How To Trade FOREX Safely.

One of the crucial elements of trading is managing your risk. To be profitable in FOREX trading you must have a trading and risk management plan in order to succeed.

Statistics show that you can lose the majority of your trades but still make big profits if you follow a risk management plan. Have NO doubt; you will have losing trades and if you don't manage your risk you will lose your money very quickly.

Losing money is painful in any enterprise but particularly in trading because it can happen very very quickly.

For example; you start with US$ 5,000, make your first trade and lose 50%. Ouch! Now you have US$ 2,500 and you would have to double that amount to get back to US$ 5,000. So you lost 50% but have to increase by 100% to get back just to where you started.

Your first decision is to decide how much money you are going to trade with?

Please only trade with a sum of money that you can afford to lose. If you are stressed when you trade, you will make mistakes. So ONLY trade with money you can afford to lose. I've said that twice because it is so important.

So let's assume you have US$ 10,000 standing around. How much should you trade with each position? This is entirely down to your personality and your attitude to risk. At the beginning I used to trade 5% of my pot each time as I was learning to trade, now I trade 10-15% as I am more certain of what I am doing. You could start with as little as 1% if you wish, or even lower.

Trade at the level you are comfortable with. Expect to make losses. We all do, and you will be no different.

The smaller the percentage the longer the number of bad trades you can make before all of your money has gone.

So once you know the maximum amount you are risking then all you need to do when you trade a stop loss and the amount of lots that you wish to trade.

A stop-loss is an automatic instruction to tell your broker to close a trade if your position goes against you. You should use STOP LOSSES on all of your trades no matter how experienced you are.

There are other factors to consider; time-frames and market volatility. If you are making short term intra-day trades then your stop-losses should be tight anyway because you are only looking for short term positions. If you are trading across days then you may want to consider larger stop losses as market volatility can stop you out early when in a longer time frame the position was profitable.

Your monetary risk is still manageable as the amount of money you risk for each trade is a factor of the stop loss and the size of your trade i.e. the number/fraction of lots that you trade. So if you want a larger stop loss then you trade a smaller number/fraction of lots.

At the end of the day the absolute value of the money that you risk on each trade is the most important.

By managing this risk you can make good money in the long term. When a trade is successful and you are in a strong trend then all you have to do is move the stop loss with the trade. Eventually the stop loss will pass the point where you entered the trade and you are then guaranteed a profit. That's free money!

A final point about managing risk.

The most important way of managing your risk is education, education and education! Very few people become successful traders overnight. It takes time and effort but it becomes very very profitable when you get it right.

It is possible to short cut this process by utilizing the latest computer technology. This allows you to purchase automated trading robots that trade on your behalf and manage your risk as well. These systems have proven to be very profitable. See below for more details.