Why you should not take risk in percentage

  • Traders in Forex market like to trade by risking in percentage. It is a big mistake that most traders are making in Forex. If you want to trade the market, take risks in dollar value. Do not take risks in percentage. It is very important to understand the difference between taking risks in percentage and taking risks in dollars. Most of the professional traders always risk a certain amount of their trading capital while executing their trade. They always trade within their risk tolerance level. However, the novice traders always stick the percentage rule thus often get frustrated after few losses. If you have a big trading account and losing only 1 percent might cost you $300. So you should have that strong mental setup to afford this loss or else you will lose control over your emotion.

    Risks in dollars

    First, we are going to talk about the risked amount in dollars. Say you have an account in Forex with 100 dollars, if you want to trade the market take risks in your dollars. You take 2 dollars risks for every trade you are placing. If you lose your trades and have made a big profit of 10 dollars, you may keep your capital safe from wild swings of the market. But when you lose the trade you are just losing 2 dollars. You can recover that dollar from trading without any stress. If you lose 3 trades in the market because you take risks of 2 dollars per trade and make 10 dollars profit in your 2 trades, you still have a profit of 4 dollars in your account. But what happens when you take the same trades with risks in your account percentage? Let’s find out.

    Risks in percentage

    Let’s begin our analysis by assuming that you are the same trader with the same amount of money in your account. You have 100 dollars and have made trades on the market. Before, you used to take risks of losing 2 dollars in each trade. Now you have changed your strategy and taking risks in percentage. If you take only 4 percentage risks of your capital, which is 4 dollars per trade, you may see it as logical risks for placing your trades in the Forex trading account UK. Every trader knows there are risks in Forex but what happens is when the risks are taken in the percentage you put your capital at risks in the market. If you lost only 2 trades in the market, you will lose 8 percent of your capital. Imagine how easy it is for you to blow up your account by losing only 25 trades if you take 4 percent risks in your trades. It is a very simple and many traders do not understand it. As long as you are risking your dollars for Forex, you are safe in the market. If you begin to take risks in percentage, you will lose your money and also your capital.

    Why you should risk in dollar

    There are many traders who will not understand the real difference between taking a risk in percentage and dollar amount. But the idea behind this is very simple. Different people have different risk tolerance level. Being a currency trader you must know your risk tolerance level if you truly want to make a decent profit without having any emotional breakdown. Even the professional traders also risk their trading capital in terms of dollar value since they know this will help them to realize their loss much better prior to the trading result.

    Summary: Taking calculative risk is one of the key element for becoming a successful trader. Most rookie traders lose money since they fail to maintain proper money management. If you simply trade the market with high-risk reward ratio then you can easily make a consistent profit.