Think in Terms of Risk

It’s often the smallest things in life that generate the greatest improvements.

The concept of thinking in terms of money risked, as it applies to Forex trading, is no exception. It’s an extremely simple concept that can have a huge impact on your journey to becoming a top Forex trader.

I’ve never met a successful Forex trader who doesn’t calculate their risk before putting on a position.

You may think that’s an obvious statement, but a surprising number of traders don’t think about how much money is at risk before opening a trade.

This is because they’re using an arbitrary percentage to calculate risk, such as one or two percent of their trading account balance.

Think about your last trade for a moment. Did you define the exact dollar amount at risk before putting on the trade? Or were you more focused on the number of pips and the percentage of your account at risk?

The convenience of Forex position size calculators has made it so that we never have to consider the dollar amount being risked. This convenience has caused a huge oversight.

Don’t get me wrong, I use the position size calculator at the link above before each and every trade.

However, I’m just as interested in the dollar amount at risk as the percentage of my account balance.

Aren’t those the same?

Yes and no.

Obviously, 2% of $5,000 is $100. In that respect, the 2% and the $100 are essentially the same things.

However, in terms of the way our mind perceives these two figures, they’re at opposite ends of the spectrum.

This is because pips and percentages carry no emotional value. So when you define your risk on a trade as a percentage only, it triggers the logical side of your brain and leaves the emotional side searching for more.

When you calculate your risk as a percentage only, you’re defining your risk but you aren’t accepting it.

As soon as you convert that percentage to a dollar amount, your mind is able to visualize what $100 looks like. This enables you to determine if you’re prepared to lose that $100. In other words, is the trade setup in question good enough for your $100?

It’s much easier to risk 2% without fully accepting the potential loss because it doesn’t carry the emotional value that money does.

The best Forex traders know this. That’s why they always define their risk in terms of a percentage and a dollar amount.