The key to successful Forex trading, or other markets for that matter, is having small losses and BIG wins. You don't have to be 80-100% winning to make money but simply need to focus on ALWAYS having very small losses and maximizing your winning trades.

How do you protect your capital and minimize the chance of having a big loss?

That's easy.

First you determine where the market has to go to to PROVE to you that your buy or sell trade is likely to be wrong. I typically use the previous swing low for buys and swing high for sells plus a few pip padding so noise doesn't knock you out and you miss the resulting profitable move. As I mentioned earlier you do NOT have to be right a high % of the time and lower winning systems can result in profitability IF you keep losses super small and get out of sub optimal trades that don't immediately take off your way near break even. A high win rate system will however allow you to use smaller stops (10-12 pip stops are our maximum for most USD pairs).

The next stop is to decide how much in % terms you are willing to risk per trade.

Risking 2% per trade is a good base line

This way you can have 5 losses in a row which rarely happens if you know how to trade Forex but does occasionally happen.

ADVANCED TRADERS ONLY NOTE

If you are a profitable and experienced trader you will likely have different trading styles, methods, and strategies. Some may work 50% of the time while others don't occur too often but when they do are 80-100% winning. For advanced traders only I recommend they trade larger size on the super high winning % trades that also often have much bigger pip gains than other systems.

So for example if your normal systems are 40 to 60% winning but one only finds a few trades per week but is usually 80% winning and gives you nice sized wins, say 30 to 50+ pips on average I recommend to INCREASE your trading size. I will increase the size on my trades 30 to 100%. When the results equal past performance of this system, this can have dramatic impact on your AVG WIN size which I'll explain later and how it impacts your success in trading currencies.

Once you've made the above 2 DECISIONS you can then decide how many Forex lots to trade. A mini lot is $10k and a full lot is $100k of currency and a mini lot is worth $1 per pip while a full lot is worth $10 per pip of price movement.

Number of lots to trade = ( Account Size X Risk % per trade ) / ( Stop in pips * Value per pip )

So for example you have a $5,000 account and are risking 2% on this trade where you are having a 10 pip stop and are trading mini lots ($1 per pip)

$5,000 x .02 = 100. You can only lose $100 on this trade which would be 2% of your account.

Then simply take the 100 and divide by your 10 pip stop * $1 per pip = 10 which results in 10. You can trade 10 mini lots in this trade which is the equivalent to 1 full lot.

If you were a full lot trader you take ($5,000 x .02) / (10 * 10) and the result would be 1 lot!

Simple!

Now this is only the beginning. In order to be a successful Forex trader you should have 50% bigger average wins than losses! This means that if on average you lose $100 when wrong you should be making $150 on average in your winning trades.

In both my experience and in watching the accounts of our close to 2,000 traders I've found that wins of 30-50+ pips happen no more than 10 to 20% of the time for most of us. This means that often times the wins are 5, 10, 15, or 20 pips. The 30-50+ pip wins just increase the average win amount even more.

The profitability formula =
Number of trades X winning % X average win amount in dollars
minus
Number of trades X losing % X average loss amount in dollars.

So there are a few things you can do to increase how much you make trading Forex. First obviously increase your winning percentage but also do whatever you can to reduce your losses. We teach our traders to move their stops to BREAK EVEN once the market moves 10-12 pips their way. This does slightly lower winning % but also DRAMATICALLY reduces the average loss in dollars!

You should also AVOID trades that are NOT likely to make you 50% more than you risk. For example, if you see 2 or 3 major resistance points 5 pips above current price and you are using a 10 pip stop DO NOT TAKE THE TRADE! If you are "likely" to only make 5 pips while risking 10 this is a recipe for disaster when trading currencies. Don't do it, EVER!

If on the other hand the next resistance area is 30 pips away and you have a 10 pip stop and you feel the trade is 50 to 60%+ likely to work you HAVE to take the trade because those 20-30 pip wins will increase your average winning trade. That's another reason above why I told you to increase your trade size on trades you feel have a 80-100% chance of working or are more likely to give you big pip moves.

The article discusses the VERY MINIMUM you must 100% understand in order to be successful trading the Forex.