Benefits of using the famous 1% risk management rule
For a secure trading business, money management is very important. Without this procedure, you can never find a suitable trade setup because the trading mind will be disturbed all the time about big profit potentials. To manage them, you will think about executing big trades with high-risk exposures. Due to big investments, the trading mind will have a tension of losing the capital. Some rookie traders may think about using small investment bit leveraging it by a high ratio of 1:100. It may sound appealing for a high-profit potential for decent risk exposure. However, you will still be in danger with high leverages because both the winners and losers affect the equity of a trading account. For a rookie trader, there is more chance of losing a trade than of making a profit.
That is why decent money management is important to reduce investment. It also reduces the impact on equity. So, your trading mind remains calm and functional for a decent trading performance. Most importantly, you get a good chance of finding suitable trade setups. So, you need to follow a 1% risk per trade strategy in Forex. There are a few more advantages of this process which we will be discussing in the following segments.
You can set the stop-loss
For a safe trading career, you will need to take as many precautions there is available before placing a trade in the Forex trading account. The stop-loss is one of the most important ones for a safe trading experience. It helps to avoid big potential loss losing trades. With a decent range, you will be setting up the stop-loss which will be set for every trades. When the market volatility causes the trades to reach the limit, your trades will be closed automatically. Therefore, you can close the trades before experiencing a high loss.
In reality, the stop-loss is set according to the risk exposure. Therefore, a trader will be setting the limit according to the 1% risk from the account balance. If you can follow this idea, the stop-loss will be safe and secured for the best trading performance.
The leverage will be small
For a decent trading business, a trader will use a 1% risk per trade strategy. There is another thing which is important for the lots. When Forex is providing the opportunity to increase the lot size of your trades, you need to consider it for a quality trade execution. Unfortunately, the rookie traders always make things worse with too big leverages. They do not care about the effect on the equity of the trading account. For your business, you need to understand which the most optimum ratio for leverage is.
If you can accept 1:10 leverage for the investment of the trades, the business will be secure. Every execution will be decently sized and without any big investment. But, your rookie trading mind needs to accept this concept. When you will use a 1% risk per trade strategy for every trades, it will help you to decide on the best leverage ratio because a decent investment policy always looks for decent leverage.
Your mind will be clean
While placing a trade, your mind needs to be clean in every occasion. No matter how uncomfortable the market condition is for a trade, you cannot lose your temper. The rookie traders in Hong Kong do not get bored by the market conditions. They lose their temper when there is too much stress on their heads. Due to big investment and big trade sizes, they always stay in tension for big profit potential. When you have this problem, your trading mind will not work efficiently.
For this reason, your market analysis will be ineffective and you will lose control over the positions of the trades. That is why a 1% risk per trade is very appropriate for an efficient trading business.