How to Determine Your Forex Risk Profile

How to Determine Your Forex Risk Profile

Regardless which type of trading style you decide on, there’s no denying that risk management rules must be included in every trade plan. This could determine whether your account can survive a series of losses and still manage to end up profitable in the long run.

As with trading styles and time frames, there are no hard and fast rules in constructing one’s risk management rules as these depend on one’s aggressiveness or tolerance. Confidence in one’s trade plan and the level of forex trading experience can also influence risk profiles.

When you’re a more aggressive trader, you could be willing to risk a larger percentage of your account per trade or in a day. There are traders that risk as much as 10% per trade or as a total of their open positions for the day while still feeling confident that they can bounce back even after a losing day. On the other hand, more conservative traders are uncomfortable with large risk and would rather risk 1-2% per trade or in a single trading day.

Aggressive traders are also more likely to keep several open positions all at once, with some potential correlation among their open trades. More conservative folks would rather trade one position at a time or be cautious about adjusting their stops from time to time.

Your risk profile can also dictate whether you are willing to press your advantage and add to your winning positions. If you are confident that price can move strongly in your predicted direction, you could opt to apply a stop-trail-add strategy, which could drastically improve your return ratio if price does move in your trade’s favor. Scaling in or out of positions can also be part of your risk management rules.

At the end of the day, it is important to get to know yourself when it comes to determining your risk profile, as this could serve as your guide in managing your trades and improving your profitability. There is nothing wrong with choosing to be aggressive or conservative as long as you trade in a style that you are comfortable with.

Of course this behavior might vary through the course of your trading endeavor as you acquire more knowledge or capital. When you feel that your risk strategies aren’t working out for you, you should have a thorough review of your forex trading journal to figure out what you need to adjust.

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Samuel Rae is an active retail trader across a variety of assets, including currencies, stocks and commodities and the author of Diary of a Currency Trader (Harriman House). His personal strategy focuses primarily on classical technical charting patterns with a fundamentally supportive bias, combined with a strict, risk management-driven approach to entries and exits. He is an Economics graduate from Manchester University, UK.