2007-12-02T13:07:00.000+02:00

Results of incorrect risk management

One of the first mistakes that kill the profit is improper risk management. Risk management is one the most important differences between making FOREX into a casino instead of an investment.

Sometimes you do wrong decisions and take losses. Everybody takes losses once in a while - professional traders, not so professional traders, gamblers, investors, everybody. Taking losses is inevitable unless you've found your grandmother's glass globe from attic that tells you the future.

Suppose you lose 10% of your capital in case of a wrong decision that resulted in a loss. To get back to the same level you were before, you have to gain 11,1% with the next trade. For example, if you had 10000 euros before and lost 10%, you are left with 9000. 10% gain on 9000 is 9900 which is less than you had before, however 11,1% gain on 9000 would get you back to 10000. In case you lose 50% of your capital on one trade, you need to gain 100% with the next one to get back to the same level!

The following table shows the results of different risk proportions:

Loss	% to Breakeven
10%	11.1%
20%	25.0%
30%	42.9%
40%	66.7%
50%	100.0%
60%	150.0%
70%	233.0%
80%	400.0%
90%	900.0%

Conclusion

The more of your capital you risk, the harder it becomes to get back to breakeven in case a loss occurs. Most successful traders tend to risk around 2..3% of their capital in a single trade or less. There's even a mentality that it's more important how much you keep than how much you make. That applies also to making decisions whether to take a trade or not. Money is not a rabbit that runs away.

Keeping Money