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Forex trading can be a highly lucrative business, but it can also be incredibly risky. Traders need to understand and manage the risks involved in trading to maximize their potential for success. There are various methods of risk management in forex trading, including preventing over-trading, auto-calculating the volume of every trade, reward risk ratio, limiting the total risk amount, and auto-closing trades before news releases or the end of the trading day/week. Now, let’s discuss in detail in the following sections.
1. Automatically calculate VOLUME of every trade. Traders need to determine the specific amount of money they will trade for each position (Stop Loss Strategy here). This could be a fixed amount of money, such as $200, or a percentage of available balance, such as 1% or 2%. Setting a maximum amount to be traded in a single position helps traders avoid risking too much money on a single trade, which can lead to significant losses.
2. Auto place Take Profit (TP) with a desired reward risk ratio. Traders should aim to have a positive reward-risk ratio, which means that the potential profit from a trade should be greater than the potential loss. The reward-risk ratio is calculated by dividing the expected profit from a trade by the expected loss. For example, if a trader expects to make a profit of $300 and expects a potential loss of $100, then the reward-risk ratio is 3:1. It is generally recommended to aim for a reward-risk ratio of at least 2:1.
3. Limiting the total risk amount to less than 6% of the balance. This means that traders should not risk more than 6% of their account balance at any given time across all trades (Alexander Elder). This means that if a trader is risking 1% of their balance per trade, they should not open more than 6 trades at a time. If they wish to open a 7th trade, they must wait until they can move the stop loss of one of their running trades to break even. This strategy encourages that traders should choose only the best signals to enter a trade, while keeping their account safe for the long term in trading journey.
4. Automatically close positions by timer: traders may experience that brokers sometimes widen spread to a huge value at the end of trading day for swapping trades. Traders could be shocked as their trades were stopped out unexpectedly due to this reason. This phenomenon often happens once positions are in small timeframe such as 30 minutes or smaller ones, this is because the stoploss distance of these are often narrow. To mitigate this issue, traders shall close their trades some hours prior to the day-end (based on brokers’ time server).
It suggest closing trades before NEWS release time which may wipe out all your current profit unexpectedly.
MT4 Trade Manger can do this for traders by suitable setting as below screenshot.
In conclusion, risk management is a crucial aspect of forex trading that can help traders minimize their potential losses and maximize their profits. MT4 Trade Manager EA provides precise calculations of the specific amount of money for every trade based on the volume of trade and reward-risk ratio. Not only does it calculate the total risk amount of running trades and warns traders about the risk-limit, but it can also close trades by timer.
Thanks for reading !
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MT4 Trade Manager EA 