Basic Risk Management Concepts
Risk management is incredibly important to learn whether forex trading, or trading another product.
Risk management for all traders at any level is of utmost importance. One of the key elements that is part of any comprehensive risk management plan is to have a pre-defined maximum percentage a trader is willing to risk on any one trade.
Whatever that percentage is, it is paramount that the trader understand that a pre-set maximum investment should be inflexible; however, as all trades are different, the executing the correct stops and level of exposure of each trade are unique. Risk exposure per trade or contract can change with each investment, so traders must understand and be able to execute position sizing. Unfortunately, on many retail forex trading platforms, traders are forced to make a choice when opening an account between having an account in which they can trade either Standard Size (100K Unit) or Mini-Size (10K Unit) contracts, but not both.
Many of these platforms do not offer retail traders the option of both types of accounts, or the correct trading tools, spreads, or currency parings as offered to Standard Contract size customers. Because of this, retail traders often choose to open an account that has the Standard sized contracts even though they do not have the capital necessary to enter a trade and still stay within their pre-determined risk parameters.
However investors who utilize PureDeal, IG Market’s unique trading platform, have other options. Directly from the same account with IG Markets, traders can choose on a trade-by-trade basis whether they wish to trade Standard size contracts or Mini size contracts. The uniqueness of this flexible platform gives investors the opportunity to modify their trades as necessary to keep within their pre-determined risk parameter.
For example, if a trader with $10K in their account had a pre-determined maximum risk level of 3% of their account value per trade, that would mean they could risk at most $300.00 on any one trade. If there was an opportunity to place a trade on the EUR/USD pair, but the trader estimated that the stop had to be placed 35 pips away, at $10.00 per pip the risk would equal $350.00 (not including the fact that there could be slippage) on one Standard contract. In this scenario, the retail investor was stuck in an account where they can only trade Standard sized lots, this trade would be outside of the predetermined maximum investment. Had this investor used the PureDeal Platform through IG Markets, they could have easily placed a trade for 10 mini contracts for total risk of (not including slippage) of $400 (10 contracts x $1.00 per pip x 40 = $400.
By having the situational flexibility to trade both Standard and Mini contracts from the same account, IG Markets traders may find that they have more opportunities to trade while still maintaining the proper risk management parameters set forth in their trading plan.
Futures trading and options trading involve risk, which may result in financial loss, and are not suitable for everyone. Any trading decisions that you may make are solely your responsibility. You may sustain a total loss of the funds used to establish a position with IG Markets. The trading activity and other information represented herein are for informational purposes only and are not guaranteed in any way. The contents of this document are not an offer, or a solicitation of an offer, to buy or sell any particular financial instrument from IG Markets.
Tags: currency trading, day trading, forex trading, risk management