trades, the lower your overall risk

another very important concept you need to understand

which is going to help you understand why you need to spread your trades

and why you need to risk a small amount in each trade, is drawdown

what is drawdown, drawdown is the amount of money

that you lose from your balance if you have a big

losing streak so if you lose a lot of your positions

for some reason how much

percentage of your balance you're going to lose. Why is this

important there a rule in trading that

if you lose fifty percent of your account

you need a hundred percent of your account of "win"

to get back to your original amount I will give you that with an example

let's say that you have a ten thousand eur account and you have a drawdown of

fifty percent

you have a losing streak and you lose half of your account so your account is going to be

five thousand

in order for your account to go back to 10.000

10,000 you need to make 100 percent you need to make

to make twice the amount of money, so the whole point is that it's very to recover

from drawdowns you need to do a lot better

in order to get your original amount let's expand this example

by talking about your trading system. I can remind you that we already made a video

about rating systems so you can go back and check it out and see what a trading system is

if you have a trading system that

gives you some particular edge that means that you're expecting to be

winning a specific percentage of your positions

let's say that in your trading system you have calculated that you win around

seventy-five percent of your positions that means that

that doesn't mean that everything's going to go perfect

and all the time you will be losing three positions and winning seven losing three

and winning seven

it's very very natural to have a losing streak of then

positions or even 15 positions. You need to know exactly what will happen

when this time occurs

and you need to have calculated exactly

your total losses. I'm going to give you an example with numbers

let's say that you have an account that is

10,000 okay? let's say that you have

chosen to risk six-percent of your account

on each particular trade. 6 percent doesn't really sound like much

but if you lose ten positions in a row you're gonna see that your account will

be almost

Half and losing ten positions in a row in a bad day is

nothing nothing extraordinary it's very possible

let's assume now that you risk 1 percent of your account with each trade

if you lose

ten trades in a row your would barely

have lost 10 percent of your account so it's a lot easier to

accept it's a bad day, go back to sleep think about your strategy come

back

and make that extra 10 percent back

so how is risk management done what are you supposed to do exactly?

what you're supposed to do is calculate the amount

that you can lose with each individual position. You calculate that by using

a stop-loss

a hard stop loss that you calculate how much it's going to be

and you don't touch after you set it like we talked in particular

previous videos

the first step is setting up your stop loss per position and calculating the

specific amount

the second step that you must do is know

how many positions you gonna have opened at the same time

so let's say that you want to risk one percent of your account

maximum at any given time and you want to have four positions

open maximum at any given time, that simply means that

each of your positions need to risk 0.25 percent

of your account. Last issue is how much percent of your balance

should you be risking with any trade there is no general

rule of thumb that tells you that you must risk

"this" specific amount even though most traders commonly accept

2 percent, this has a lot to do with your trading frequency

which is very important. If you are trading a lot of trades per day

something like

ten trades per day or twenty trades per day, you should be risking a very

very small amount of your balance

I would say something like 0.2 percent or even lower

however if you're trading once per day then you can

maybe risk around one or two percent of your balance

if you're trading like once per month or you're a swing trader you put a lot of

thought into the trade you read the news every trade is a very

much calculated decision, it makes sense to risk something like five percent of

your balance

you should not risk more than that because

like we explained before you're not going to be able to manage your

drawdowns

you not gonna be able to manage your exposures

you gonna be in high risk of blowing your account

now let's go to cTrader. I'm gonna show you how to

place and calculate your stop loss in cTrader

in order to do your risk management. I have opened a 10,000 EUR account here

and let's assume that I wanna risk 1 percent whith each one of my trades so I

want to risk

one percent of 10,000 which is a hundred EUR

we have a

kind of a down trend here, it's not very reliable because non-farm

payrolls came out today and I'm

I'm not very fond of trading this particular news but

let's assume that we have a downtrend here and we want to enter sort

we want to place our stop loss at 1:36038 because it's

higher than the previous swing so we assume that the trend is going to

continue downwards

you may be going to go high but not higher than the previous swing

what I'm gonna do is I'm going to measure the amount of pips that I want to risk

which is 17 pips I will open an order screen

and I am going to place minus 17

at the stop loss that I want to risk. We said that we want to risk

100 euro with each position we see

we here that's it's 125 so I need to make my volume a bit smaller

it was 100k I'm made it 80k

and now I see that I'm risking exactly 100 euro

I'm going to press sell

my position is filled and I'm exactly where I want to be

I am risking 100 euro

and I'm short. Now you can, if you want you can move your

stop loss to a more technical level like exactly here you can add a bit more

on your position

and for example make it 90K

of course some people may not want to use technical levels when putting a stop

loss

maybe they want to use a specific amount when they're

to risk a specific amount with its trade. In this case it's very easy, you're going to put out an

order screen once, you're going to calculate

how many pip are you going to use with your specific volume and you're always going

to use these values.

You can even set it in QuickTrade settings so you can

you can keep your discipline. One thing that I forgot to explain that

that I want to talk about now is why are we

risking a percent of our balance instead of a specific amount

why not say that i'm gonna risk 100 euro with my

10,000 account forever the reason is that if you risk a percentage

the percentage that you risk goes up

when our account goes up so you're risking

a hundred dollars 100 euros a ten thousand euros

110 euros at 11,000 euros

and it goes on so your risk grows with your account and your reward

also depends on your risk so the more risk is your account grows

the more you're gonna make also. This goes

both ways when your account to get smaller you risk

a smaller percent with each trade because if you risk the same amount you're going to

to blow you account a lot easier

so that concludes our maybe most important video the video about risk

management

we talked about basically what risk management is

how you should think and what to do

how to calculate the amount of money that you

risk with every trade how margin works what is margin leverage and these

kind of concepts

so thanks for watching