You can have one of the best forex system in the world but with bad risk management, it will only fail. Perhaps, you might as well get your account blown out with that system in a couple of trades. Was the system bad? Not at all. It was your bad risk management practices that made it fail.
Bad risk management is one of the main reason that fails the budding career of many new forex traders. Many people start trading forex dreaming of making a million in just a few months. They overtrade, take on too much risk and get blown out by the market.
Practicing bad risk management with a very good forex system will only produce bad results. You just need a couple of losing trades in a row with your bad risk management strategies to get your account blown out.
Capital preservation should be your number one priority. A forex system that gives 20% return with 1% risk is much better than a system that gives 80% return with 15% risk. The second system is infact dangerous and might simply blow out your account in a matter of few trades.
Suppose, you have a coin and you have $100. Your friend want to bet $10 dollars for every flip of the coin. You and he agree to make 1000 flips. Ideally if you win all the 1000 flips, you will be making $10,000. But if you lose all the 1000 flips, you lose $10,000. But you have only $100 in your pocket. So, how much maximum to bet on one single flip of the coin?
Betting $10 on each coin flip means if you lose just 10 coin flips in a row, you lost your $100. This means your chance of losing with $10 per flip is a whopping 90%. But suppose, you ask your friend to reduce the bet to only $1 per flip? Will it work?
Betting $1 per flip means you will have to lose 100 flips in a row in order to lose $100. This means your chance of losing has drastically reduced to only 5%. This is how good risk management can save you from catastrophic loss in trading.
The success or failure of any forex system depends on the risk management rules that you apply with it. If you use too much risk, you lose pretty soon. On the other hand, if you use low risk, you might not make a high return but your chance of facing ruin also reduces drastically.
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