Yes you’ve probably heard this one many times before. However we need to really emphasise the importance of good risk management and how key it is in order for you to achieve your financial success in trading. Risk management starts with your account balance first. Let’s take an example of a good risk management approach.
Say you have a £1000 balance in your MT4 account.
You should not be trading with no more than a 0.10 lot, which is the equivalent of £1. This is also 1% risk of your account. The reason why we trade with small lots of a large account is because trades usually won’t go your direction straightaway, sometimes it takes hours, days if not weeks! With a small lot size the trade can swing in opposite directions and you won’t need to worry too much about over leveraging your account or possibly blowing it. Also a very important factor to take into account is the amount of positions you can hold simultaneously at every given time. Again let’s take the £1000 balance account as an example. If you have more than two 0.10 lots running at the same time, this is the maximum you should do, meaning one should not open any more positions till trades are closed.
Risk management in trading is the single most important factor most traders ignore when day trading. If you want continued success and consistent profits, apply the appropriate risk management according to your balance.
Here’s a list of risk management guidelines one should follow depending on your account size.
£500 account balance – 0.05 lots max trades 2-3
£1000 account balance – 0.10 lots max trades 2-3
£2000 account balance – 0.20 lots max trades 3-4
If you have a larger account, feel free to contact us and we shall help you define a suitable risk management.
Also remember you will not win every trade, so it’s very important to define your risk to reward ratio before placing trades and understand fully the risk you are taking when placing a trade.