Let’s face it. Everybody starts forex trading with some form of a scalping strategy. Even if strategy doesn’t exist, scalping does, at least at the beginning. So there is plenty of RISK involved in, given the fact that 95% of all retail traders lose money in trading. While a massive chunk of retail traders are scalpers, statistically scalping rides along with risk, whether you like it or not. But if you get IT right, it also means high reward. I mean if you get RISK MANAGEMENT right…
Risk management is key not only for scalping strategies. But we deal with larger trade contracts for shorter price-targets to maximize profit. So what is at stake here? it totally depends on stoploss, leverage and corresponding account size. The question is “Can I afford it, if I take this loss?” Never ever take the trade if the answer is a “no.” If the answer is a “yes” and the risk percentage would be below 4% (most traders set it to 2 – 3%) of the capital for the single trade, only then would I enter a trade. Icing on the cake is that when you have the rule set to enter trades with at least a 1:1 Risk to Reward ratio.
Risk Management and retail traders
Retail traders get it wrong in trading because they all focus only on the profits. While the best of the traders focus on protecting their capital. This is the single most fact that differentiates between professional traders and amateurs. The objective for a trading day must be to end the day at least with the same capital that the day was started with. It seems pessimistic, of course. But who says optimists make the most money by scalping, or even in trading in general for that matter.
The one thing that does not come within the boundaries of risk management is win percentage. Keeping the win percentage high is not the goal. In fact, a healthy win percentage is only a by product of a good scalping strategy and a disciplined trader combined. The point here is, if you can device a set of risk management rules and trade with highest standards of discipline, then you can’t help but be profitable regardless of the win percentage. And this is a valid statement for all types of forex trading, not just for scalping.
One thing for certain, trading does not have to be complicated. Same goes with risk management. It doesn’t have to include equations from Einstein. But it sure has to be included in trading. Does it mean that by including extra filters to trade entry decisions, that you might by pass a few trades that otherwise would have been entered and profited with? On hindsight, yes. But does it also mean that the overall profits and the quality of the trades would skyrocket? With proper risk management rules, of course yes.