One of the fundamental rules of risk management in Forex trading is that you should never risk more than you can afford to lose. Despite its fundamentality, making the mistake of breaking this rule is extremely common, especially among those new to Forex trading. The FX market is highly unpredictable, so traders who put at risk more than they can actually afford make themselves very vulnerable.
If a small sequence of losses would be enough to eradicate most of your trading capital, it suggests that each trade is taking on too much risk.
The process of covering lost Forex capital is difficult, as you have to make back a greater percentage of your trading account to cover what you lost. Imagine having a trading account of $5,000, and you lose $1,000. The percentage loss is 20%. To cover that loss, however, you need to get a profit of 25% from the remaining capital in your account ($4,000). This is why you should calculate the risk involved in Forex trading before you start trading. If the chances of profit are lower in comparison to the profit to gain, stop trading. You may want to use a Forex trading calculator to assist with your risk management.
A tried and tested rule is to not risk more than 2% of your account balance per trade. In addition, many traders adjust their position size to reflect the volatility of the pair they are trading. A more volatile currency demands a smaller position compared to a less volatile pair.
At some point, you may suffer a bad loss or burn through a substantial portion of your trading capital. There is a temptation after a big loss to try and get your investment back with the next trade. However, increasing your risk when your account balance is already low is the worst time to do it. Instead, consider reducing your trading size in a losing streak, or taking a break until you can identify a high-probability trade. Always stay on an even keel, both emotionally and in terms of your position sizes.