All successful and professional traders have a solid plan to manage their money and risk in trades. Although with a few simple rules this money and risk management is possible but many amateur traders ignore it and in the end they will fail in their trades. Using SL, TP and risk/reward ratio is the best practical way to lower the risks of Forex trading to minimum.

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21. Money and Risk Management
Besides following a solid strategy, management of money
and risk in Forex is the most important factor that
determines the outcome of your trade. Management of
money is about the portion of your equity (or balance) you
risk on your open trades. In any case (except for optimal
trading), you are not allowed to expose more than 3% of
your equity to the market. Because of high risk of Forex
trading (even with proven strategies), putting more than 1/30
of your equity (or balance) in the open trades increase the
chance of fast drawdown of your equity and losing all your
money.
Risk management in Forex is about taking measures to
prevent big unaffordable losses. The simplest but most
effective tool to control (or limit) your risk in a trade is
Figure 20.4 High performance trading opportunity

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setting a Stop Loss (SL). On the other side, setting a Take
Profit (TP) target for your trade is highly recommended to
guarantee your expected profit. Don’t underestimate the
power of these simple tools in your trading. In fact, before
entering any trade you are required to determine and set
your stop loss and take profit targets. As soon as you do this
you actually define a risk/reward ratio for your trade. For
example if you set your stop loss 30 pips away from the
entry price and set your take profit target 90 pips away from
the entry price, your risk/reward ratio will be 1:3 or simply 3.
The safe threshold of risk/reward ratio to enter a trade is 2.
If your ratio is better or equal to 2 you are allowed to enter a
trade. If not, I recommend you to avoid that trade. So, your
last step after analyzing and confirming a trade opportunity
is to calculate its risk/reward ratio. In spite of simplicity of
deriving your risk/reward ratio from known stop loss and
take profit prices, setting stop loss and take profit is a bit
challenging. It demands some experience to realize the best
places to put these two key risk management limits.
As a general rule, try to set your stop loss maximum 10-15
pips away from local minima or maxima and all in all not
more than 25-35 pips away from the entry price. To be more
exact, according to my experience and automated trading
simulations the optimal stop loss for AUD/USD, NZD/USD
and EUR/GBP is 15-20 pips, EUR/USD, USD/JPY, USD/CHF and
USD/CAD is 20-25 pips, GBP/USD is 25-30 pips and for EUR/
AUD, GBP/AUD and GBP/JPY is 30-35 pips away from trade
entry price. However, if you faced with a situation that
needed to put your stop loss farther than 35 pips away from

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the trade entry price, it is a good sign that the optimal time
to enter that trade has passed and it is better to ignore that
trade.
Setting take profit target can also be challenging. Just like
setting stop loss, this skill will be acquired by time but as a
good technique, estimating the momentum of the price is
very helpful to find the best take profit level. The chart
pattern, the length of pins in pin bars and the distance of
current price from moving average can help you to predict
the momentum of price. Then to get assured that your profit
target will be hit, set it at two/third way of the trade entry
price from the first nearest support or resistance level (if
you have concluded that the momentum will be small) or
two/third way of the trade entry price from the second
nearest support or resistance level (if you have concluded
that the momentum will be large).
Figure 21.1 How to predict TP target using momentum
signals

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The following pictures show you how set your best SL and TP
targets and how calculate your risk/reward ratio.
Figure 21.3 How to manage your risk in Forex
Figure 21.2 How to manage your risk in Forex

5. What you read is a free sample of “The Ultimate
Forex Trading System-Unbeatable Strategy to Place
92% Winning Trades.” From this book you will learn
top 8 Forex trading strategies (92% winning rate),
the best money and risk management method, high
performance trading and the best advice to control
your psychology during trades. All required tips to
become a successful trader are included in this book.
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