Forex trading has become a popular platform for those seeking profit within a short time. It has high liquidity, low transaction costs and constant market accessibility. However, all these good things come with risk. The higher your chances of making profits, the higher your risks are. So, you need to be good a forex risk management. The 1% rule blueprint is considered the basis of risk management in forex trading. The blueprint emphasises on long-term sustainability by knowing how to control emotions and preserve capital, ensuring that your account is never destroyed.
The 1% Rule Core Principle
The 1% rule for forex risk management is very important as it can prevent wiping out your trading account completely and throwing you out of the market. With this rule, you know how much risk your move can be, and it will help to focus your mind on the win and not on the risk that much.
You must decide how much you can afford to lose on every trade. Set this amount using the 1% rule; that is, if the balance of your trading account is $20,000, then you can allow yourself to lose 1% of $10,000; that is, $100. If you keep your losses to 1% it will be difficult to kill. Even if you lose 6 trades in a row, you will only lose 6% of your money, and it won’t be difficult to survive with that amount of loss. You will have the opportunity to turn things in a positive direction.
Most traders’ goal is to get the maximum profit on every move. But the right approach should be to minimise each loss. This way, you will be able to survive even in the most difficult market situation.
Why Traders Need To Use 1% Risk Rule
A trader can stay in the forex trading business for a long time by applying the 1% risk rule. They can also make better decisions to enhance their gains. The 1% rule of forex risk management keeps the trading capital intact, so a trader won’t lose too much money within a short time. This rule will help to achieve long-term growth. You can guard your emotions and make decisions more rationally. The rule applies to all market conditions.
Other Strategies
Before trading, you should decide when you will leave the market. In case the market is not in your favour, you should identify the price point at which you will leave. This is called the stop-loss price, and it will help you to plan before your emotions and other circumstances affect your conscious decision.
You also need to know the right position size to align the trade size with stop-loss distance and dollar risk. You should also use a favorable RRR (Risk-to-Reward). A ratio of 1:1 means you should win more of the trades to make a profit; 1:2 means you only need to win 40% of your trades to stay profitable, and 1:3 means you will gain with only a 25% win rate.
You shouldn’t put everything in one basket. You must have different strategies for different assets, too. As the markets are competitive, one strategy will not work for all your assets.
The biggest battle in forex trading is to keep your mind in control. You will have to fight with lots of emotions while trading. There will be fear of losing, which will cause hesitation to make a big move, thus masking your decision. There will be early exits and second thoughts as well when you fear. Greed is another difficult emotion you have to deal with.
When you start winning, you will choose to trade large amounts of money because you become overconfident. Then there is the revenge trading and chasing moves, which usually occur when you lose. At the back of your mind, you want to get the money back that you have lost and, in the process, keep on losing more money. You will ignore all the evidence and just follow your emotions.
Conclusion
The forex market is very attractive with mover than $7.5 trillion moves every day. You need to learn to take important trade decisions irrespective of your emotions to manage risks well. The blueprint for continuous success in this trading is knowing the right number, discipline and mindset. With the 1% rule of forex risk management strategies, you can have significant monetary growth in this trading.
