Forex Forex Education Forex Risk Management

Forex Lot Size: How to Limit Risk in Forex More Easily

Position size is usually the easiest way to keep maximum transaction loss under control, and sometimes it is the only way. The size of the forex position is how many forex batches (micro, mini or standard) you order per transaction. Your risk is broken down into 2 parts-transaction risks and account risk.

What is a lot in forex, how much is a lot and why does it matter? An obsessive approach to risk and money management, which means keeping transaction risk as low as possible or avoiding relatively large losses, whatever you call it, it separates the long-term elite survivors from the majority who eventually retire. The size of your positions is a fundamental part of risk management because the smaller the lots you handle, everything else being the same (leverage, number of lots, and more), the lower the value of a pip.

So, smaller batches of forex mean less profit in each percentage of movement in price, but also more important, less loss. It’s the losses that could end up with your capital, your trust, and your trading career. For a large number of reasons based on the history of fórex trading, currency pairs are traded in standard batches of 100,000 units of base currency (1 forex lot). To make trading more profitable for the average individual, online fórex brokers invented mini accounts with lots of 10,000 (1 mini lot) and micro-accounts with lots of the size of 1,000 units (1 micro lot). We don’t just like these innovations. We love them. Because a small lot reduces the risk for each lot traded, they give you a large number of advantages over standard lots.

They provide better flexibility to adjust the size of your positions to the circumstances:

When you’re winning, you can increase the size of the position by adding foxes.

While you’re learning, making the transition from a demo to a live account or a losing streak, small batches help you keep losses in check until your situation improves and is successful for weeks or months.

When you want to enter or exit from a staged position with only part of your planned position (another risk management technique), small lots make this technique easier to do while keeping total venture capital within 1-3 percent.

Here is how these elements link to give you the ideal forex position size, no matter what the market conditions, the mode of the transaction, or what forex strategy you are using.

Continue reading for more information on what is a lot in forex, how much is a lot, or begin to trade and see for yourself in real-time as the size of the lot in the forex influences your gains and losses.

01 – Determine the limit risk per transaction in your account.

This is the most important step in determining the size of the forex batch. Determine a percentage or a limit amount that you will risk for each transaction. The vast majority of professional traders dispose of their risk in a ratio of 1 to 3 percent of their account. Let’s take an example, if you have a $10,000 trading account, you could risk $100 per transaction if your risk is 1 percent of your account. If you risk 2%, then you can risk $200. You can also use a fixed amount, but ideally, this should be less than 2% of the value of your account. For example, you risk $150 per transaction. As long as your account balance is at $7,500, then you’re risking 2% or less. While other transaction variables may change, account risk remains constant. Choose how much you’re willing to risk in each transaction, and stick to that. Don’t risk 5% on one transaction, 1% on the next, and then 3% on another. If you choose 2% as the risk limit per transaction, then each transaction should risk 2%.

02 – Determine pip risk in a transaction.

You know the maximum risk you will take per transaction, now pay attention to the transaction in front of you. The Pip risk of each transaction is determined by the difference between the entry point where you place your stop-loss command. The stop-loss closes the transaction if the losses reach a certain amount. This is how we control the risk in each transaction to keep it within the limits set for the account, as discussed above.

Each transaction varies, based on volatility or strategy. Sometimes a transaction can have 5 pips of risk, and in another, there can be 15 pips of risk. When making a transaction, consider both your point of entry and the stop loss point. You want the stop loss point to be as close as possible to your entry point, but not so close that the transaction is settled before the expected movement occurs. Once you know how far the stop-loss entry point is, in pips, you can calculate the size of the ideal lot for the transaction.

03 – Determine the size of the forex position.

The ideal size of the fórex position is simply a mathematical formula equal to:

Pips at risk * value of the pip * negotiated lots = money at risk

We already know the figure of money at risk, because this is the maximum we can risk in any transaction (step 1). We know the Pips put at risk (step 2). We also know the value of the Pip for each currency pair (or you can search for it).

Now what needs to be done is discover the lots negotiated, what is the size of our position. Let’s assume you have a $5,000 account and risk 2% of your account on each transaction. You have the possibility to risk up to $100, and contemplate a transaction in EUR/USD where you want to buy at 1.3030 and set a stop loss at 1.2980. This situation results in 50 risk pips.

If you are trading mini lots, this way every pip move is worth $1. Therefore, taking the position of 1 mini lot will result in a risk of $ 50. But you are in the possibility to risk $ 100, therefore, you can acquire a position of 2 mini-batches. If you lose 50 pips in 2 mini fórex positions, you will have lost $100. This is the exact amount of risk you tolerate in your account; then the position size is accurately measured with respect to the size of your trading account and transaction specifications. You can enter any number in the formula to get the ideal size of your positions (in batches). The number of batches produced by the formula is linked to the value of the pip entered in the formula.

A proper selection of the size of forex positions is essential. Set the percentage you will risk per transaction; 1 to 3 percent is recommended. Note the risk per pip in each transaction. In relation to the risk taken on your account and pip, you can already calculate the batch size for your forex positions.

The smaller the size of the forex lot, the lower the risk because it reduces the following:

  • The value of each forex pip.
  • The cost of every 1 percent that moves against you.

Potential loss if your stop-loss order is reached. We measure the risk not by the total size of your position but by the potential loss if your stop-loss order is reached.

Yes, a smaller position means less profit when prices move in your favor, with less income as a result of trading operations. But the top priority is to have as few losses as possible. Always. A loss percentage requires a higher percentage to recover, as you have less base capital. Once you find the right combination of trading styles, instruments, and analysis that best suits you, you’ll have the time to increase batch size, risk, and profit potential.

Until you are consistently successful for many months (regardless of the percentage of successful transactions), the priority is to maintain risk and loss in any transaction within 1 to 3 percent of your account size. Benefiting only from the minority of successful transactions is fine, because many successful traders achieve it that way, as we will discuss in other articles.

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Every Trader Should Know This About Money Management

Money management is generally the most important factor determining profit or loss in Forex trading strategies. This fact is so often overlooked that it must be repeated again and again. It is one of the key commercial essentials. The management of money itself will not give you a margin of victory-you need a good entry into trade and effective exit strategies for that-However, without smart fund management practices, a profit margin will not see your profit potential, and there is even the risk of a total loss.

There are two elements in money management that Forex traders must consider carefully: how much of their account is risked per transaction and the percentage of their account that must always be at risk, measured in full or by some kind of sector. There are no absolute answers to those questions, the best for you will largely depend on your own appetite for risk and your tolerance of loss, temporarily or permanently.

Risks in Your Account

Every time you open an operation you’re risking money. Even if you have a stop-loss, you could suffer a negative slide and lose more than you anticipated. Clearly, if you have many open trades at the same time, even if the whole holds a sense at the individual level, together can contribute to having an unacceptable level of risk. Similarly, if you keep many open trades betting all towards the same currency and in the same direction, you run the risk of a sudden loss beyond what is acceptable. So, it’s a good idea to determine a maximum number of open operations simultaneously; and repeat, but by coin.

For example, it is possible to determine that you will never have more than 2% of your risk account size in open trades or more than 1.5% at risk in a single currency. You should also be very careful when trading in currencies that are linked to another currency by your respective central banks. For example, someone who was short in the Swiss franc last January using even a relatively small amount of leverage of 4: 1 has probably had his account deleted, and this will be independent of whether you have any stop loss, as the movement has been dramatic.

Also, if you are trading with Forex or other instruments that maintain positive correlations, you may also need to put a limit on the total of open transactions that are strongly correlated. This becomes more important if you are operating beyond Forex, for example, oil and the Canadian dollar have a high positive correlation.

The exact amount of maximum risk you must take is up to you but bear in mind that once your account has been reduced by 25%, you need to increase it by 33% just to get back to square one. The lower it gets the worse it gets: a loss of 50% requires a 100% increase!

How Much Risk Per Transaction?

Now that you have some risk limits set for your account in general and by currency type, you must address a different issue as to the amount you must risk per transaction. Of course, it is okay to risk different amounts per operation, but this must be determined systematically.

There are different reasons that need to be analyzed in order to determine the size of the position in your Forex strategies, but any risk per transaction must be calculated as a percentage of its total capital. The capital of the total account can be determined by looking at the amount of cash obtained in your account-you must assume the worst-case scenario, that is, that each open transaction will result in losses.

There are two advantages to this method instead of simply risking the same amount and again this is independent of performance, which is the case when using a predetermined fixed batch size or a fixed amount of cash:

Forex strategies tend to produce payoffs or losses and not a uniform distribution of results. Using a share of capital to quantify the size of each trade, which means you will risk less when you lose and more when you are earning, which tends to maximize winning streaks and minimize bad streaks. You can never completely delete your account! Using a fixed batch size or cash amount could end your account, or at least cause a decline from which you can never recover.

Here are some of the essential elements to consider in determining the amount to be risked per operation:

– What would be the worst performance you could have and what would it look like? Could it deal psychologically with a reduction of 10%, 20%, or even worse? Should it go that far in negative territory?

– The frequency with which you negotiate will also be a factor, as this will have an impact on your maximum fall.

– What are your expected profit and loss percentages? Try your trading again. Let’s take an example, if you have a foreign exchange trading strategy where you plan to lose 80% of your trades, but earn 10 times the risk in the remaining 20%, your transaction risk should be lower than if you were planning to do 3 times your risk in 40% of your operations. And clearly, if you maintain an exit strategy that is flexible, immediately, just make a brief approximation of how it’s likely to turn out over time.

– Is it possible with the size of your account to negotiate as little as possible? Let’s take another example, if you have a $100 trading account, and what you want to risk is 1% for operation, you will have to risk a single penny per pip with a stop-loss of 100 pips. This could be impossible, depending on your broker. However, what you should do is capitalize up or otherwise change your business strategy instead of increasing your risk per transaction if that is the case.

– Is your trading account a savings product or a small amount of venture capital? If your total equity is $25,000 for example, and you have a $10,000 account, you could have less tolerance to falls by comparing it to a $1,000 account.

Always remember that your capital management strategy will act statistically with your earnings rate and the average size of your earnings to directly affect your gains or losses over time.

Stop Loss and Position Size

The stop loss should never be determined based on the minimum that can be allowed. Let’s look at an example… If you want to risk a maximum of $20 per operation, but the minimum size of the position with your broker is allowed to be $1 per pip, therefore this is a horrible reason to put a stop loss of 20 pips and a batch size of $1 per pip! What you could accomplish in this case is look for another broker or increase your trading account balance if you have enough venture capital to invest, or else find a Forex trading strategy that usually uses a stop loss of 20 pips, if you are comfortable with it.

However, it is legitimate to determine the stop loss by measuring average volatility, and, especially in trend trading, this in itself can be a very powerful money management strategy. For example, using a multiple of the average 20-day range to determine the cap, and then basing the size of the position on the percentage of account capital is a very common money management method within the trend strategies of Forex trading.

Even if you base your stop loss on technical levels, it may still be worth using a good measure of volatility to calculate the size of the position. For example, if the average range of 20 days is twice the range in a very long term, you can risk half of the reference risk per pip related to your account’s capital.

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What You Can Do Today to Control Your Trading Risk

Risk, something that you are either afraid of or something that you love, whichever one is you, controlling it is vital if you want to become a successful trader. When you first started you probably created something along the lines of a risk management plan, this will tell you what you should be trading with each trade, what your stop losses should be and all sorts of other important information, its purpose is to protect your account from losses so that you are able to survive a number of losses before losing your account.

The thing is though, a lot of people make one, but make a small one, one with not a lot of information in it, or they simply decide to just ignore the rules that they have worked out. Whichever way they do it, they are avoiding the controlling of their risk, and eventually, this will lead to disaster and the possibility of a completely blown account. When the risk involved starts to rise, we often end up doing things that we would;t ordinarily do, such as closing out trades early, closing out for losses, or simply coding everything through a panic. We will promise to learn from these mistakes, but as soon as we get into a similar situation, we will normally do the exact same thing, not learning from the past, simply because we are not using proper risk management.

The issues start to arise when the risks that you are taking are larger than your risk tolerance levels allow, some of us love the risk others hate it. A lot of traders, especially newer ones will spend all of their time looking and working out when to enter a trade, but they often don’t put a lot of thought into when they will get out, this is where risk management needs to come into play. It is all about working out when you need to get out of your trades, both in winning and losing positions, but of course, being able to limit your losses when your trades are going the wrong way is vital and one of the most important aspects of your trading. So while it is important to know when to get into trades, you need to also work out when you will get out, prior to actually getting into it.

You need to work out where your risk tolerance lies and then adjust your risk management to suit it, the last thing that you want is to be a nervous wreck every time that you put on a trade. It is the same the other way around too though, you want to have some form of caring with each trade, if you do not care about the risk then you will be making silly trades, making trades you probably shouldn’t a risking far too much with each trade, simply because you do not care about the consequences. So it is a bit of a balancing act, but we are now going to look at some of the things that you can do to help manage your risk.

Trade Sizes

Trading with a large trade size can mean that you can make a lot more profit on each trade, on the flip side, you can also make much larger losses, the volatility will go through the roof the larger the trade size you use. So while it can be exciting, especially for those with good risk tolerance, it can be a nightmare for those without, and potentially a disaster for your account. You need to bring your trade sizes more in line with your account balance. Many people decide to risk between 1% or 2% per trade, this gives you a lot of leeway for losses, a loss will only cause you to lose up to 2% of your account and so when you do lose, it is limited and sustainable. If you aren’t able to work out what your trade size should be then it would be best to start small and then work your way up until you reach the appropriate level.

Holding Trades

For many there is only short-term trading, something only becomes long-term trading when one of the short-term trades stays in the red, people just don’t want to close out trades when they are in the red and this is an extremely risky move to make. The longer that you hold onto a trade, especially when it is in the red, the more volatility it is exposed to, this volatility is what is dangerous to your trade and can continue to take it in the wrong direction. You need to be able to limit how long to hold onto trades. If your average trade length is 10 hours, then why would you suddenly hold on to one for 7 days? You shouldn’t and so you need to set a limit to your trade times, try to keep them relatively the same, there is no harm going a little over now and then, but do not suddenly start holding on to them for 10 times your normal length.

Stop Losses

Stop losses! Use them! That is about all we need to say. Stop losses can save an account, they are that important, if you aren’t quite sure what they are yet, they are a limit that you put on each trade, a certain level, when the markets reach that level the trade will automatically close. If you are trading a strategy that requires longer-term trades then you won’t want to be in the position where you need to sit in front of the computer for the next 12+ hours, so instead, in order to protect your account you will put on a stop loss to ensure that you only risk the amount that you are willing to risk. This is a fantastic way of protecting your account and something that you should certainly use.

To go along with the stop losses and take profits, these work in exactly the same way but instead of closing out losing trades, they will close out trades that are positive. This is a way of ensuring that you take the expected or wanted profits, often when a trade goes positive it will eventually return back to a negative figure, this is a way of ensuring that you take the profits even when you are not at your trading terminal.

Risk to Reward Ratio

Your risk to reward ratio details how much you should be winning and how much you should be losing on each trade, this also dictates where you put your stop loss and take profit levels that we mentioned up above. It is important that you understand how this works, it can make or break a strategy as having a bad risk to reward ratio can make your strategy unprofitable. If you are trading at a 1:1 ratio then it can be quite hard to be profitable, you will need more winning trades than losing to be profitable, something far easier said than done. Instead aim to have a reward ratio of at least 2:1, some go as high as 10:1, which would mean that you would only need one trade to be profitable out of every 10 in order to be in profit. Work out what works well for your own risk tolerance as well as your strategy.

Those are a few of the things that you can do to help control your risk when trading, there are of course far more things that you can do, these are just some of the basics. What is important for you to take away is that you need to manage your risk, without doing so you will end up losing a lot more than you expected, so get on top of it and you will be in a good position for being a profitable trader.

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How Much Money Should I Risk On Forex Trading?

Novice traders are often surprised to learn that when it comes to being profitable in the long run, controlling risk is as fundamental as making good trades.  Position size, Risk, and money management are no less fundamental than entry strategies and trade exit strategies and must be considered scientifically and completely. If you succeed, then as long as you can maintain a trading margin (which is not so complicated, there are several well-documented trading margins), you will have a solid model to make a lot of money. You don’t need to choose spectacular trading operations to make large amounts of money, you just have to keep doing the right thing constantly, and let the magic of managing money be composed of snowballs growing from your bottom line. To get it right, start by asking the right questions.

How much money should I put into my trading account?

You have hired an account with a broker, and are ready to start trading. Just deposit some cash. How much should you put? You should be honest with yourself, and consider how much money you have that is available for wealth creation. It should not include assets such as a house or car in that calculation, or pensions: the correct question would be, how much free cash can you get in your hands, without debt, and use it to try to increase your profits? When you have this figure, you should be thinking of placing between 10% –  15% of it in something risky, like Forex Trading. You may think this is a small amount, but it really isn’t – please read on and I’ll explain why.

The risk or “Barbell”

Imagine that there are two traders, trader A, and trader B. Both have USD 10,000 in liquidity, which is all the cash that each of them can get to invest in creating wealth. After opening brokerage accounts, Trader A invests its $10,000, while Trader B invests 10% of the same amount, $1,000, while the remaining $9,000 is invested in United States-guaranteed Treasury bonds that pay a low interest rate.

Consider your respective positions. Trader A will be at a psychological disadvantage, as the account represents all the money he has, so the losses will probably be painful for him. You also need to worry about the broker, lest he files for bankruptcy and be unable to repay any of his funds back unless the broker is backed by a government deposit insurance program and obviously as we always recommend, will have to be a regulated broker.

Even then, its capital could be held back for over a year before he could get any insurance. Because of his fears, even though he knows that the best risk per trade for his trading strategy is 2% of his share account per trade (explain the issue of how to calculate later), he decides to risk less than this. He decides to risk only one-tenth of the total amount, so he will risk 0.2% of his capital on each operation.

Trader B feels much more relaxed than Trader A. She has $9,000 parked with lots of security in US Treasury bonds and has $1,000 in her new brokerage account. Even if he loses the entire account, in the end, he would have lost only 10% of his investment wealth, which would not be fatal and could be recovered. It is the collections over 20% that are challenging to recover. Trader B is psychologically more prepared for risk than Trader A. She has calculated that the ideal risk by trading for your trading strategy is 2% of the capital of your account per trade, just like Trader A, but unlike Trader A, She’s gonna risk that amount in full.

Both Trader A and Trader B will start by risking the same amount per cash transaction, $20.

Trader B, with the account under $1,000 and the $9,000 in US Treasury bonds, ends up with a total profit of $811, of which $117 is interest received at the end of the year on US Treasury bonds. Trader A, with the largest account of $10,000, ends up with a total profit of $627. Although they initially start with the same risk, if they diversify risk capital between a very conservative fixed income and a more risky investment, it pays Trader B a significant profit and gives her the peace of mind to aggressively play the risk as it should be.

How much money should I risk?

This is not a difficult question to answer if you know the average or average benefit you can objectively expect to make in each transaction and are only interested in maximizing your total long-term benefit: use a fixed fractional money management system based on the Kelly Criteria (a formula to will be explained in more detail in the next paragraph). A fixed fractional system has the risk that the same percentage amount of the value of your account in each trade, as shown in the above example of Traders A and B using 0.2% and 2%.

Fixed fractional money management has two major advantages over other strategies. First, you risk less during losing streaks, and more during winning streaks, when the effect of composition really helps to build the account. Second, it is virtually impossible to lose your entire account, as you are always risking X% of the remaining, and never everything.

The last question is, how is the size of the risk fraction calculated? The Kelly Criterion is a formula that was developed to show the maximum amount that could be risked in a trade and would maximize the long-term benefit. If you know your approximate odds for each operation, you can easily calculate the optimal amount using a Kelly Cries calculator. In the best Forex strategies, the amount advised by Kelly’s formula is typically between 2% and 4% of the capital account.

A warning: the use of the total amount suggested by Kelly is bound to result in large reductions after losing the veins. Some veteran traders, such as the prominent Ed Thorp, have suggested using half the amount suggested by a Kelly Criteria calculator. This generates 75% of the long-term benefit, but only 50% of the reduction, produced by the full Kelly criteria.

Monetary management: Part of “Holy Grail”

It’s no exaggeration to say that the main reason why traders still fail, even when they’re following the trend and getting their inputs and exits mostly right, is because they are not following the money and risk management techniques set out here in this article, as part of a global trading plan. Forget the trade result you take today and worry about the overall results of the next 200, 500, or 1000 trades you will take in your place. If you are able to make a profit of only 20% of your average risk by trade, which is feasible using a trend-tracking volatility-breaking strategy, it is totally possible to turn a few hundred into a million within a few years.

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How to Set Up a Forex Risk Management Policy

Working out how to set up your risk management plan is quite a big question. In fact, there are a hell of a lot of things to think about and different aspects to implement. Due to that fact it will be impossible for us to tell you about all of them, as some are individual to each trader. We can, however, go over some of the different things to think about when it comes to your risk management plan. It is up to you how much you do, but remember, one of the keys to being a successful trader is that you have a proper risk management plan in place, to protect your trades, your accounts, and your overall capital. So let’s take a look at some of the things that we should be thinking about when we are setting up our risk management plans.

The first thing that you are going to need to do is simply gain an understanding of what trading is and how it works. There is no bigger risk than to try a trade without actually understanding how it works. So while this won’t exactly go into your risk management plan, you can’t really start to create your plan without actually understanding what it is that you are creating. Trading and forex is a never-ending learning hobby, you will be constantly learning and will never know everything, this also means that you will be constantly learning new ways to reduce risks, so be sure that you are aware of this and always willing to learn more about forex and trading.

You then need to understand how leverage works, it can be a gift but also a curse. Leverage basically allows you to trade with more capital than you have in the account, sounds fantastic, but with this increased trading power also comes increased risks. With leverage of 100:1, you can use a $1,000 account to trade the equivalent of $100,000. This enables you to increase the trade sizes that you can put on, increasing your profit potential, but these larger trade sizes also mean that you have the potential to lose far more with each trade. Ensure that you know the risk of the leverage that you are using, do not go too high, as this can cause issues depending on your strategy, we would suggest not going over 500:1 for any strategy.

You then need to get your trading plan sorted, you need to decide on a strategy that you wish to use, there are hundreds of them out there, try and find one that suits you, something that goes along with your personality. If you hate waiting then go for a shorter time frame strategy like scalping, if you do not have much time to sit at the computer then go for a longer-term one like position or swing trading. This trading plan should also act as a sort of decision-making tool for you when you wish to place a trade. To set out some rules that you need to follow, they will help you work out the right entry and exit price for you to place your trades with. When you do this, you should also keep your trading journal to detail the trades that you make to ensure that they are all in line with your strategy.

You can also set a risk to reward ratio, this is basically detailing how much you are going to risk in order to make a certain amount of money. Many people go for at least 1:3, this means that for every $1 that you risk you will want to try and make $3. For a $100 trade would potentially lose $100 but will have a potential profit of $300. This sort of strategy will mean that you can be wrong more times than right and still be in profit. It is important to set this out correctly as it can make it far easier to work out where to place stop loss and take profit levels.

We briefly mentioned them but you need to learn to use a stop loss and take profits with every single trade that you take. If you place a trade without a stop loss then you are potentially risking the entire account balance on a single trade with a risk to reward ratio of infinite losses. These are paramount to protecting your account from trades gone bad, we don’t need to explain the importance, but any sort of successful trader will be using stop losses.

Learn to control your emotions, something that you have probably heard before, but it is important when it comes to being consistent and minimising losses. Emotions such as greed and overconfidence can really hurt your trading efforts, causing you to place trades that you probably shouldn’t or placing trades that are larger than your account or risk management can take. Try to avoid using these emotions to trade with, if you feel them coming on then work out some coping mechanisms, even if that is as simple as simply walking off and going outside for a bit. If you are feeling emotional or have clouded vision, then try to avoid trading at those times.

Keep an eye out for the news, the news can cause huge movements and spikes in the market, so knowing what news events are coming up and how they may affect the markets can give you an advantage and the opportunity to get out of the markets before they happen. It is always advised that you do not trade during news events or disasters, so knowing when they are coming up (news events that are) will give you the opportunity to get out before they cause the markets to move. It is impossible to see them all coming but knowing some of them will at least be helpful.

You should also get to know the limits of your account, if you have a balance of $1,000 you will have very different limits to someone with an account of $10,000. There will be different possibilities when it comes to trade sizes and the risk management that you can do, as well as different profit potentials. This isn’t a large point, but just be aware of your limits so you do not over-trade on your account.

The final thing that you should be doing is using a demo account, every change that you make to your strategy or your plans you should demo the changes first, this ensures that you are not risking your own money on an untested change. Try the change for a period of time before you do anything else on a live account. Demo demo demo, that is the moral of the story and if you don’t there is a very good chance that your account will eventually blow.

So those are some of the things that you can do and that you should be thinking about when it comes to creating your risk management plan and policy, there are of course other things to think about, but doing at least these things will give you a good starting point for it.

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Are Risk and Volatility One In the Same?

According to the dictionary, someone or something is volatile when it changes or varies easily and unpredictably. Speaking of a financial asset, its volatility or standard deviation is a statistic that describes simply with a number how much the price moves over time. That is the more volatility an asset exhibits, the faster and more extreme its unpredictable fluctuations are.

“That morning no one could imagine that John Appleseed would decide, instead of going to his office, to go to the mall with his AK-47 and murder for no apparent reason a dozen of his neighbors. Later, a friend of his commented in tears to the news channel: We don’t understand what happened to him, he seemed so normal, so non-volatile…”

The adjective “descriptive” here is key, as volatility only gives us observable information of past price variations. It tells us nothing about the nature and risk of the underlying process that produces it. This distinction is essential and is often ignored, mistakenly identifying risk with volatility. The adjective “descriptive” here is key, as volatility only gives us observable information of past price variations.

Risk is a difficult, complex, and multidimensional concept. Meanwhile, volatility and other descriptive statistics are a comfortable attempt to reduce their many faces to a simple number. As if the speedometer of the car gave us all the necessary information regarding the risk of driving. Even the CNMV uses a risk scale between 1 and 7 depending on volatility to classify IFs. Thus, a “1” fund has virtually no risk, and a “7” fund is very risky.

“Even the CNMV uses a risk scale between 1 and 7 depending on volatility to classify investment funds… This doesn’t make any sense.”

This doesn’t make any sense. If we imagine a fund that loses exactly -2.00% every month, its volatility according to the standard deviation formula would be zero (it has no volatility) and could be considered “risk 1” on the scale. Perhaps avoiding these contradictions, on the CNMV website they heal in health and hide saying that even if a fund is classified as “1”, it does not mean that it does not have risk. But they don’t explain why.

The Volatility of the Crocodile

Investors seized on the back of a financial product of low volatility. To better understand why it is a mistake to make equivalent risk and volatility, let’s look at the example of the pelican and crocodile. If we observe for a long time the quiet movement of a crocodile by the river, it transmits to us the information that there is no danger, that its movements are slow (little volatile) and we can predict and adapt to them easily.

So, our sympathetic pelican can ask the crocodile to take him to the other end of the shore and trust that he will continue to behave as he has done so far. In this example, the pelican is equating the very low observable volatility of the crocodile with very low risk.

Why does the pelican think there’s no danger? Because if we do not know its underlying nature and only know its volatility (which is observable), the risk of not getting safely to the other shore should be minimal. But all who know the nature of the crocodile know that there is a great and silent (unobservable) danger.

“Why does the pelican believe there is no danger? Because if we do not know its underlying nature and only know its volatility (which is observable), the risk of not getting safely to the other shore should be minimal.”

Crocodiles move most of the time very slowly (they are very few volatile), but occasionally and unpredictably, their behavior changes radically: they move extraordinarily fast (much faster than its past volatility could even make us imagine) to trap in its jaws its trusting victim. Therefore, the mere empirical observation of the behavior of an asset, product, or strategy (its track record) is not sufficient to know the risks we face when investing.

The volatility of a fund or product is not a good measure of risk because it only tells us how much it moves over time, not about the nature and risks of that movement or where the underlying strategy can take us. Risk is too complex and profound a concept to be reduced to a simple and comfortable (for clients and quantitative analysts) number.

The volatility of a fund or product is not a good measure of risk because it only tells us how much it moves over time. It is in the nature of the underlying strategy that the risk of investment funds and products lies, not in their volatility. There are very risky and non-volatile strategies (investment crocodiles). An extreme example is the sale of options out of money.

This strategy produces positive monthly returns over long periods with hardly any volatility, which makes them very easy to pack and market (its track record of continuous increases without volatility, for example of approximately +1% per month, sells very well). Eventually, a crash happens in the markets, causing the investor to lose, if not all, virtually everything previously invested and earned in the fund.

High volatility stock market investment, but harmless in the long run. On the other hand, there are very volatile strategies with little risk, which we might call the Chihuahua investment in our zoo: They move a lot and make a lot of noise, but they are totally harmless.

The trivial example is the investment in diversified stock exchange globally through ETFs or low-cost fund, considered as very risky because of its high volatility (we can temporarily lose half of the investment), but that in the long run will give us a return around double the world’s GDP growth. Paradoxically, it is the risk-averse investors who give up profitable and low-risk long-term investments, preferring low-volatility products that sometimes hide crocodiles.

The reason is more psychological than rational: they can’t bear to see that they are losing money for a while (a key point I already talked about in Volatility and Emotional Accounting). The industry knows this and gives the customer what he asks for, even if it’s not what’s best for him. That is, mostly crocodiles of low volatility instead of (noisy) chihuahuas of high profitability.

Forex Risk Management

Simple Trading Advice That Can Save Your Forex Account

Are you losing control of your trading? Do you feel lost in your own analysis and despair in the markets because your trading goes nowhere? You are not alone. Many other forex traders suffer from “analysis paralysis” because they use overly-complicated trading strategies. One of our problems is that almost everything we learn in our lives shows us how to survive at work and how to survive in the “real world”. The foreign exchange market is a different world for which you are unprepared and, of course, we apply what we know about the workforce to the forex markets.

As you have probably already discovered: the two worlds do not fit together very well. Forex requires a different approach, one of mental strength, one that forces us to show iron discipline. Sometimes “doing nothing” is the most cost-effective approach. Does it sound counter-intuitive? Most things in the forex market are like that. Based on my experience, most traders do not find success until they simplify their trading strategy.

Today, I will show you some simple steps you can follow to change your trading strategy to operate with a “simple forex” method of trading. Forex requires a completely different look, one of mental strength, one that forces us to teach iron discipline.

Remove All Unnecessary “Extras” From Your Graphics

It is normal that you want to take advantage of every possible advantage to try to put the odds of success at your side. For a trader initiated, it usually means to leave on the hunt for all the “shiny new objects” as indicators, other graphics tools, and anything that seems exotic enough to offer you a “selective view” of the financial market that not everyone is aware of.

Those who pursue trading strategies that use indicators are generally satisfied with the performance provided by the system in the longer term. The natural internal workings of most forex indicators respond very slowly to the movements of the organic market. The indicator can therefore offer a sign of purchase or sale only when most of the movement is finished, thus putting you at a very bad price to enter. Indicators also don’t work very well in the markets they are consolidating, generating bad commercial signals that can cause a decrease in their balance.

Take a look at the stochastic – a popular forex indicator that comes with most graphics programs. Stochastic is simply designed to operate under specific financial market conditions. Unfortunately, it does not work properly in trend markets – it is the main requirement to make money.

What traders do then is to look for another indicator that “fixes” the problem, one that “filters” the bad signals and gets the original indicator to work better. Despite having the best intentions, this only adds more problems to the chart. Rather than offering us an easier analysis, it makes it more frustrating, as the two indicators will probably offer contradictory signals and will never coincide to offer a clear trading opportunity.

The trader will then look for more “graphical aids” to remedy this, but the situation will escape his control and the graph will end up looking like something like a nuclear power plant control panel.

This is a very frustrating work environment to operate in because you can’t even see where the real price is and the price is the most important item on your chart. Once a trader reaches this point he usually ends up cleaning the chart and starts again. Most traders will find themselves back with the flat price chart and there is nothing wrong with it. At this point, you should have your moment of inspiration.

Trading with a flat price chart is the simplest, most effective, and most commonly used trading method in today’s trading industry. If you notice that the graphics are escaping your control, then do yourself a favor and remove all unnecessary data from your chart and start learning how to trade directly with price action.

Do Not Over-Complicate with Support and Resistance

Even with a flat price chart, the trader can still get carried away and get into a frustrating mess and that’s literally what happens most of the time. Marking support and endurance levels on the chart is one of the most basic and vital skills you need to succeed in any forex trading strategy. Even the core traders, who follow and operate according to the news, need to have a good understanding of how to draw supports and resistors to “complete” their market analysis.

Surprisingly, many traders – new and experienced alike-continually move the line of support and endurance and “defecate in their own nest” as they go crazy with the way they set levels on their chart.

Levels in the Chart

It is time to focus here again on the lesson and learn how to keep trading simple, which also applies to support and endurance levels. Do this and your Forex system will benefit quite a lot from it. At the time you are plotting markets in a price range, limit yourself to marking the top and bottom line of containment. You don’t need the lines to coincide fully, where all the shadows and bodies align perfectly, as this is very rarely going to happen.

Just mark the general area where the price is spinning. Everything you need to focus on the most important turning points, where the price is going to change course and create a decent price movement that you can take advantage of for profit. Operating in the center of the range is risky, the price can be very erratic, unpredictable, and volatile, as it is like a high rotation area that can make you lose a lot of money. But the traders still try to operate in that area: don’t be one of them.

Probably the best place to get into a price range is at the price range limits, so we just have to mark these limits. It’s as easy as that, if you can’t see a sign to buy or sell at these major turning points, then keep waiting. Sometimes, doing nothing is the most cost-effective strategy we can use and it is also one of the less easy decisions to take and follow.

Markets in a range are easy to negotiate, all you need is two levels. The markets in motion, however, are a little different. I work with turning levels in a trending environment.

As you can find out, even when we have good trends in the daily chart that look like they will last forever and offer clear buying/selling signals, many traders continue to lose money despite how obvious things are in that environment. Honestly, I think the main problem comes down to time. Losing traders are not getting into the trends at the right time and are being pushed out of the market by trend fixes.

Marking simple strength and support levels can protect your trading account from these errors. During the trends, I frame and concentrate on turning points, where the old resistance becomes the new support and vice versa. Time and again, the turning points of the trend will end with the counter-trend movements. This is where we will most often see the trend shift and move towards new highs or lows again. Start looking for and marking these spin levels and check them for signs of purchase or sale that align with the trend.

It is the turn levels that you must watch for to catch signs of buying or selling in forex. In this case, we have some upward rejection candles that told the trader that the lowest prices were denied by the financial market at the giro level. Just keep in mind that, with a financial market that is on a trend, you really just need to worry about spin levels.

Remember what I said before: these levels will not always align perfectly, so just mark the overall area that you anticipate will act as a main turning point on the chart. Also don’t forget to mark the main weekly turning points, as they can stop strong trends and trigger big turns in price. The same must be done: analyze the weekly graph and mark the strong and clear turning points.

I hope you’ve begun to show him the power of simple trading. There was no need for any complicated indicators or complex graphics tools. It’s just about working with a flat price chart and being very minimalist in marking levels of support and stamina.

Once you simplify the way you mark levels, technical analysis will become much clearer, less frustrating, and you will begin to learn to anticipate future price movements on a flat price chart.

Learn A Simple Forex Strategy That Keeps Your Trading Simple

If you are using a trading strategy you need to use indicators, complex math, or even one that requires spending hours and hours in front of the computer screen. I would recommend that you have the psychiatric hospital in your speed dial numbers! There are many trading strategies that allow us to use our heads only as an external observer. Most of us have busy lives and we really can’t afford to spend hours in front of the graphics by scalping or day trading.

Swing trading can be a very good alternative for those traders who want to be able to trade easily and adapt it to their lifestyle. For example, you may want to operate “full-time”, while keeping your job or studying full-time. How best we can do this is using “end-of-day trading strategies”, where you only have to analyze the market once a day and spend about 20-30 minutes analyzing the financial markets to make your trading decisions.

I use price share trading strategies combined with swing trading as part of my end-of-day trading strategy. The use of some of the examples I’ve shown in today’s tutorial can be seen in the daily chart at the close of New York to identify low-risk and high-reward business opportunities within the daily time frame. This system only takes us about 15 minutes to set up operations and forget about it.

We have a good bullish tendency and we can see that a turning level has stopped a corrective movement against the trend. This is a classic sign of “buying” stock from the end-of-the-day price, right at the hot spot where we anticipate it will act as a turning point of the wider trend. The bullish rejection candle informs the spin trader of the price share that we will probably see higher prices from here.

Actually, it’s as easy as counting 1, 2, 3. You can set your purchase order, complete it with stop and take profit levels, and then let the market follow from here alone. The best conclusion we can draw from all this is that don’t have to stand in front of the screen for hours, as you are free to move on with your life while the financial markets take care of the rest.

I hope today’s tutorial helped you remove all the complicated elements from your chart and trading system, to seal something simple. If your trading system is too “complicated” or needs too much of your day, then you should consider switching to the end-of-day trading strategy that exploits the benefits of price share and swing trading.

Even if you like intraday trading, I strongly believe that you will benefit if you remove the indicators from your chart and learn to “read” a flat price chart to anticipate price movements directly from the same candles. Once you remove all of these complications and start working with plain price charts, your trading strategy will be less stressful, will offer more clarity, and will be a more profitable enterprise.

Just trading the few major currency pairs like EUR/USD, GBP/USD, and USD/JPY and following the long-term trends when the market moves comfortably in the direction of trends is a simple and cost-effective way of trading, and doesn’t need any support or resistance or indicators at all. Give yourself a break and at least give him a chance.

If you liked some of the graphic patterns we saw in today’s lesson and would like to learn more about keeping trading simple, minimalist, and profitable, then you can take a look at my Forex trading strategies.

In my experience, currency traders don’t usually succeed until they learn to read the markets by analyzing price action. Make things simple and logical and trade with a logic that you can understand. Don’t be greedy and chase money, use your energy to become the best possible trader and money will flow naturally to you.

Forex Money Management Forex Risk Management

When Professionals Run Into Problems With Trading, This Is What They Do…

If somebody told you at the beginning of a professional forex career that you will have to bust many accounts and work for a couple of years to get it right, would you still take that road? Probably not, because in the end, you might not even get to the professional level. A lot depends on you, how much do you love trading and how much do you want to have a job most people dream about. People will settle for less, why is that so is not important, it is more about is that enough for you. At some point on this road, in case you lose a few accounts or run into obstacles, you may fall into a bad mood called desperation. So much was sacrificed only to scrap everything, you might think. Nobody will say this, but it will happen to most of the traders if not all. At any moment in a professional forex trading career, it is a possibility your mindset will take a hit, and here is what professionals have to say about this. 

The Old Problem

People that want to become forex traders do it when they want to get out of their present situation. Forex trading is much more attractive than a day job, at least for ordinary people working for XYZ company from 9 to 5. However, with all the warnings forex trading is only for the most persistent, people go in thinking they are just better than everybody else. Well, even genius traders mess it up, and mistakes are good, better make them early on. 

Desperation comes in when you pay for impatience. Rushing to forex trading just because you need alternative income so you can quit your job or drop out of college is a faster path that hits back at you. Feeling that you are missing a lot if you do not start trading now is a warning you need to take seriously. Before allowing forex to hit you financially, demo trade. Then it might hit you psychologically, your real money is safe at least. Professionals take real losses, and you have to get ready for that first. So patience is a must, you are not going to be ready in a few months and more likely not even for a few years. 

Pro Approach 

Professionals know this “trap” so they do not start panicking when they have a bad month. They play the long game and patiently wait out to see if something is really not aligned with their trading. The right mindset about this would be even when you are losing, it is good. Professionals do not get emotional to the point they lose their trading ability, but actually are very intrigued about what could take their multi-year successful strategy down. It is a great discovery because ironing out the problem makes their strategy even closer to perfection. The result of this research is also very beneficial for understanding the market and to other traders as well. What follows is looking for tools or trading measures that could evade the losses from this market situation. 

FOMO and Risk Fear

Fear Of Missing Out is also one of the most common issues beginners develop but later advanced traders may experience the paradox of “knowing too much”. FOMO is handled by having a strict rule set or a trading system. Some traders count candles until it is too late to enter a trade, some have indicators, but they all have something that prevents them from feeling that fear. There is a simple barrier in the form of a rule. 

When traders love trading they are very well informed, they digest a lot of information from various sources. This can at times affect their trading where they become risk-averse. It is hard to have a decision based on every indicator, news, or other data. Traders have to focus on a set of “decision-makers”. 

One of the ways to redirect the risk fear is gradually entering the position. This could be referred to as the Scaling-in method of money management. Older traders and investors are especially fearful of the new wave that is probably taking over currencies as we know them. We are talking about cryptocurrencies of course, and their intangible form is not really understood. The new age of currencies goes along with the new generations but veteran traders are conservative most of the time. Gold and precious metals are their choices over bitcoin and have this fear of risk (unknown). Scaling in method starting with small amounts is a good way to break this fear, gradually increasing the amount as the trade progresses. Professionals with an open mind do not have problems accepting new markets as long the asset is globally present. 

The New Problem

According to the experiences of pro traders, the journey of ironing your emotions does not easily stop. So if you are a beginner reading this article, be ready for a bumpy ride and do not ever get discouraged. Pro traders have devised a way to combat that deep but mellow feeling they have wasted many years and that they might give up trading. This feeling gets stronger when you become a pro. For clarity, a pro trader is not the one who is trading real money, it is the one who does it for a living, with his or with somebody else’s money. The feeling you are not good at what you are doing gets stronger even though you have reached the level most dream about. After every loss, it reminds you. For some, it could be a bad month after you lose sight of the long play you are actually aiming for. Desperation is there, some traders feel it more, some are more rational. According to pro traders, there is no way around it, the longer you are in trying to trade your way the more you get the feeling all was for nothing. 

The best way to get yourself on track nevertheless is by putting the work early on your strategy, plans, the whole system, and of course psychology. When you have a really tested out system with great results, you have confidence in what you are doing. The reason why pros might get desperate is that even though the system is tested out, the market is changing. Results are changing. 

It could be a motivator to find out new, better trading methods, but it is for the wrong reasons. Fear of failure should be overcome at one point, it seems only time (experience) of generally good results can make you glad you chose to be a professional forex trader. According to experts, if they could take away one thing on their road to ascension, it would be that feeling. Otherwise, it is a great profession. Having an eyeopener such as realizing you will be doing 9 to 5 jobs for most of your life will likely put you on a different track than most people. On this track, not necessarily forex trading, the same feeling will come up. Professional traders make sure they know what they are doing, the same translates to everything else.

Forex Risk Management

Hedging and Coverage: What Forex Trader’s MUST Know

If you’ve heard the word hedging or hedging mentioned and you’re not sure exactly what this is about when trading, this article can help. As is normal in my posts, an example to bring it down to earth. Imagine you have bought a car or a house. When we buy an asset of this type we usually want to protect our investment from possible accidents or situations that may occur against us.

One of the simplest ways to protect these assets is to take out an insurance policy that allows us to reduce the possible losses we might have if some unexpected situation occurs that we sometimes cannot avoid. In trading, hedging works similarly. It is simply an investment to compensate or protect our funds, reducing the risk of price movements against us. In this way and simply put, investors or traders use hedging to reduce and control their risk exposure.

A very important aspect when using a hedging strategy is the fact that as you reduce the potential risk you also reduce potential earnings. This is because, as an insurance policy, coverage is not free. Hedging can also be achieved by opening a position in another financial asset that has a negative correlation to the vulnerable asset, that is, the initial investment we want to protect. In the case of Forex, we say that two currency pairs have a high negative correlation if the correlation is negative and above 80 generally, in this case, the pairs move in opposite directions.

For example, in the foreign exchange market, the pairs with a high negative correlation are usually the EUR/USD pair and the USD/CHF pair. Anyway, I leave you a complete article that I wrote about forex correlation and how you can consult it at any time (you don’t have to do the calculation manually). It’s an important concept.

Before you continue, it’s important to know that hedging is not allowed in the United States. This is because brokers operating in that country must comply with the “no-coverage” rule known as FIFO (First in, First out. First in, first out) of the NFA (National Futures Association).

This “no cover” rule only allows for an open position on the same symbol. If, for example, we open a purchase position on an instrument and then open a short on the same instrument with the same volume, the initial position is closed because one order cancels the other. Because of this limitation, typically brokers that are regulated by NFA have international subsidiaries for their customers outside the United States.

Advantages and Disadvantages of Hedging

Like any strategy, hedging has its advantages and disadvantages. Depending on your trading system it may or may not make sense to apply it (I don’t use it, I’ll tell you later). One of the main advantages we find in having to negotiate with hedges is that they limit your losses, but as I was saying, it also erases a portion of our profits. Although it is a fairly conservative trading strategy (a priori), it allows us to have a high hit rate, although the profit/risk ratio decreases.

Hedging increases liquidity in the market because it involves the opening of new clearing operations. However, this represents a disadvantage as a trader because you will pay more commissions. Although we can do it on almost any platform, some brokers do not allow you to do it, bear in mind before applying it. A clear disadvantage that we must always bear in mind is that not all risks can be covered.

Types of Hedging Strategies in Forex

The types of hedging strategies are varied and although they all seek to reduce risks and limit losses, each of these strategies can achieve its goal in different ways. Let’s look at the most common trading strategies used:

Total Coverage: As its name indicates, when we make a total coverage we keep open the same volume in long and short operations. Full-coverage allows you to block your exposure in the market, that is, raise or lower the asset in question will not affect your account. Be careful because a trade with a fixed profit and loss level could reach its stop or take profit and close (and you can keep the contrary trade open with a negative float and no coverage).

Partial Coverage: With a partial coverage strategy you have open long and short positions, but with different volumes. Here already if there is risk (the difference between the volume of one and another position of the same asset that you have opened.

Correlated Coverage: The correlated hedging strategy is one of the best known in trading. Although I mentioned this strategy at the beginning of the post, let’s go a little deeper. It consists of covering an open operation with another operation in a correlated currency pair. The correlation between both currency pairs or assets can be positive or negative.

In Forex, an alternative is to trade “strong” currencies against “weak” currencies and thus maintain less exposure with strong ups or downs. Suppose for example you decide to go short on the pair EUR/USD. Currency pairs such as AUD/USD and GBP/USD have a high positive correlation with EUR/USD, so their price is likely to fall as well.

If you open another short in AUD/USD or GBP/USD, you are more exposed in the market because of the EUR/USD short position you already have. In the case of currency pairs with a high negative correlation as the case of EUR/USD and USD/CHF, if we open a short in EUR/USD and go long in USD/CHF we would also be incurring a higher risk.

Here, we can perform a correlated coverage. What must be vital to us is always to maintain in mind the following: if the correlation is positive, to make the coverage you must trade in opposite directions (sale – purchase or purchase – sale) and if the correlation is negative you must trade in the same direction (purchase – purchase or sale – sale).

Direct Coverage: It consists of opening positions in the same currency pair. It may seem a bit confusing or pointless, I explain it better with an example (like not):

Suppose you are long in the pair EUR/USD, the position is green but still does not reach your take profit. You’re coming up with a high-impact story (for example, NFP or GDP) and you want to partially protect your earnings without closing the position. One way to protect yourself from movements due to the high volatility this news may generate is to open a short position in the same pair and when volatility decreases close the hedging position. Minimizing in this way the potential risks of the news.

Direct coverage is also often used to leverage corrective movements in a trend. Anticipating a possible price correction in an uptrend, we can cover a long position by opening a short position. If the correction does occur, we gain in the short position while maintaining the long position.

Coverage with Futures: Hedging operations with foreign exchange futures are one of the hedging more used by the big market operators. Suppose an investment fund, based in the United States, invested in a Japanese company and generated 1 million yen in unrealized profits. Since the investment fund needs dollars instead of yen, it can buy USD/JPY futures contracts on the stock exchange for the total amount of yen it expects to receive (total coverage) or for a percentage of the total to receive (partial coverage). In this way the fund secures a fixed rate for its yen, protecting itself from the risk associated with USD/JPY torque fluctuations.

Hedging: Yes or No?

From my experience, I consider that every trader should know and know how to apply the different strategies around hedging, especially in a market as volatile as the Forex market. What we want to achieve with coverage is to minimize risks of movements against us when making an investment and at no time seeks to maximize potential profits, so we can consider it a purely defensive strategy.

It allows us to manage our positions in a calmer way, reducing the stress of the psychological factor when trading. There are many hedging strategies depending on the financial instrument you are operating.

Robots Using Hedging

We find a lot of systems on the Internet that may seem very attractive but that constantly make coverage by delaying losses and adding more and more positions. You can imagine how this ends. Run away from these kinds of robots. And you’ll wonder, how do you detect them? Easy, don’t buy a forex robot that you don’t know how it’s created, how it works, and you’ve spent time testing. That’s for not telling you straight away not to buy a robot to trade.

My Opinion

As you know, I do algorithmic trading and none of my systems apply hedging. They could tell you that psychologically this technique makes you not close with losses and… I ask you, why not take the loss and delay it by taking more commissions?

Doesn’t make any statistical sense in that case. Applying currency trading systems individually does not. Hedging can make sense in correlation strategies as we have seen between assets or in our stock portfolio to protect us from currency risk. If for example we buy shares in dollars but our account is in euros. I certainly think today it is an excellent tool, not for trading systems.

Forex Risk Management

How Do I Know if My Risk Appetite is Reasonable?

Risk is something that is present in pretty much everything that we do when it comes to trading forex, each trade that we put on is a risk, each time we increase our lot sizes or trade a new currency pair, it is a risk, risks are everywhere. While risks are present, and there are ways to monitor and reduce the risks, there is one thing that we are not able to change, and that is our own tolerance or appetite for risks.

Risk tolerance is basically your ability to deal with risks, it is an emotional state where you are either tolerant of the risk, able to deal with it with a clear mind and an objective view, intolerance is where you are not able to handle it quite as well, it will cause you to stress, it will cause you anxiety and it can even cause you to place trades that you otherwise would not have.

Your risk appetite is about how much risk you actually want, for many wanting risks would seem like a strange thing to want, but for others, it is something that they get their buzz and thrill out of it. In fact, this lust for risk can cause people to trade too much, to trade too large and to trade at a level that puts their accounts at risk. For others with very little risk appetite, they may not want to trade at all once they have experienced the risks that are involved.

With that being said, how do you know whether your own appetite for risk is appropriate and reasonable? Firstly, if you are getting severe anxiety or stress from trading, you don’t really want to press that trade button due to worry that you may lose something then your risk tolerance and appetite is on the low side, if it is really bad, then this can be a sign that trading is simply not for you, there will be risks and to trade is to accept those risks. For some it is possible to work through it and to develop a better tolerance to the trades, for others it is simply not possible and so trading will simply be a stressful situation for you.

On the other end of the spectrum are those that like a little too much risk, they want to place huge trades, they want to be trading at all times regardless of their strategy or how the markets are. The more volatile the markets the more they will want to trade as the risk and rewards are both far higher. This can be a dangerous situation to be in as very little risk management will be put in place, these sorts of thrill-seekers will either become rich very quickly or lose everything in a matter of days, sometimes both, getting some wins, getting the confidence and then losing it due to risking too much.

Those are the two extremes when it comes to risk tolerance and appetite, what we need to remember is that there are in fact things that we can do to help maintain a safer trading environment. If of course, you are right in the middle of the tolerance and appetite levels, then you are in a great place when it comes to trading as you are able to tolerate the risks and are also not afraid to take a few.

So let’s assume that you are either high or low on the appetite level, what can we do to help? The first thing is to create a trading plan, within this plan you will have set out some rules, these rules are there for one important thing. They are there to ensure that you are in line with your plan and that your risks are limited. These rules will help someone with a low appetite for risk to understand that they are still in charge and that trading along these rules gives them the essence of safety, a way of controlling the risks that they are being put under.

For those that are on the high end, it will enable them to reign in the risks that they are taking. Trading to the rules will basically ensure that you are not putting on any additional trades that you shouldn’t be and that you are not placing trades that are simply too large for your account. Of course, it is up to the person whether they continue to follow it, but some discipline will enable you to manage your risks a little better.

Your risk management plan must also be in place. This plan sets out all of the risks that you will be putting yourself under, it will give you a good understanding of what risks there are and also how you will be reducing them. Ensure that you understand where your stop losses will be, what your risk to reward ratio is along other aspects of your trading. Much like mentioned above will enable you to maintain your risks and to help you stay at the right level. When we trade to the plan, we are making good trades, regardless of win or a loss, and with taking good trades we will ultimately profit at the end of the day. The issue of course is sticking to that plan, which is often easier said than done.

So what level of risk appetite is reasonable? There isn’t really one. There are some people who are in the middle which is perfect for them, but for many others, you are in a situation where you either like the risk or you hate it, but wherever you are on the line, you need to ensure that you have everything that you can in place in order to manage and reduce the risks that you are putting your account under. Stick to those plans and you will be in a great situation.

Forex Risk Management

Measuring Trade Risk Levels with VaR and CVaR

Quantifying risk when trading has become one of the biggest concerns (or at least should be) as traders. The volatility, volatility of exchange rates, interest rates, etc. have made the study of risk increasingly important. In this article, we will show you how to use VaR and CVaR to assess your risk levels with a high degree of accuracy. 

Another important issue that has enabled us to improve the study of risk, among those associated with our operation, has been the exponential increase in the computing capacity we currently have. Currently, as a trader, you have at your fingertips, from your laptop or smartphone, databases with all the necessary price history information for almost any financial asset you want to trade.

When developing a trading strategy or system we should not only focus on clearly establishing the rules for entering and leaving the market, but we should also objectively analyze the results of our trading system.

To achieve an objective analysis, a wide variety of metrics have been developed that evaluate different aspects of our operation. In this article, we will teach you to use two metrics based on risk control: Value at Risk (VaR) and Value at Risk (CVaR). These risk assessment measures have different methodologies and techniques for their estimation.

Before entering directly into the study of them, it is important that we have some basic concepts, such as what is financial risk and what are the types of risk.

What is Financial Risk?

In the investment context, the risk is the probability of loss due to events that can produce significant changes, and that affect a financial asset. Therefore, it is important that when we decide to make an investment, we identify and quantify the various types of risks to which we will be exposed when making the investment.

All investments carry an associated risk, but when we manage risk well we can find great opportunities for significant returns. Surely you’ve heard of “risk aversion”. Risk aversion refers to an investor’s attitude or preference to avoid financial uncertainty or risk. This leads him to invest in safer financial assets, even if they are less profitable.

Types of Financial Risk

Although there are many risks in the investment world, financial risk can be classified into three main categories:

Market risk: this type of risk refers to loss risk arising from price movements of a financial asset or the market in general.

Credit risk: the inability of a party to respond with the obligations of an issue or with the strict terms of the issue (amount, interest, etc.), thus producing a loss for the counterparty.

Operational risk: This type of risk is defined as loss risk due to insufficiencies or failures of processes, personnel, and internal systems.

Now that we have clarified these basic concepts, let’s see what VaR and CVaR are all about.

Value at Risk (VaR)

Value at Risk is a statistical metric used to assess the risk of a given asset position or portfolio. VaR is the maximum expected loss, under normal market conditions, in a portfolio or trading system, with a probability (usually 1% or 5%) and a known time interval (usually a day, a week, or a month).

The VaR is measured through three variables: amount of loss, probability of such loss occurring (confidence level), and the time interval of occurrence. It is important to note that VaR does not seek to describe or predict worst-case scenarios, but rather to provide an estimate of the range of potential gains or losses.

Ways to calculate VaR

There are three main methodologies or approaches to calculating VaR:

Parametric method: when we calculate the VaR using the parametric method, we assume that profitability has a normal distribution and the portfolio is a linear function of the factors. For the parametric calculation, it is necessary to have the main statistical parameters (mean, variances, covariance, standard deviations, etc.) of the financial asset or portfolio that we are analyzing.

The formula for calculating VaR using the parametric method is as follows:

VaR = F * S * σ *


F = Value determined by the confidence level (also known as Z value).

S = Amount of portfolio or financial asset at current market prices.

σ = Standard deviation of asset returns.

t = Time horizon in which the VaR is to be calculated.

Historical simulation method: uses a large amount of historical data to estimate VaR, but makes no assumptions about probability distribution. One of the greatest limitations of this approach is that it assumes that all possible future changes in asset prices have already been observed in the past. The value of the VaR will depend on the source of the data and the size of the series (time frame of the data).

Monte-Carlo VaR Model: The calculation of VaR using the Monte-Carlo method is based on generating hundreds or thousands of hypothetical scenarios based on the series of initial data entered by the user. The accuracy of the VaR will depend on the number of scenarios we simulate, the higher the accuracy. The validation of the model is fundamental, for this it is recommended to carry out backtest tests to verify that the estimated VaR is verified with the historical series.

A practical example of how to calculate VaR:

I will do this by setting an example to calculate in VaR in actions to simplify calculations of pips and lots:

Suppose we have a portfolio composed of 1000 shares of the company ABC and the current price per share is 12$, the daily standard deviation is 1.8%. How can we calculate VaR with a 95% confidence level for a day?

The formula for calculating VaR is:

VaR = F * S * σ *

To calculate the value of F, we use the “DISTR.NORM.ESTAND.INV (probability)” function of the Excel spreadsheet.

F = DISTR.NORM.ESTAND.INV (confidence level) = DISTR.NORM.ESTAND.INV (95%) = 1.6448

S is the total amount invested in the portfolio and is calculated as follows:

S = share amount * market price = 1,000 shares * 12$ = 12,000$

The standard deviation σ is equal to 1.8%.

As we want to calculate the VaR for a day, then t = 1.

We replace the values in the VaR formula and have:

VaR = 1.6448 * $12

This VaR value tells us that the investor has a 95% confidence level that their investment will not lose more than $355.28 in a day.

What if we increase the level of confidence to 99%? In this case, the VaR would be:

VaR = 2.3263 * $12,000* 1.8% * = $502.48

This VaR value tells us that the investor has a 99% confidence level that their investment will not lose more than $502.48 in a day, or what’s the same, the probability of suffering losses greater than $502.48 during a day, is only 1%.

Advantages of VaR

Some very significant benefits of using VaR for the quantification of financial risk without the following:

-The VaR is a highly recognized standardized risk measure among traders and regulators. It has become a standard in the financial industry.

-It adds all the risk of an investment into a single number, making it very easy to assess the risk.

-It is probabilistic and provides us with useful information about the probabilities associated (confidence level) with a specific amount of losses (maximum loss).

-It can be applied to any kind of management and also allows you to compare risks of different portfolios regardless of their composition, whether fixed income or equities.

-The VaR allows you to add risks from different positions taking into account the way in which they correlate with each other, the different risk factors.

-It takes into account multiple risk factors and can focus not only on individual components but also on the overall risk of the entire portfolio.

-Because it is expressed in the loss of money (base currency; dollar, euro, etc.) it is simpler and easier to understand than other indicators that measure financial risk.

Disadvantages of VaR

But VaR, like any other metric used for trading systems, has its disadvantages:

-Generally depends on the quality of the historical data used for its calculation. If the data included is not accurate or correct, the VaR will be of little use.

-Although the interpretation of the values of VaR is very simple, some methods to calculate it can be very complicated and expensive, for example, the Monte Carlo method.

-It can generate a false sense of security in traders. Any measure of probability should not be construed as a certainty of what will happen. Remember that as traders, we only handle uncertainty scenarios never certainty scenarios, we do not make predictions.

-It does not calculate the amount of the expected loss remaining in the probability percentage.

Conditional Value at Risk (CVaR)

The conditional risk value (CVaR) is the mean of observations in the distribution queue, that is, below the VaR at the specified confidence level. Therefore CVaR is also known as expected deficit (Expected Shortfall, ES), AVaR (Average Value at Risk), or ETL (Expected Tail Loss).

The CVaR is the result of taking the weighted average of observations for which the loss exceeds the VaR. Therefore, the CVaR exceeds the VaR estimate, as it can quantify riskier situations, thus complementing the information provided by the VaR.

CVaR is used for the optimization of portfolios because it quantifies losses that exceed VaR and acts as an upper bound for VaR.

Properties of CVaR

CVaR stands out for having better mathematical properties than VaR, being a consistent measure of risk because it meets the criteria of:

Mono tonicity: If one financial asset performs better than another in any time horizon its risk is also lower.

Positive homogeneity: Refers to the proportionality between position size and risk.

Invariance to Transfers: By adding capital to a position your risk decreases in direct proportion to the capital added.

Sub-additivity: Asset diversification decreases the risk of a global position.

In summary, the most important message that CVaR is a consistent measure of risk is the following: the risk of two or more assets that make up a portfolio is less than the sum of the individual risks.

Interpretation of the conditional value at risk (CVaR)

The choice between CVaR and VaR is not always straightforward, since the conditional value at risk (CVaR) is derived from the value at risk (VaR). Generally, the use of CVaR rather than just VaR tends to lead to a more conservative approach in terms of risk exposure.

While VaR represents a maximum loss associated with a defined probability and time horizon, CVaR is the expected loss if you cross that worst-case threshold (maximum loss). In other words, CVaR quantifies the expected losses that occur beyond the VaR breakpoint.

As a rule, if an investment has maintained stability over time, the risk value could be sufficient for risk management in a portfolio that keeps the investment active. However, we must bear in mind that the less stable the investment, the greater the chances VaR will never display a complete image of the risk. In practice, trading systems rarely exceed VaR by a significant amount. However, more volatile systems may exhibit a CVaR many times larger than the VaR.

Finally, if we create a trading system and calculate your VaR, this VaR tells us what the maximum loss is with a certain level of confidence and time horizon. But if the loss is greater than VaR, how much should we expect to lose? This is where the conditional-at-risk value (CVaR) comes into play, which will tell us what the conditional average expected loss is if more is lost than the VaR.

Forex Risk Management

A Risk Management Model to Forecast the Margin Level

Margin call and Stop Out are some of the trading conditions that are infallibly indicated in the trading account conditions. Margin call is a warning sign, which the broker sends to the trader to deposit new funds into the account when losses on open transactions have approached a critical level. If the trader does not make a new deposit into his account and the losses continue to increase, the broker may affect a forced closure of the trader’s transactions.

Stop out is a notice of auto-close of transactions, which occurs when there is an insufficient margin level to keep account positions open. Brokers indicate in their agreements the percentage of this level, which may be different in each case.

Control of the margin level is one of the essential rules of risk management. In order to make this process very optimal, professional traders often create models, which allow estimating the level of the minimum margin required with specified leverage and volume of transactions. For more information on how to create models, how to calculate the margin level, and how to manage leverage, read this article.

Margin Call and Stop Out: Concepts and Calculation Rules

Terminology is the first thing the trader has to study before testing his strengths in Fórex. Without it, it is impossible both successful trade and collaboration with your broker. For some reason, in most cases, beginners believe that it is enough to download a strategy from the Internet, follow the recommendation point by point in the demo account to be able to start earning “a goose paste”.

Boxes such as “I have read and accept the terms” are automatically marked. It is that the merchants ignore the concept “offer”, where they have described all the conditions of the trade in mole type of accounts. In the end, this can lead to losses and disputes between the trader and the broker. Today, you will know two important concepts, Margin call and Stop out, whose parameters brokers always indicate in the commercial terms of each account.

In this article I will explain:

  • What are Margin call (margin call) and Stop out with practical examples (already defined above).
  • How to create a model to control the required minimum margin level and how to apply it in trading.
  • How to avoid stop-out (forced closure of open positions).
  • Stop Out and Margin Call: how not to run out of deposit at an inconvenient time.

This story happened on December 30, 2015, when miracles occur and one can ask for new magical desires. On that day Denís Grómov, a private merchant, also expected miracles. If we want to explain otherwise it would be impossible how in just 4 and a half hours and with the deposit of 5.6 million roubles (approximately € 64,400) he made more than 5,000 transactions of purchase and sale of currency for a total value of 42 billion roubles (about € 483,000). Later the 38-year-old merchant will say that he did not understand what happened. It’s just that the price of the dollar was growing and winning on the stock market was the best option if you looked at it from the point of view of spending on the margin. The result was sad: having lost all his deposit, the trader was left in debt to the broker and now owes him 9.5 billion roubles (about 110,000 euros).

The trader operated with a specific asset USDRUB_TOM, whose exchange rate today is set as the official tomorrow by the Central Bank of Russia (TOM – tomorrow). Grómov noted that compared to USDRUB_TOD (today) the US currency cost a little more. In 38 minutes he made more than 2,500 operations buying the US currency with the official rate for today (today) and selling it with the official rate for tomorrow (tomorrow). As it seemed to Gromov, the deposit was insufficient, so he applied the broker’s leverage. The general purchase/sale position of the asset did not exceed the margin requirement (the sum of the deposit retained by the broker as a guarantee for the opening of commercial operations), but at that time the volume of operations was already about 23.7 billion roubles (about € 2,724,000).

At that time he was called the manager of the broker, warned him of so-called “margin call” and proposed “reducing leverage (borrowed funds) by opening up opposite positions”. The trader’s mistake was simple: he did not take into account the price for arbitration (carrying out complementary transactions at the same time in the price difference between different markets on the same financial asset). Any leverage increases the volume of the transaction for which an interest charge (swap) is charged when a trading day is terminated for keeping the transaction open for more than one day. The operations with the asset USDRUB_TOD were executed on December 31 while the operations with the USDRUB_TOM, only on January 11. For all those days a swap was charged from the merchant’s account, which was larger than his deposit. This was what the broker manager told the unfortunate trader, who had only to close the open-to-loss transactions.

The merchant tried to solve the problem through the court, but without success. However, this story serves as a compelling example of how relevant it is to know the terms “margin call”, “stop out” and “swap”.

What are Margin and Margin Call Operations?

Margin operations are leveraged or leveraged operations offered by the broker. The margin allows opening positions for a total amount of ten, one hundred, and even one thousand times larger than that of the entire merchant deposit on condition that this amount is returned.

Each broker has its own leverage: 1:1 (the broker does not have it); 1:10 (the trader can open trades with a volume ten times larger than his deposit), 1:100, and even 1:2000. According to the recommendations of European regulators, before the permitted minimum limit of leverage was 1:200 and now, from 1:50 with the prospect of decline to 1:30, although this does not stop offshore licensed brokers. Therefore there is still leverage of 1:1000 and even 1:2000.

No one from the company representatives will tell you where the broker gets so-called leverage, on the pretext that they protect trade secrets.

There may be several options:

Aid to liquidity providers. Liquidity providers are investment banks whose liquidity depends on the deposit of investors through which the merchant’s deposit can be increased. Although there is one question: what do liquidity providers gain? Perhaps, brokers share the spread with them. But if, in fact, it’s so obvious, what is the reason why providers hide the leverage mechanism?

Technical multiplier. Regardless of the leverage offered the trade is done with merchant funds. The merchant, who buys a currency, will sooner or later sell it to regain balance. Broker leverage is only a digital instrument that is offset in opposite trades. The total volume of transactions with this type of digital instrument is much larger than the amount of the real currency in the broker’s accounts. But the system maintains the balance since after each purchase transaction there is a sale transaction and vice versa. If one merchant wins, the other loses.

Broker – “kitchen”. The manipulation of figures is carried out within the same company. The aim of the broker is to offer the trader the largest leveling so that he can lose his funds as quickly as possible.

In theory, they very often say that leveraged transactions are “a virtual loan with a deposit guarantee from the trader” or “bilateral transactions in which the trader who bought the asset with borrowed money is forced to sell it later”. Actually, it’s not entirely true. In any credit transaction, the lender also runs the risk of not getting the loan back. In margin transactions, the broker does not assume this risk.

Leverage Examples

No leverage – The trader has $1000, of which $600 wants to invest in oil. Oil volatility is small: – 0.1-0.3% per day. Suppose the trader performs intraday trade and in the oil market, a force majeure is produced and, as a result, instantly the oil price drops by 5%, that is, from $ 60 to $ 57 per barrel. If the merchant has opened a long position with his $ 600, the losses will be 600*0.05=$ 30. The deposit of $1000 is a small amount.

With leverage – Suppose the trader is confident that oil prices will rise and makes the decision to apply the 1:1000 leverage. The broker retains $600 of your deposit as collateral and $400 of the free margin (uncommitted balance) will serve as insurance. Thus, the trader opens a position worth 600*100 = $60,000. Force majeure spoils the investor’s plans and the loss of $30 becomes $3000. The merchant does not have this money in his account, so all his transactions will be closed by force before oil prices drop to the level of $57. It is easy to calculate that the guarantee of $ 600 with the indicated leverage is able to withstand just a 1% decrease in price ($ 0.60), the unencumbered balance ($ 400) – $ 0.40 more.

Margin Call (margin call) is a situation in which the broker informs the trader of the need to deposit new funds into the account in the event of a reduction of the sum below the established level. It is a kind of warning that the merchant’s deposit under the current conditions will soon end.

Stop Out is a forced closure of the trader’s open transactions at the current market price when the proportion of the deposit amount and the current loss to the amount of the guarantee for the positions opened at this time (margin level) is lower than the corridor has established. Open operations are closed one after the other until the free margin exceeds the established limit.

Example: The runner places the margin call in Fórex at the level of 20% and the stop out, at 10%. The merchant deposits $300 and applies the leverage of 1:100 by opening a deal worth $20,000. The amount of own funds needed to open this type of operation is 1/100 out of 20,000, or $200. The 20% of the guarantee amount is $40 and 10% is $20. Then when the trader loss is $260 a warning signal will be sent; when the trader’s account drops to $20, the forced closure of open trades will be generated.

Important! By setting limits on maximum leverage, European regulators are struggling not with brokers, but with the psychology of traders. The size of the leverage on Fórex carries no risk. Since there is no difference if the merchant with a deposit of $ 300 will open a position with leverage of 1:100 (the guarantee is $ 200) or with leverage of 1:200 (the guarantee of $ 100). It will continue to operate with available funds of $300. The volume of the position matters! If in this case, the volume is the target ($20,000), then in practice the emotions push operators to open large volume operations with greater leverage, which can lead to losses.

On the MT4 platform, the data on available funds and the margin level are indicated in the menu below in the “Trade” tab.

Specific Terms

Deposit is the amount of funds deposited into the trading account.

Balance is the amount of funds of the merchant at the present time, which remains in the account after the transactions have been executed. It is equal to the current adjusted profit or loss balance. If the amount of loss on unprofitable open transactions exceeds the profit on profitable transactions, in this column the figure will be less than the amount of loss. For example, the deposit is $100. One of the two trades was profitable and reported a gain of $32. The second operation has been closed to losses: $ 43. 100+32-43=89.

Margin (also known as “guarantee”) is a short-term loan service provided by the broker while his position is open. If the merchant buys the euro for a value of $10,000 and with leverage of 1:100, the loan will be $100.

Free margin is the capital not involved in the trade that the trader can use at his discretion. It is calculated as “balance”-“margin”.

Margin level serves as the indicator that reflects the account balance and is expressed as a percentage. For the trader, you will have something to look at. If its value falls below the stop out set by the broker, the closing of operations begins. The following formula will help us to do the calculation: “Funds”/”Margin” * 100%.

Example: The merchant deposits $100 into the account and is about to open a position with a volume of 0.01 lots at the price of 1.4500 with the leverage of 1:100. 1 lot is 100,000 units of a conditional currency, therefore, to buy 0.01 lots you need $14.5. (Total: $1,450). “Deposit”: $100. “Balance”: before the opening of operations is also $ 100. “Margin”: $ 14.5. “Free margin”: $ 85.5. “Margin level”: (100/14.5)*100 = 689%.

How to Calculate the Approximate Margin Level?

Any theory is necessary not only to be able to apply it in practice but also to be able to make forecasts with your help. The risk management system shall involve the development of several risk management models that allow current amendments to the table in a matter of minutes according to the market situation, and to see how the future outcome changes.

The management of the level of deposit allows to foresee in which quotes of the pair with the established volume of a lot can occur the stop out in Fórex. With averaged volatility data, an individual strategy can be created to increase (decrease) the volume of positions according to the rate of change in price and the level of leverage.

Peculiarities of Margin Operations in Forex

Unlike other types of loans, the merchant does not pay a percentage for the use of the loan on a regular basis. Any broker has swap, a commission that is charged for keeping a position open at the end of the day. The swap is charged against all open positions, including those in which the loan funds are involved, and deducted from the trader’s own funds, thus accelerating the reduction of the balance.

In most cases, margin operations are short-term. The trader takes advantage of leverage only when he is completely confident that the trend will not change. After making a profit from short-term positions, the trader again operates on their own funds only. In most cases the trader will not lose more than what he has deposited in his trading account, that is, the account balance will not be negative.

A clarification on the last point. The broker who lends his money for one day is not at risk, as in the event of a sudden price reversal he will have time to automatically close all the trader’s transactions. The situation is different if the transactions are transferred to the next day or in the case of serious force majeure.

Example: In mid-January 2015, the Swiss Central Bank allowed its national currency to fluctuate. In one night the franc shot up against the dollar and the euro at 30%.

That decision was unexpected to many. On the first day, due to the existence of high volatility trading conditions were amended: some suspended operations, some changed the margin requirement. Almost all brokers suffered losses on the illiquid market, and the British department of Alpari (UK) even went bankrupt, whose official version is that. “due to the volatility the company lacked liquidity. The losses of the clients exceeded the funds deposited, and the broker was forced to reward them on his own”. It’s a perfect example of how the exception confirms the rule.

How to Avoid Margin Call and Stop Out?

  1. Read the offer where the trading conditions of each trading account are indicated in detail.
  2. Comply with comprehensive risk management standards. The theory is that the sum of simultaneously opened positions should not exceed 10% (rarely 15%) of the deposit amount.
  3. Use the example of the table given in the article.
  4. Be cautious when using leverage. Set a target in the volume of positions and do not try to open the maximum position possible.
  5. Estimate the share of leverage and volatility. The higher the volatility, the lower the leverage in margin operations.
  6. Set the stops.


You should not be afraid of leverage, any instrument in the hands of professionals is capable of delivering benefits. Leverage is the individual choice of each, so in this article, I do not give a uniform recommendation applicable to all traders. Strict observation of risk management and control of unprofitable positions is one of the most effective methods of avoiding stop-out.

Forex Risk Management

Best Trading Position Part 3 – Risk in Parallel Trades

If you are reading this article, you must be serious about trading. Did you know that curiosity and eagerness to learn are the two crucial components of being a successful trader in the long term? Since this is our part three discussion on the best trading position, we are continuing our journey of discovery, listing proven ways to achieve sustainable success. Now, of course, there can be many different approaches to trading, but here you can learn what actually works. If you happen to be seeing this title for the first time, make sure that you go back and read the story from the beginning, covering parts one and two as well, along with related exercises

Last time we talked about effective ways to protect your trades, deepening the story about the risk and introducing the topic of stop losses. What we did not talk about in the previous article is that traders often wonder about exiting trades, fearing that they might miss that one opportunity to preserve their assets. However, you will find that with the right system in place, you should always be notified before a particular trend or favorable period ends, so the price should not even hit your stop loss.

If the price ends up violently moving in a different direction from what you would want to, you still know that you would never lose more than 2% of your account if you set everything up the way we discussed earlier in this series. That is what the ATR indicator we previously talked about is about, helping you manage and adjust to volatile markets regardless of the circumstances. Now, besides general risk and exiting trades, there is another key question to ponder about if you really want to protect your assets.

How many individual trades can I have open at 2%?

When traders read about the 2% instruction, they often fall for the trap of overleveraging, which tends to lead to really bad consequences. To understand where most traders fail, imagine that you entered three trades involving the following currencies: the EUR/AUD long, AUD/USD short, and AUD/CAD short. You assume that by opening three trades at 2% each, you are doing the right thing. Unfortunately, your thinking would be faulty here and you would add more risk instead of controlling it properly. Since there are three trades involving one currency (AUD), you now have a 6% risk in one asset. Therefore, please note down the following rule in your notebook: You can have as many trades running at the same time as you please, but you must never have more than one trade at 2% risk going long or short with the same currency.

What should I do if I am getting several signals for one currency?

There are a few solutions that you can always use in trading if you find yourself in a similar situation. For example, you can choose only one trade to enter. You can either make this choice freely or, if you need reassurance, compare the other two currencies in the pair and measure them against other currencies. So, if you are weighing between the AUD/USD and the AUD/CAD, compare the USD basket and the CAD basket to see which seems to be a better option

Aside from this approach, you can also opt for entering both trades but at 1% risk each. This is not only a wise way to control the risk when you have multiple trades open at the same time but also a form of a hedge, as you have one currency against two different ones.

What should I do when I almost get another signal involving the same currency?

First of all, you do not have to necessarily ignore all signals of this type. If you happen to get one signal for a particular pair, followed by something that may turn out to be a signal soon, you can always choose to play smart – enter one trade at 1% and wait to see what will happen with the other pair the following day. With such “almost signals,” it is always wise to give yourself space to gather more facts before you make any decisions.

Should I always enter trades at 1% risk only?

No, by no means should you enter all trades at reduced risk. Overleveraging is as detrimental to your account and development as is being timid. This mindset will not get you far, so make sure that you avoid seeing this as a form of protection because it is will hinder your growth, both in terms of your trading skills and your finances.

Regardless of your market of choice, you must always put your risk under control no matter how many trades you decide to enter. Greed can be a funny thing, especially when we don’t know what situations trigger our hunger for more. To have control over your trades, you must consciously choose to follow a specific rule and do so in a disciplined manner. And, on this note, we are going to end today’s lesson, leaving you with the task of trying out these methods with your demo account as soon as possible.

As we promised, we are offering you the right solution to the problem given in the last article of this series:

RISK = TOTAL ACCOUNT x 2% = 50,263 USD x 2% (0,02) = 1,005.25 ≈ 1,005

ATR = 86

STOP LOSS = ATR x 1.5 = 86 x 1.5 = 129

PIP VALUE = RISK ÷ STOP LOSS = 7.79 ≈ 7.8

Upon the completion of this task, we know that one pip should equal the previously calculated amount, so we can estimate that the unit value is going to be 78,000 (usually 0.78 lots) for the EUR/USD currency pair. 

P.S. Practice note-taking whenever you test a new method or approach in trading and watch for Part IV to follow.

Good luck!

Forex Risk Management

How to Avoid the Forex Drawdown Trap and Come Out On Top!

Drawdown is an extremely important benchmark of one’s development as a forex trader which is why it is the topic of today’s article. Shortly defined as an investment or fund decline, drawdown is in fact a much broader term that requires additional attention. While definitions range from less to more detailed, they generally confirm one thing – that drawdown is an important element for performing account measurements.

The challenges concerning this subject do not truly stem from the inability to understand what the term essentially represents, but they do have a lot to do with its scope. The existing variations anyone can find on the internet may not do enough justice to the topic of drawdown and, thus, forex traders as well who want to do things the right way. Due to these nuances in interpreting drawdown, we are exploring how to properly measure it and set some healthy boundaries in order to fight vagueness, prevent future problems, and boost traders’ careers right from the start.

Drawdown Loss

Some definitions state that drawdown is the loss expressed in percentages that one has taken over a specific period of time. Therefore, should an individual’s account drop from $50,000 to $48,000, it could be interpreted as a 4% yearly drawdown. Nonetheless, what would happen if a trader only had experienced wins in the beginning, without ever going below the initial $50,000? This question is both interesting and necessary because the odds of backtesting and forward testing processes being predominantly positive experiences are not that low at all. This further makes the initial definition void of depth, as it is likely to mislead those curious to improve their trading and accurately measure their performance.

If any trader is offered an opportunity to trade on behalf of another individual, receiving an exorbitant sum of $2 million as a part of the deal, what is the right drawdown percentage that he or she should offer on their end? Interestingly enough, if the trader suggests a 0% drawdown, the investor will probably walk away, feeling that the other party is trying to pull off a scam. The reason for this likely scenario lies in the differences in understanding how to calculate drawdown. Therefore, we will not see drawdown as a percentage of an account’s total number of losses but as the number of drops a trader experiences at any point in time within a year.

This piece of information is something any investor would like to know in advance so as to properly assess the likelihood of growth and the overall progression. Hence, if you state that your value equals zero, you would come off as fraudulent and insincere, if not even silly, because the big players understand the natural oscillations of the market, accepting the decline as part of the game.

Maximum Peak-To-Through

Most investors will always be interested in discovering what maximum peak-to-trough decline is, so the right question to ask oneself would be as follows: What is the highest percentage you have ever lost before you started to win again? Your account may go from $50,000 down to $49,000 only to go back up to $53,000 and drop again to $51,000, which then points to a drawdown of $3000 or 5.5% as your maximum account declines. Aside from this piece of information, those in demand of your trading services may also be inquiring about how much time it took you to recover the drawdown, so you may want to start recording this data as well.

In addition to proper measurement and interpretation, traders may be curious as to know what acceptable or appropriate drawdown may be. For example, if a person spirals down from $50,000 to $40,000, we are talking about a staggering 20% drawdown, which would require skills better than those Warren Buffet can offer. In this case, one would then need to achieve a 25% return just to reach break-even, which is not only practically impossible but also points to a bigger problem in the person’s trading system.

If someone manages to experience a 20% drop, this should immediately signal that their risk management is out of control. This further points to a very real possibility of a trader wasting away all of the client’s money, which is opposite from their requirement of receiving a consistent return each year. If you are currently experiencing a similar problem, it is time you stopped trading and started to reevaluate in order to make some important conclusions. On the other end of the spectrum, a drawdown that we can find to be acceptable is that which equals up to 10% at any point in time, understanding that if the limit ever goes beyond this value, you will need to look into what caused the major losses in the first place. 

Minimizing Future Losses

The process of striving to make things right is crucial for trading in every way possible, and if a trader is capable to stop and isolate each case where he/she could have done better, the prospect of minimizing future losses is immediately boosted. You may discover here how your volume indicator has been misleading you or how your exit indicator is not telling you the best possible time to exit, so any attempt to improve will inevitably lead to debunking false beliefs that caused poor judgment and the drop in the account. An additional piece of advice that each trader should take into considerations is related to the time and testing ratio – we need to go back and forth with testing and not be impatient or superficial because the amount of time and focus we assign to our testing will be proportionate to the success we get afterward. 

You will also find that some forex prop traders who boast about their experience in trading currencies online came forward with their less-than-glorious experiences with some other markets, where their drawdown almost reached 10%. These testimonials are exceptionally valuable because we get to learn that developing a new system, or improving an existing one, takes a lot of adjustment and patience as well. While we can all make mistakes in trading, it is absolutely necessary to understand where these problems stem from, despite how grave or minute they seem to be.

Last but not least, it is of vital importance that all traders take the standpoint of trying to always minimize the damage because no matter how great your wins can get, it is your losses that hold the power to destroy your account and possible business deals. Therefore, whether you are a beginner or an experienced forex trader, always aim for a maximum drawdown of 10% or less at any given point. While people at the beginning of their trading careers may be more aware of these numbers, this topic is in fact relevant for all traders, regardless of the width of their portfolios or their capacity and skill range. While measuring may pose a challenge for some, understand that the willingness and ability to correct what is faulty is your one way to experience the lucrative side of this business.

Forex Education Forex Risk Management

Are You Taking On Too Much Risk While Trading?

One of the phrases that you have probably heard the most since starting out with trading is risk management, but what does that actually mean, and do you do it? To put it into simple terms, risk management is about reducing the potential risks to your account and protecting your account from dangers and large losses. This sounds simple enough and quite an obvious thing, but you will be surprised at how many people throw it out of the window on their quest for bigger profits.

Risk a Set Amount

One way that people reduce the amount of risk that they have on each trade is to limit the potential losses of each trade, they do this by setting stop losses on each trade that they make. A number that we see a lot of 2%, people seem willing to risk 2% of their overall account on each trade that they make, this would mean that the account would be able to survive up to 50 losing trades on a row without any wins, something that is very unlikely if a proper strategy is being implemented properly. It is important that if you set yourself a maximum loss per trade that you stick with it or if you deviate, only to deviate lower, going higher will put your strategy out of sync and could potentially damage your account equity quite a bit.

Adding to Trades

Something that a lot of people do is to add positions to an already winning trade. This basically means that when a trade is going the right way, you add in an additional trade to make the overall trade size a little larger. While this may work for some, a lot of strategies have not taken this into account so you should be careful when considering it. When you do add an additional trade, you need to bear in mind that your overall risk is increasing, do you stick to a maximum 2% loss on that trade, or do you increase or reduce it? Unless your strategy has already taken these additional trades into consideration we would advise against adding to existing trades as it could mean you can lose more than you had anticipated on that trade.

The Right Trade Size

How are you working out your trade sizes? Is it based on your account size or your strategy? Whichever method of working it out that you use, you need to stick with it. More often than not, your trade size would be based on the percentage of the account you are willing to risk with each trade. There are trade size calculators available all over the web that can help you to work out the exact size of each trade that you should be using based on the pair being traded and the percentage of the account that you are willing to risk. It is important to stick to regular and similar trade sizes for each trade, as suddenly adding larger trades could completely throw your risk management out the window and could be endangering more of your account equity than you would normally be willing to risk.

Taking Profits

Something that people often don’t associate with risks is taking profits, knowing when to come out of trades is just as important to protect your account as restricting your losses. To put this into perspective, a trade has gone into profits, you feel that it may reverse but it is in profit so you will let it run to see if it goes any higher, it suddenly reverses and you are now back to a break-even level or even in the negatives. In order to protect your account, it should have been taken in profit, many people use take profit levels, others have a certain percentage where they move the stop loss levels into profits to guarantee the profits. The importance of doing this is that you will have wins and losses, but it is important that you are able to take those wins as they are there to help cancel out the losses, having them also become losses will put your account in danger.

So those are a few things to think about when looking at the risks you have to your account, there are of course many other things to think about, but those are some of the bigger ones. Think about whether you do these things, if you do, think about how you can improve on your own risk management for the future to help protect your account.

Forex Daily Topic Forex Risk Management

Position Size Risk and System Analysis


Some authors label this topic as Money Management or Risk Management, but this misses the point. Money Management doesn’t tell much about what it does, and Risk Management seems more related to risk, which has been discussed on the subject of cutting losses short and let profits run.

However, Van K. Tharp has hit the point: He calls it position sizing, and it tells us how much to trade on every trade and how this is related to our goal settings and objectives.

1.    Risk and R

In his well-known book Trade your Way to your Financial Freedom, Van K. Tharp says that a key principle to success in trading is that the investor should always know his initial risk before entering a position.

He suggests that this risk should be normalized, and he calls it R. Your profits must also be normalized to a multiple of R, our initial risk.

The risk on one unit is a direct calculation of the difference in points, ticks, pips, or cents from the entry point to the stop-loss multiplied by the value of the minimum allowed lot or pip.

Consider, for example, the risk of a micro-lot of the EUR/USD pair in the following short entry:

        Size of a micro-lot: 1,000 units
                Entry point: 1.19344
                  Stop loss: 1.19621
Entry to stop-loss distance: 0.00277

Dollar Risk for one micro-lot: 0.00277 * 1,000 = $ 2.77
In this case, if the trader had set his $R risk – the amount he intends to risk on a trade – to be $100, what should be his position size?

Position size: $100/$2.77= -36 micro-lots (it’s a short trade)

Using this concept, we can standardize our position size according to the particular risk. For instance, if the unit risk in the previous example were $5 instead, the position size would be:

$100/5 = 20 micro-lots.

We would enter a position with a standard and controlled risk independent of the distance from entry to stop.

2.    Profit targets as multiples of R

Our profits can be normalized as multiples of the initial risk R. It doesn’t matter if we change our dollar risk from $100 to $150. If you keep our records using R multiples, you’ll get a normalized track record of your system.

With enough results, you’ll be able to understand how your system performs and, also, able to measure its statistical characteristics and its quality.

Values such as Expectancy (E), mean reward to risk ratio(RR), % of gainers, the number of R gains a system delivers (R multiple) in a day, week, month or year.

Knowing these numbers is very critical because it will help us to achieve our objectives.

You already know what Expectancy (E) is. But the beauty of this number is that, together with the average number of trades, it tells you the R multiple your system delivers in a time interval.

For example, let’s say you’ve got a system that takes six trades a day, and its E is 0.45R. This means it makes $0.45 per dollar risked.

 That means that the system also delivers an average of 0.45×6R=2.7R per day and that, on average, you’d expect, monthly, 54R.

Let’s say you wanted to use this system, and your monthly goal is  $6,000. What would your risk per trade be?

To answer this, you need to equate 54R = $6000

So your risk per trade should be set to:

R= 6000/60 = $111.

Now you know, for instance, that you could achieve $12,000/month by doubling our risk to $222 per trade and $24,000 if you can raise your risk to $444 per trade. You have converted a system into an exponential money-making machine, but with a risk-controlled attitude.

3.    Variability of the results 

As traders, we would like to know, also, what to expect from the system concerning drawdowns.

Is it normal to have 6, 10, 15, or 20 consecutive losses? And, what are the chances of a string of them to happen? Is your system misbehaving, or is it on track?
That can be answered, too, using the % of losers (PL).

Let’s consider, as an example, that we have a system with 50% winners and losers.

We know that the probability of an event A and an event B happening together is the probability of A happening times the probability of B happening:

ProbAB = ProbA * ProbB

For a string of losses, we have to multiply the probability of a loss by itself the number of times the streak duration.

So for a n streak:

Prob_Streak_n = PL to the power of n = PLn

As an example, the probability of 2 consecutive losses for the system of our example is:

Prob_Streak_2 = 0.52
= 0.25 or 25%

And the probability of suffering 4 consecutive losses will be:

Prob_Streak_4 = 0.54
= 0.0625 or 6.25%

For a string of six losses is:

Prob_Streak_6 = 0.56
= 0.015625, or 1.5625%

And so on.

This result is in direct relation to the probability of ruin. If your R is such that a string of six losses wipes 100% of your capital, there is a probability of 1.56% for that to happen under this system.

Now we learned that we must set our dollar risk R to an amount such that a string of losses doesn’t bring the account beyond the maximum percent drawdown that is tolerable to the trader.

What happens if the system has 40% winners and 60% losers, as is usual on reward/risk systems? Let’s see:

Prob_Streak_2 = 0.62 = 36%

Prob_Streak_4 = 0.64 = 12.96%

Prob_Streak:6 = 0.66 = 4,66%

Prob_Streak_8 = 0.68 = 1.68% 

We observe that the probability of consecutive streaks of the same magnitude increases, so now the likelihood of eight straight losses in this system has the same probability as six in the former one.

This means that with systems with a lower percentage of winners, we should be more careful and reduce our maximum risk compared to a system with higher winning ratios.

As an example, let’s do an exercise to compute the maximum dollar risk for this system on a $10,000 account and a maximum tolerable drawdown of 30%. And assuming we wanted to withstand eight consecutive losses (a 1.68% probability of it to happen, but with a 100% probability of that to occur throughout a trader’s life).

According to this, we will assume a streak of eight consecutive losses, or 8R.

30% of $10,000 is $3,000

then 8R = $3,000, and

max R allowed is: 3000/8 = $375 or 3.75% of the account balance.

As a final caveat, to get an accurate enough measure of the percentage of losers, we should have more than 100 samples on our system history (forward tested, if possible, since back-tests usually presents unrealistic results). With just 30 points, the data is not representative enough to get any fair result.

You could do the same computations for winning streaks, using the percent of winners instead, and multiplying by the average reward (R multiple).

1.    Key points and conclusions

  • Position sizing is the part of the system that tells us how much to risk on a trade and is directly relevant to fulfilling our goals
  • The unit of risk R is a normalized symbol for dollar risk
  • You should measure, register, and be aware of the main statistical parameters of your systems: Expectancy, Percent winners and losers, reward to risk ratio, and the mean monthly-R (the average number of R your system achieves in one month)
  • You should compute the maximum R allowed by your system and account size for the max drawdown bearable for you, and not bet more than that amount.


Forex Risk Management

How to Mitigate Forex Trading Risks and Profit More

Risk, something that people either love or hate, it is something that is there in everything that we do, every single day. When it comes to trading there are of course a lot of risks, the majority of the risks that we put ourselves under are in relation to the money that we have put into our accounts, there are, however, a number of different risks including those to our health and more importantly mental health. There are many different things that you can do when it comes to trading to help mitigate some of the risks, and when you have negated some of the risks you will also open the doors to better profits, so we are now going to be looking at some of the things that you can do to help reduce the risks that you are taking for a hopefully more safe and consistent trading experience.

One of the things that are being pushed out a lot in advertising and by various social media influencers is the leverage that you are able to use. To put things simply, the higher the leverage that you are using, the higher the risk that you are putting onto your account. Think about it, if you have $100, and a leverage of 100:1, this means that you will be trading with $10,000, you will be able to place larger trade sizes up to example 0.10 lots. But if you had leverage of 1000:1 you would be trading with a balance the equivalent of $100,000, allowing you to put on a trader of 1 lot. If the markets move a single pip in the wrong direction. With the 1000:1 account, you will lose $10, with the other $1. So it will take a much smaller movement for the account to blow on the 1000:1 account than it would with the 100:1 account, so keeping the leverage at a sensible level will limit your trade sizes but at the same time help to protect your account from bigger losses.

Stop losses, use them, their functionality is in their name, they help to stop further losses, they are one of the primary tools that you can use to help prevent losses and to protect your account. Stop losses are incredibly easy to implement when placing a trade. You can input the stop loss at the same time, the way it works is simple: you set a price in the market, if the markets fall down to that level, then your trade will be automatically closed. It is a fantastic way to protect your account, especially if you are not able to sit at the computer, it will allow you to walk away knowing that your account is still safe, even with a loss. Your trading strategy should have a risk to reward ratio built into it, this is the loss site of that ratio and ensures that your trades remain within your strategy, it also helps to take awesome of the psychological stress away from the trades, as you have already decided what the maximum loss is and so do not need to stress when deciding whether or not you need to close the trade or not.

Volatile conditions can be amazing for your profits, but also for your losses. Trading during times where there is a lot of volatility can make things a little more risky to your account, this is mainly due to the fact that the markets and the prices will be jumping up and down quite a bit more as well as there being higher spreads from the brokers. Trading during these moments can help you to produce some incredible profits, but there is also the risk, putting on stop losses during these times would be vital, but when there are huge amounts of volatility, the markets could actually pass through those levels for greater losses, so it is often a good idea to simply avoid trading during these conditions in order to remain safe.

Try to limit the amount that you are trading with each trade, if you are only risking 2% of your account with each trade, then you will be able to survive quite a few losses in a row without putting your account in danger. This can be limited through the use of stop losses that we mentioned above as well as limiting the trade size that you are using. Being able to limit the losses with each trade is one of the fundamental parts of a risk management plan. Of course, you will still need to put the proper analysis in motion in order to put on your trades, just because the account is protected from larger losses does not mean that you can simply put on any trade that you want, this will ultimately lead to losses.

Another option that you can use is to use a higher time frame of chart. Doing so will enable you to take slightly longer-term trades and to better view what trends are taking place. The higher p the time frame is on the charts, the longer term that you are looking to trade for, this also means that you will be putting in smaller trades and holding them for longer. When you trade on a lower time frame, you will be looking for quicker profits, so the trade size will be larger to make it more worthwhile, but you will only hold the trade for a short period of time. So a way of limiting your trade size is to trade on the target timeframe, the profits can be just as big, they will just come a little later down the line.

Those are some of the things that you can do to help overcome some of the risks that come with trading, there are of course some other things that you can do too, you should always be looking to help improve your own risk management and to protect your account, how you do it is up to you, but take some of what is written here and you will be on a good path in order to protect your forex trading account.

Forex Risk Management

How to Deal With Overexposure Like A Professional

Risk management in forex is of extreme importance and traders around the world have often struggled with overexposing themselves in one currency. We will address this issue using our trading system as a practical example. Exceeding the 2% risk limit (according to our risk management using our algorithm structure from previous articles) without having any awareness of how these oversights occur is almost every beginner trader’s mistake. These scenarios are frequently driven by a news event or some other occurrence that affects the specific currency they are trading, which consequently leads to an enormous loss. These losses can at times be so grave that they completely extinguish a trader’s account or erase several-month-long work despite traders’ initial efforts to maintain the risk at 2%. Interestingly enough, it typically happens that most trader’s individual trades are properly set at 2% when the exposure to only one of those currencies turns out to be increasingly higher. Today we are going to assess risk from several real-life situations and discuss them in order to gain some insight into how to manage risk better. 

Imagine a situation where a trader who is already going long on EUR/USD gets a new signal somewhere along the line to enter a new trade and go short on EUR/GBP. The trader does not ask any questions and enters the trade as the system suggested, setting the risk at 2%. Naturally, if the system has been properly tested, there is a high chance of winning both trades, which is important for beginners as they often shy away from these situations. Although it may seem like too much risk, these circumstances can prove to be quite fruitful. Despite the fact that these occurrences happen often and that the outcome is generally positive, the trader from the story made a single mistake thinking that the risk on the EUR equals zero. The risk, in fact, is 2% long and 2% short at the same time, which further entails that the trader will not take any other EUR-based trades unless at least a portion of the existing trades is closed. What traders frequently fail to grasp is that the 2% short and long, despite the opposition in direction, cannot cancel one another or equal 0%. 

Another situation involves a trader who received two long signals for EUR/CHF and EUR/USD and decided to enter both trades at the same time. In order to manage risk in these ongoing trades, the trader would need to take 1% from each trade to have a 2% risk on the EUR. If the individual for some reason decided to exit either of the two trades, the risk would come down to 1%. In this case, the traders could enter another trade or a continuation trade of the one that had just been closed. The trouble is that many traders assume that they somehow have their whole 2% here, which then leads to increased risk. The goal here is to fit into that 1% that we have left after the second trade was closed.

Should a trader receive a EUR/USD long signal but then reconsider his/her options because another EUR-based pair is likely to get there in one day, they can take a 1% risk on the first currency pair and wait for the 24h to pass to see what will happen. The other trade may or may not get to the place we hoped or expected it to reach, which can be quite unsettling but does not involve any increased risk or missed-out opportunity since the previous requirement was met. The equity is settled with the EUR, so the trader can, if he/she wishes, enter a new trade later on when an opportunity presents itself. Even if you decide to enter a 2% EUR trade in the beginning without waiting for the situation with the other pair to fully develop, there is no mistake made. The choice falls on the traders alone and no damage is done until the risk limits are properly sit – 1% on one of the two trades or 2% on a single trade. 

Sometimes it happens that the market is quite active and that prices are moving, so you can get several signals on a single currency at a time. What you should do here is divide the 2% by the number of trades you wish to enter. Therefore, if you received four signals for four EUR trades, make sure that each of the four trades has a 0.5% risk. While this may seem like a lot, it actually can prove to be both useful and lucrative as long as the risk is managed well. If you assumed that the EUR is going to do well and your assumptions prove to be correct, you will take wins in all EUR-based trades you entered. However, if your assumptions somehow turn out the other way, your trades are secured because the proper risk management can function as a form of a hedge.

While this is an excellent strategy and a secure way of protecting oneself, this does not imply that any trader should go on a spree looking for several trades involving one currency as this often fails to bring the results we are hoping to get. The system you have worked to build should be enough as a source of signals, so there is no need to go beyond that. Moreover, it is also extremely important for traders to trust their algorithms when we do get several signals for one currency at the same time and not miss opportunities out of fear.

Traders can sometimes be misguided by the sudden success they experience in some of these situations when they win instead of losing despite not having set the risk properly. Such outcomes can be particularly dangerous for the understanding of how risk management truly works. Once the winning part ensues, traders can get so excited that their thinking processes get affected negatively and no logical conclusion can be drawn as a result. In order to overcome this challenge and improve your overall trading, especially if you are at the beginning of your forex career, you should devote time to learn about money management and trading psychology, which will prove to outdo all other forex-related topics by far.

The more advanced traders who have already started backtesting their systems may be experiencing some difficulty due to the inability to apply today’s advice during these processes. The problem with dividing risk while backtesting is that it would make the whole assessment that much longer, so the suggestion here is to test the system on different currency pairs one by one. Overexposure prevention is important but, for the backtesting part, it would dimply overcomplicate everything, However, during the forward testing, whose purpose is to gain more clarity and see the things which may be fixed, you can expect to see some differences. This second part of testing should also serve to prepare you emotionally for trading real money and traders should, thus, be particularly vigilant throughout the process. Any of the parts that you do not focus on entirely or fail to address with a sufficient amount of attention during the demo phase will inevitably haunt you down later on and probably in a much more serious situation affecting your or other people’s finances.

As we described above, the dangers of accidental success are real, which calls for increased attention to testing processes where one can discern what works well and what can potentially endanger his/her entire forex career. If you suddenly go into the negative having taken a few losses in a row after an incredible 15% win is quite indicative of a malfunctioning system. The challenge here is not to interpret the word system as tools, numbers, and indicators alone because, as we said before, money management and trading psychology are superior to any technical aspect of trading in the spot forex market. Even if you have already lost a lot and feel doubtful about your abilities and knowledge on trading, what you can and should do is go back to the basics – start a demo account and devote the proper amount of attention testing requires.

Therefore, to sum it all up, if you are intent on trading a single currency through several trades, make sure that your 2% risk is divided accordingly, based on the number of trades you enter. We can see from this how trading requires precision both in terms of settings and emotions. Traders may know everything there is to know about entering a few trades involving the same currency at the same time, but the excitement and the enthusiasm may still blur their vision and prevent them from interpreting their results in an objective manner. The testing should help traders get accustomed to their systems, wins, and losses, but the topic of risk management cannot unfortunately be applied in this format to backtesting due to its complexity. The psychological side of trading can become increasingly heavy on the trader if they fail to recognize which role their emotions play in risk management, causing traders to either take too little or too much risk. While forex is a complex net connecting various fields of our existence, articles such as this one can serve to guide individuals on their way of bettering themselves, their prospects of making money, and thus their living conditions as well.


Forex Risk Management

Tips for Traders Wanting to Take on Larger Positions

Thinking of increasing your position sizes to bring in more profits? It’s true that this can help put more money in your pocket but increasing your position sizes also entails risking more money to make more money. Some traders rush to take larger positions too quickly and wind up blowing their accounts because they just aren’t ready, and they have issues along the way because they exceed their risk tolerance when doing so. If you want to pull off position size increases successfully, take a look at our tips below to get the best start. 

Tip #1: Check out your Performance so Far 

Is your desire to trade larger justified by your performance thus far? The truth is that you shouldn’t even think of trading larger positions if your account is in the red. If you jump to larger sizes when you aren’t doing well trading smaller ones, can you really expect to make a profit? If this is the case, don’t be discouraged, as you simply need to keep focusing on improving your results or practice on a demo before you start risking more money. On the other hand, if your account is in the green and has been for a while, this is a good sign that you’re ready to move on. 

Tip #2: Try a Gradual Approach

If you’ve determined that your profits prove you’re ready to take on larger position sizes, you don’t want to make the mistake of making a much larger increase all at once. Trading larger means taking more risks and might come with some downsides you didn’t expect. For example, you might start feeling anxious or fearful now that more money is on the line. Or you might find yourself feeling depressed if you take a large loss that you aren’t accustomed to. The best way to do this is to gradually increase your position sizes over time. As long as you’re getting good results and still feeling confident, you’ll know that it’s time to increase the size you’re taking a little more. 

Tip #3: Look at Percentages vs Dollar Amounts

If you lose money, it can be a lot harder to accept if you’re thinking of the exact amount of money you lost in terms of cash. Allow us to explain: if you risk 2% on a trade on an account that holds $10,000, then you would lose $200. If you risked the same 2% on an account holding $100,000, you could wind up losing $2,000 instead. Losing the $2,000 is obviously much more devastating, and this is why you should think of your losses in terms of percentages instead. It’s a lot easier to think of your loss in terms of over 2% over the raw dollar amount, so you’ll be less likely to become emotional over it. 

The Bottom Line

Before you even think of taking larger position sizes, you’ll need to make sure that you’re account is making money, rather than losing it. Once you’ve confirmed that you’re ready, it’s best to take a gradual approach to trading larger so that you can ensure you keep a secure profit coming in with no nasty surprises. If you ever start to feel overwhelmed, you might want to stay at the size you’re at or go back to taking smaller trades until you’re feeling more comfortable with the increased risk tolerance. Our final pro tip is to think of your risk in terms of percentages rather than dollar amounts so that you’ll be able to cope with larger losses without feeling overwhelmed. Remember that losses are inevitable, so you’ll need to ensure that you’re ready for the increased risk that comes with taking larger trades.

Forex Risk Management

Ways to Keep Your FX Trade Earnings Consistent

Once you start making money as a forex trader, you’ll never want it to stop. Sadly, none of us are safe from trading fallout and you just might find yourself at the end of a string of losing trades if you aren’t careful. If you want to keep making profits consistently without falling victim to this problem, try following these tips:

Limit Your Losses

While we’re often thinking of how much money we could make on each trade, it’s more important to focus on avoiding losses. If you risk a lot on one trade, you might get lucky and profit, but you have to think of how much money you could lose as well. If you go risking 10% or more on each trade, you’re far more likely to blow your account. Think slow and steady rather than risking larger amounts as if you were gambling. When it comes to limiting these losses, different traders use different methods.

Using a stop loss is a common way to ensure that you don’t lose too much, but you’ll also want to think of your risk tolerance for each trade. You might prefer to risk a certain percentage of your account balance on each trade based on the trade’s risk to reward ratio. Everyone has their own risk tolerance, but you shouldn’t be risking large amounts of money on each trade you take. 

Know your Strategy

You can’t expect to keep consistent profits coming in if you don’t know the ins and outs of your chosen trading strategy. You’ll want to start by choosing a strategy that works for you depending on how much time you have available to trade and you’ll also need to ensure it isn’t too difficult. From there, you’ll need to figure out the strengths and weaknesses associated with your plan. 

Only Risk what you Can Afford to Lose!

You should never deposit money into your trading account that you can’t lose, so don’t even think of depositing money needed for necessities. You’re always hoping to make money, but you have to remember that there could be times when things don’t go in your favor. You’ll also want to think of how much you’re actually willing to lose on each trade, which goes hand in hand with our first tip that covers limiting your losses. 

Be Patient! 

Sometimes, you’ll just need to sit back and do nothing as a trader. Some struggle with this because they feel unproductive by doing nothing. Others are simply addicted to the rush of trading so they enter trades even when evidence doesn’t support those decisions. This can cause you to lose money and will certainly have a negative effect on your profits. 

Don’t Give Up!

The reason why most traders fail isn’t that trading is too hard, it’s because they give up too easily. One bad day, a few losses or a blown account are enough to send some traders packing for good because they decide that trading isn’t worth it or they just aren’t good at it. The truth is that the mistakes that caused those losses could have often been avoided, but many beginners just don’t put enough time into research and figuring out what they’re doing wrong. If you want to make consistent profits as a trader, you have to hang in there and work on any mistakes that are affecting your profits.

Forex Risk Management

How to Deal with Losing Streaks and Drawdowns

One of the aspects of being a professional trader for which many are unprepared is the depressing periods of drawdowns in forex. Losing streaks can shake you and wreak havoc on your emotions, levels of confidence, and feelings of self-esteem. If you’ve been operating for a while, you’ll know what we mean. Consecutive losses place you in a state of “panic,” which severely degrades your decision-making process.

So what can we do? How can you recover from a losing streak or even avoid it in the future? Forgive our frankness, but the reality is that you cannot completely avoid this kind of accumulation of lost trades, they are simply a fact in trading. That is why it is very important that you learn to prepare, anticipate, and deal with this inconvenience, so when the time comes, the mental and emotional impact will be reduced.

Don’t be one of those traders who thinks “this won’t happen to me” because the reality is that someday it will happen to you. Even the best trading system that can exist is not free from the occasional losing streak. Trading is a profession that focuses on statistics and probabilities, so it is very unhealthy to believe that you will never lose money. You should wait for the losses.

In the “heat” of a drawdowns period, your future as a forex trader will be determined by the way you handle yourself in that moment of hopelessness. Will you collapse under pressure and let your account disintegrate along with your emotions? Or will you remain strong, disciplined, and logical while maintaining a rational mindset and maximizing your chances of surviving the storm?

In today’s guide, we will share some tips to help you through those difficult times on your way to trading.

Drawdowns in Forex: Don’t Let Your Mind Fool You

Placing an operation is quite easy, perhaps excessively easy. It’s just a click on a button and in a matter of milliseconds, your operation is running. The ease of placing a transaction can make a trader act on impulse without really thinking about what he has done. This is especially true when you feel emotional, such as having had some consecutive losses.

When you plant an operation, you do it because you think the odds are in your favor, and you’re exploiting your advantage in the market. When you are suffering the effects of your emotional side due to a drawdown, it is easy to despair and have a sense of urgency to take another operation in an attempt to recover the recent losses. This happens even if there is no good operation to take. It is called revenge trading.

When you operate in despair, you make bad decisions, and the market uses those feelings against you. You will begin to convince yourself that there are good setups in front of you, like a person stranded in the desert who sees mirages in the distance. It’s just your mind playing tricks on you.

It is important that you maintain discipline, taking only high probability operations and not starting to operate setups of the 2nd or 3rd category just because you are eager to get your money back. Consistency is the key to success and will be a vital component in recovering from a losing streak.

Use a Trading Journal to Highlight Potential Problems

You must keep a diary designed not only to record your operations data but also contain the psychological components of your operations. This way you can track your “feeling” and “mental state” during the different phases of your trading.

Such psychological data can be used during losing streaks. Go back to your recent operations in your journal and compare all those that make up the drawdowns period. There’s a good chance you can do it to see a common problem or weakness in the way you felt at the time.

It’s very likely that all this escaped your attention in the heat of the moment when you pulled the trigger. Surely the only thing on your mind was the desperate thoughts of getting everything back with a big winning operation. The problem is that many traders will do almost anything to recover their losses in the market, but they are willing to do very little when it comes to improving their emotional and mental performance.

Before taking any surgery, you should check your diary and remind yourself what happens when you operate on impulse and without discipline.

Maintain Positive Risk-Benefit Ratios

Remember, forex is a business, and businesses need a return on investment. Every time you place an operation you are risking some of your capital with the intention of getting a return on the investment. You only risk that capital when your trading system tells you that the chances of getting a good return on your risk are in your favor.

Positive benefit-risk ratios are a mathematical concept that ensures you aim for a return greater than your risk in each of the positions. When you do the accounts you discover that the positive ratios allow you to have more operations with stops executed than those whose objective was reached and still maintain the ability to grow your account.

If you remain disciplined and focused, you will eventually begin to see your operations achieve their objectives. It is not uncommon for a properly planned operation to eliminate all losses from a slump. Maintaining strict money management is vital during difficult times, and positive risk-benefit ratios should be at the core of any sound money management system. If your money management strategy allows your losses to be greater than your profit goals, then discard them before they destroy your account.

Have Faith in Your Trading System

Losing streaks come and go. Operating with a system you can trust and put your faith in will be very important. Just as with a diet, if you don’t think it’s helping you, you won’t get attached to it and therefore never reverse your unhealthy habits. A trader needs confidence in his trading system to be able to stay in good mental and emotional condition. Trading is useless if you do not believe in the trading methodology you are practicing.

We know losing streaks will make you question your trading strategy and even tempt you to make those “in-flight adjustments” to your plan. Remember that the market is dynamic and goes through different phases. One or two of these phases may not work very well with your system. If you start changing your rules, you could turn your trading system into something useless during market conditions in which you would have experienced good profits.

Don’t try to fix something that isn’t broken: no strategy has a 100% success rate. One aspect that we find critical is that you understand the reasons why you take the operations that your system generates. Many traders blindly follow the alerts that come out of some “magic indicator” they have bought. The trader has no idea why he’s pulling the trigger, he only does it because the gauge tells him to.

How can you trust the system if you don’t even know where those operations come from? The focus should be on how the trading system sends the signals. It should be based on a logic that you can understand. This is one of the innumerable reasons why like price action trading. Operating with price action signals allows you to understand market movements and safely identify high probability situations in which you can pull the trigger without hesitation.


No matter how long you’ve been trading forex, every day you face a major new psychological challenge. If a forex trader tells you he can operate without emotion, he’s lying. As a trader, you will always be struggling with your emotions, making sure they stay away from your trading decisions.

The periods of drawdowns caused by losing streaks will blow up your emotions and there is a good chance that they will start to bring out the worst in you. Most people take their trading performance personally, and these losing streaks become a reflection of how they see themselves as people, resulting in low self-esteem and periods of depression.

Whether you like it or not, you will experience emotional upheavals from time to time. The way you handle yourself in these situations will be what will strongly impact your chances of success. Sometimes a trader could bring to the trading screen the stress of his outer life, coming from a bad day at work or a family discussion.

The best thing you can do when you’re emotional is to get away from the graphics. This is so simple, but it can do wonders for you. Sitting in front of your trading screen in a negative state of mind is unhealthy.

Get up and go do something that takes your mind off trading. Go to the gym, it’s important to stay healthy; watch a movie, or organize something with your friends. Socializing with other people will be a refreshing experience of the solitude of your trading table. You will notice that once you have participated in some activity that you enjoy, you will return to the markets with a fresh and positive attitude.

Operates on Favourable Terms

One of the big problems of novice traders is that they tend to look at a single market and sometimes become obsessed with it. They tend to confuse bad price action signs with good ones, due to the lack of consideration of market conditions surrounding the signal. Trends are the place where you can make a lot of money, and consolidation periods are just “black holes” that work as traps for your money. Operating when the market is going nowhere is like whipping a dead horse and expecting it to do something.

Often traders are taken to stop loss on the first operation and then start “revenge operations” on the same market to try to recover the lost. It might be helpful to create a rule for yourself that you will stop operating for 24 or 48 hours if you have more than 2 missed operations on the same day. Market conditions should be the first check when you look at the charts; if there’s no movement, do yourself a favor and stay away from that market.

Don’t Give Up on Me!

Remember, losing streaks are not uncommon in trading. Each operation individually is completely independent of the previous one and the next one. Just because you’ve had eight losing operations doesn’t mean the next eight can’t be winners.

Don’t despair or get anxious, if you do this your money will flow into the pockets of traders who have confidence and discipline. Always keep money management positive-oriented, so your winning operations will outperform your losers, making drawdowns periods somewhat less likely.

Do not be prey to revenge trading or panic trading. You need to maintain confidence in your trading system, remain patient, disciplined, and always have realistic expectations of the forex market. If you are looking for a system that is logical and in which you can understand why you are placing each operation, then price action is our recommendation for you.

Forex Risk Management

The 4 Most Common Errors in Capital Management

One of the driving forces behind forex traders is being able to escape their monotonous daily routines. We all fantasize about quitting our conventional jobs and experiencing freedom while making money off our computers.

But does this mean that you can sit on the couch and occasionally press the buy or sell button while watching “Game of Thrones”? Probably not. The reality is that you are leaving a world in which you have been raised to survive and are entering another world for which nothing has prepared you. In the forex currency market, there is a different set of rules.

As traders we know, deep down in our minds, how important capital management is, not only for the health of our trading account but also for our mental health. The average trader’s approach makes it very difficult for him or her to ever make a profit or sustain real growth in forex.

We’ve talked to many traders, and there seem to be a few common mistakes that continue to occur. In this article, we fully intend to expose about capital management and highlight some bases on which you might be building your money management mentality, and which may be harmful to your chances of getting where you want.

Don’t orient your goals toward money.

Some of the most common questions say something like:

  • Can I do 10% a month?
  • How many signals a week can I expect?
  • How long will it take me to double my account with $1,000?

All these questions have a strong focus: the urge to make money really fast. The big problem we have with these kinds of “goal-oriented” questions is that they cannot be answered the way the trader wants to be answered.

The foreign exchange market is a dynamic environment. A month could be very productive, with many “easy prey” and lucrative trading signals. The next month could be a dead zone, where the price is consolidated and compressed with low volatility, preventing you from making money from price movements.

Don’t try to force rigid money management goals in a fluctuating environment. Pretend you are in the last week of the month; What are you going to do if you are not even close to completing your “monthly fee”? In what way you will give an answer to the pressure you put on yourself to achieve your monetary goal?

With a sense of urgency, you might need to be more aggressive and start forcing operations; operations in which you wouldn’t normally pull the trigger, but now under this pressure, you feel you need to take immediate action.

The best way to fix this is to not set any goals, but instead, concentrate on becoming an excellent trader who is a master at reading graphics and managing risks. Learn to take what the market has to offer. Take action only when the market offers you a valid signal for your trading system, which you know gives you an advantage with the odds in your favor.

We don’t like to admit that we can’t predict or control what’s going to happen every time we look at the graphics. Sometimes the market is too noisy and hostile to operate, it’s that simple. In these cases, it becomes a black hole, in which you throw money and it is consumed by consolidations.

Some months you will do well, in others you will not see profit or even suffer a loss. What you never want to do is define your possible success with absolute numbers, which will lead to self-inflicted emotional pressures, and a negative self-assessment if these are not met. If you try to make money fast, you’ll be taking an incredibly high risk.

Measure Success in Pips

If you’ve seen a forex blog, you’ll notice that traders measure the outcome of their pip operations, or “how many pips are up or down this day. This has become the social standard for forex traders, we are all used to talking to each other in this way, using pips as a benchmark for performance. But the truth is, it’s not the right way for a serious trader to assess how well an operation has gone or its risk.

Pips are only a measure of distance on a price chart. Catching a move is great, but the most important thing is how the setup has allowed us to catch that move. You see, 1 pip for us could mean something different than what it means for you, and at the same moment totally different from what it means for someone else. Pips are very relative measures and therefore have relative values. If you “win 100 pips“, but your stop loss was placed at a distance of 500 pips, it is a negative-oriented operation, which gives you no right to brag about winning those 100 pips.

You should also note that a movement of 100 pips will look very different in EUR/USD compared to the EUR/AUD pair, and in turn will be different in GOLD. If you see a movement of 100 pips in EUR/USD, it would not be uncommon to see the EUR/GBP move 250 pips on the same day. The GOLD can easily move 2,000 pips in a session, and when you compare the graphics side by side, they all look quite similar despite the drastic differences in the movements of pips.

100 pips in EUR/USD is not the same as 100 pips in GOLD, and to further expand the differences, we can say that pips also contain an “intrinsic value” that is unique for each operation.

The value of each pip is defined by the following factors:

  • Size of the position (lotion).
  • The quoted currency of the currency pair you are trading (it is the currency that appears 2º in the pair).
  • The currency in which you have your trading account.

If your trading account is in USD, then any pair whose quoted currency is USD (XXX/USD) will always have a pip value of $10 per lot. If you were using AUD in your trading account, and you operated these same pairs (XXX/USD), then the value of each pip would be determined by the AUD/USD pair exchange rate and the batch size in the pair you are operating.

Let’s say we open a transaction in GBP/USD with 5 standard lots, and the trading account is in USD. In this case, each pip would be worth $50. The operation would increase or decrease our account by $50 for each pip earned or lost. A movement of 100 pips in our favor would put us ahead by $5,000.

Compare the same situation with that of another person who takes the exact same operation but uses AUD on his account. The “pip value” will be different in this case, and this person should fix this difference by adjusting the position size to compensate. We won’t get into mathematical calculations here, the important thing is that you understand the idea.

So, when someone tells you they’ve won 200 pips on their operation, it doesn’t really mean much. If it was in EUR/USD, the movement has been pretty decent, probably a good operation, but if it was in GOLD, it’s not even an accomplishment.

Remember, the real measure of the success of an operation is how much return on investment you were able to get with it. The bottom line for trading is money, we are not exchanging magic beans, here we are looking to earn $$$$.

If you’ve had to risk $1,000 to win $100, then you’re playing to destroy your account. If instead, you risk $100 and earn $1,000, you’ve done very well! , getting a 900% return on investment. We all know that to fit into society you must speak in the classic terms of pip movements here and there, but when it comes to recording your own data, don’t be a pip counter when measuring your success.

Capital Management: Under-Capitalisation

How many accounts have you ruined or seriously compromised because you weren’t happy with the profits you were making and decided to expand your risk to compensate? A serious forex trader knows that trading should be treated as a business. One of the most common failures for small businesses is under-capitalisation, that is, not having enough money.

The ironic thing about forex is that you can start and operate with small amounts of money. Technically you can operate with initial investments as small as $100! That being said, if you want forex to generate $500 a week with a $100 investment, then you’re very undercapitalized!

The undercapitalisation affects the trader deeply at a psychological level. Undercapitalized traders want the big income they want, but they don’t have the power to make it happen in their account, so they are prone to risk more and overexposure to the market. This can lead them to clear their account quickly, and then become frustrated and angry traders.

Do not be the one who overexposes your account to a massive risk by the desperation of getting “the big win”. This is a betting mentality that provides an incorrect framework for developing the trader mentality.

Cutting Operations Too Soon

One of the fastest ways you can do harm yourself is to become a “micro forex manager“, the trader who sits down to make lots of fine micro-adjustments to their open positions. Sometimes you may feel like you should babysit your open operations until they reach a profit. When a trader makes adjustments to his stops, or does anything outside the original trading plan, this will usually result in an unfavorable outcome.

Don’t sit back and look at your floating gains and losses, because each pip of movement will generate more and more emotions. If you do this, you will therefore have a better chance than close an operation based on emotions even when there are no clear exit signs.

Think of all those times you’ve interfered with your open operations and all you’ve achieved is to deprive yourself of the potential earnings that you would otherwise have achieved.

The price will not move in the straight line you would like, but will move in “waves” or zig-zag patterns. It is logical to expect a transaction to come in and out of profits several times as the financial market gradually moves in the direction it wants to go. This is a basic principle of swing trading.

Do yourself a favor: put your operation in a logical way that you have confidence in and then just walk away from it. Close your trading terminal and don’t even look at it until the next day. This type of “prepare, forget, and collect” system will do wonders for you, financially, mentally, and emotionally.

Forex Risk Management

The Importance of Risk-Reward Management in Forex

Trading can be fun, mentally stimulating, and beneficial in several ways. But you shouldn’t confuse it with a casino machine. There are people addicted to trading, and many of them surprisingly have some sort of structured plan. The problem is that when managing their capital, these traders tend to fix the risks of their operations based on how they feel at the time. This type of placement of transactions with random sizes causes the trader to have no control and usually to be placed in situations of extreme exposure of his capital, which is dangerous and stressful.

Traders should introduce money management in the trading plan. It is not important whether you are an intraday trader or a scalper, someone who uses many indicators or just follows the price action. The point is that all trading systems, no matter how exotic, need good money management. This management will help the trader in various ways:


Money management plans allow you to calculate risk very accurately. This eliminates any work of “guessing” the size of a position. If you find yourself placing commands with random position sizes that cross your mind, you will surely have a fairly interesting equity curve. When applying the control of good risk management, your operations will have a consistent risk. With each operation, you will know how hard you will be hit if your stop loss is hit. There is no shame in a stop-loss execution. No one earns 100% of their operations, and your risk management plan should ensure that your winning operations are broader than your losers.


The problem with operating without a money management plan is that you don’t really know how much risk you’ve placed in each operation. You could be risking too much on an operation and take a major loss, then on the next operation risk an insufficient amount and achieve your goal, but the profits will be less than they should. This responds to consistency in risk. We don’t want to risk $500 on an A operation and then only $50 on a B operation. If we have a plan regarding the amount to risk, our equity curve will stabilize, which will allow us to sleep more peacefully at night.

Money management allows you to keep emotions on the sidelines. Operating without a money management plan is quite stressful. Every element of trading is in need of a structure, and without it, you could surely encounter an anxiety attack if an operation doesn’t go your way. With position sizes or random stop placement, you don’t really know where you’ve gotten yourself. Surely by placing the operation you anticipated that it would go your way, but what if that doesn’t happen and you start losing more than you should?

This will begin to bring dangerous emotions that should never be mixed with trading. You could move your stop loss even further to give the operation the space to turn around, or maybe you could remove all your stops, exposing 100% of your capital in the markets. Or you could prematurely close an operation when it would actually have reached your goal. You could even open a new operation to help recover the accumulated losses. These are all dangerous practices that will do great harm to your mental health, and cause you to fall into stress.

The idea of using a money management plan is to avoid intervening emotionally in your operations. This way you will have consistency: you have already calculated how much you will lose if your stop loss is reached, you know that you feel comfortable with it and you also know that if your operation reaches the goal you will get a good return on your investment.

Money management could be the difference between success and failure. A proper money management strategy could bring a trading system that is below average back to life. You could even use the popular “moving stocking crossing” strategy, apply smart money management, and achieve major improvements in the performance of this system. One of the most important features of a powerful plan is that must project a return on positive investment. This is often achieved with positive risk-reward ratios.

The Power of Risk-Reward Management

Everyone is looking for the “holy grail” of trading systems. If you ever manage to find it, we can guarantee that it has a powerful and robust risk-reward model. The risk-reward profile of a money management plan could be the difference between success and failure, so it is very important that you come to understand the concept and apply it correctly to your trading.

What is risk profit?

The risk-reward ratio represents how much you’re risking compared to how much profit you’re aiming for. Here’s an example:

-If we open an operation with a risk of $50 and target a profit target of $250, then our risk-reward would be $50/ $250, or 1:5. We’re risking $50 to get a $250 return.

-If we had risked $10 and targeted a profit of $30, our risk-reward ratio would be 1:3.

-This percentage is very important for your commercial success in the long term.

The Danger of Negative Risk-Reward Ratios

Many traders use capital management methods that can have very negative effects on their equity curves. For example, scalpers are traders who place many small trades into and out of the market quickly. They believe that being on the market for a short time has some kind of advantage, although we disagree.

Let’s look at the money management profile of a trader who uses high-frequency trading strategies. Because scalpers only target small targets, it is difficult for them to get positive returns on investment. Here’s the reason: the market is full of players who operate for different reasons. This causes vibrations in price, which constitute the “noise” generated by all transactions taking place on the market. If a scalper targets a 3-pip target it is very difficult for him to place a stop loss that gives him a positive risk-reward profile.

Let’s say that the scalper wants to get a risk-reward ratio of 1:3. This means that you will need a stop loss of 1 pip to achieve this. Similarly, if I wanted a ratio of 1:1, I would need a stop loss of 3 pips. As you can see, the size of stops loss is unrealistic, with such small stops the trader would be taken out of the market almost instantaneously due to the noise that we have spoken about. At any moment the market could vibrate up and down 5 pips. For this reason, scalpers often get around this problem using negative risk-reward ratios, meaning they risk more than they expect to gain from each operation. A typical scalper could target a 5 pip target while placing a 20 pip stop loss to “cover” from any market noise.

In this example, the risk-reward ratio would be 4:1. This is a position we do not recommend you to be in. For each lost transaction, the trader will need 4 trades that reach their goal, and that if no additional loss occurs while getting those 4 winners.
That is why it is essential that your risk-reward ratio remains positive, otherwise you will be chasing your own tail and you will not get anywhere with your trading.

How a Positive Risk-Reward Ratio Gives You an Advantage

Now that we understand the concept of risk-reward ratios, let’s take a look at how a positive ratio can make you shine as a trader. Remember, positive risk-reward ratios mean you’re aiming to get more than you risk every time you plant an operation. A positive risk-reward ratio means more return on your investment, the advantage here is that you can tolerate more stop loss executions than you think. In fact, it is possible to lose more than half of your operations and still make a profit. This is because your winning operations recover all the losing operations you have accumulated plus a bonus. This way you’re able to grow your equity curve.

Losing trades hardly make a dent in a trader’s account that uses a positive risk-reward ratio. The higher the risk-reward profile, the trader can endure losing more trades without receiving damage to his account. We must stress that the higher the profit target, the more difficult or time-consuming it will be. Risk-reward 1:6 operations are not as easy to achieve as 1:2. We only have to earn 25% of all our operations to maintain the breakeven and with at least 26% we can already think of a long-term gain. We are confident that you now understand the benefits of including a robust money management system in your trading and can even further improve performance by introducing positive risk-reward profiles.

Forex Risk Management

What is Your Actual Trade Risk Tolerance?

While there are many possible pieces of the puzzle that you can put together to earn money, certainly the most important general area is money management. The most important thing for money management is to understand its role regarding risk tolerance in Forex trading.

What is Risk Tolerance in Trading?

So, before we continue, we need to understand what risk tolerance is when we talk about transactions. It simply means the amount of risk you can tolerate per trade. It is a little different from money management, as money management focuses on your ability to survive a continuous series of losses. However, risk tolerance is more in line with the psychological ability to take a loss.

What is intended to make understand with this is that various traders are very comfortable risking 3in a trade, while others will risk 0.5% in the same setting. In general, it is a personal problem, as each individual person and trader will, of course, be different. However, knowing your risk tolerance will ultimately be crucial to your success, as if you are not comfortable in a position, you may be leaving too soon. What will be even worse is that many times when you are in that position, your startup analysis can be successful and you are jumping off the market based on fear, and not on anything substantial. There are some worse things to see a position go your way after you’ve been a little scared.

How to Know Your Risk Tolerance Level

Knowing your risk tolerance is a lot less than complicated than you realize. As a start, you should know that understanding money management is critical, so we’ll use two examples that are realistic:

Suppose you take a setting and risk 1% of your total account at the loss limit. If you feel very comfortable with this position, then you know that it is within your risk tolerance. A very simple exercise could be to get up and get away from the computer. Continue with your day and see if you are too concerned about how the position is working. If you can go to the park, work, or spend time with your friends or family without checking your position often, you are most likely within your risk tolerance.

In another trade, maybe you risk 2%. In this scenario, you are more concerned about trade and analyze how it works quite often. If it causes stress, it is above your risk tolerance. It is really so simple. I can’t tell you how many times I’ve found myself above my own risk tolerance, I had a bargaining chip against me, and then I turned in my direction just to get out of the balance point just to get rid of the uncomfortable feeling. Of course, trade continues to work in my favor and I would have cleaned it up. Psychological stress can have a big influence on how trade works.

An Exercise to Measure Your Risk Tolerance

I leave you with a simple exercise. Place an operation with a total risk of 0.5% in the stop loss. Watch how it feels when you walk away from the computer and let the market do what it wants. The next transaction should be 0.75%, with the same parameters and the same observations. From there, it simply rises by 0.25% every time you make an exchange until you find it too difficult to leave the market alone.

Some people will feel comfortable risking insane amounts of money, like 20%. That’s a completely different conversation as you approach money management. Money management dictates that you shouldn’t risk that kind of financial impact, but at the end of the day, working at a reasonable range to find where you can leave the trade just to decide which way it’s going, will be one of the main steps forward to become a much more professional trader. For what it’s worth, I’ve found that in many traders the risk tolerance is about 1%. Their tolerance may be different, but in the long run, these types of operations can be converted into good returns.

Forex Risk Management

Where Do Forex Trading Risks Actually Come From?

Have you ever wondered where trading risks are actually rooted? What causes risk, and even more importantly, what is causing losses? Spend a few minutes learning more about where the main risks of Forex trading actually come from.

Error in analysis and prognosis. Any publication of statistical information, the publication of the results of the Fed meeting, and meetings of other central banks have their effects. What we’d better find out is whether the trader correctly assessed the importance of this or that news item. And the forecasts, made by the majority, were justified? Traders should consider these and other factors in the forecast. And there can often be mistakes. Traders often ignore or lose something important, which can result in an incorrect forecast.

Force majeure. It can come in many ways: human disaster, unexpected political decision, terrorist misfortune, the discovery of new mineral deposits, release to the market of a new product that has not been previously announced, sudden bankruptcy. Force majeure often has both long-term and immediate consequences. Examples of long-term force majeure include the collapse of “dotcom” and the mortgage crisis in the United States, which has become a global crisis. It should be noted that there are investors who managed to make a profit from the crisis. (I recommend watching the American film “The Big Short”, which describes this situation quite well).

Human factor. Incorrect interpretation of patterns, signs due to fatigue, lack of attention, stress, etc.

Another classification is the simplified division of the causes of trading risks into forecasting errors in technical, fundamental, and human analysis. I have already commented on the main reasons for the main risks in the section “Force Majeure”, and I will dwell on more details on the risks resulting from errors in technical analysis.

  1. High volatility at the time of opening the transaction. The greater the volatility, the greater the breadth of price changes and, therefore, the more and faster you can gain from it. It seems reasonable, but the risk lies in assessing this volatility because if the price going to your detriment, you can lose even more than you earn. The data of the indicators are relative, as well as the data of the volatility calculators.

TIP: Identify volatility visually. The price range is often identified as the distance between opposite fractal ends or candle accumulation. For starters, you can trade on the history. At first, it will be difficult for beginner traders (know from experience). Second tip: greater volatility, different from the daily average, is observed at the time of the appearance of fundamental factors. Just don’t open any transaction at this time.

  1. Level of trading. The trading strategy of trading by levels individually: someone opens positions expecting a level rebound, someone tries at breakup. For someone that’s a loss limiter. There is the so-called zone of turbulence around fractal levels in short-term time frames, where the price moves in different directions with a narrow amplitude. Predicting price movements in this area is inefficient.

TIP: Use the levels only as a guide. Open transactions out of levels and try to avoid staging at levels of resistance and stop support, as it can be used by large traders (market makers, which will be discussed below). If the transaction is already open in the direction of levels, then it is better to leave before reaching the level. Otherwise, there could be a rebound with the possible slip, which will worsen performance. Basically, the analysis is reduced to determine whether the break/rebound of a level is true (the trend) or false (the correction). Does it make any sense to risk it?

  1. Opening of transactions in overbought and oversold areas. This is the risk of opening a position at the end of a final trend. A classic mistake is trying to enter when the trend is already underway. At the peak of growth, large traders abandon trading, reaping some less intelligent traders.

It seems reasonable to employ RSI or stochastic, but they are not efficient at minimizing risks. They are often lagging behind, they invest in extreme price zones, and so on. So even if you use the indicators to determine the zones, you can still make a mistake.

TIP: You can identify signs of trend depletion as follows. The amplitudes in the three fractal sections are compared side by side in the time frame M1 (the exhaustion of the trend is clear there before). If the amplitude is shrinking (the amplitude of each subsequent fractal is shrinking), this suggests that the trend is exhausting.

And the wisest and simplest advice is to know how to get into an operation right at the beginning of the trend, not to imitate most. Be careful when interpreting the signals of the indicators, there are no perfect and impeccable indicators.

  1. Opening of transactions where there is no clear trend. There are situations where a trader makes a correction or a local price change for a new trend, which often occurs on the flat. It is difficult, especially when inexperienced to identify the flat end, as it often does not have a clear beginning or end.

TIP: I suggest again to use the comparison of price amplitude within the flat trend. If in the short term, there is a price movement whose amplitude deviates sharply from the average value, you should be alert. Do not enter an operation immediately, the first price change could be a correction. Analyze multiple time periods at a time: the signal period is М1-М5, confirming longer periods.

  1. Incorrect indicator parameters. This will result in an incorrect interpretation of the signals.

Council. Before starting to use an indicator with adjusted parameters in trading on a real account, try the system (tester МТ4, FxBlue). More detailed information about testing and optimization strategies in this summary.

  1. Application of pending orders. Outstanding orders are used in trading strategies based on the opening of transactions when the price exceeds the consolidation area. Orders are placed in opposite directions, betting that one of them will work. The risk arises from the fact that outstanding orders are set on the basis of intuition, rather than actual price movements. The distance is calculated, for example, in percentages of the average value of the price movement in the consolidation area. There is always the risk that the price will be positioned outside the area, order, and go in the opposite direction.

TIP: To reduce risk, avoid using pending orders.

  1. Abrupt reduction of contributions when a long position is opened. There are many examples of when the price fluctuated by 500-1000 points in just a few minutes. Of course, hardly anyone could react, make a decision, and make a compromise.

TIP: Always use stop loss.

  1. Market makers. A particular trader is just a token of a bigger game. Market makers are big players, and they can influence price through their huge capitals. They can create a necessary repository of information by manipulating media, forums, and other resources through forecasting, analysis, and information.

But this is not his only means. They could see levels where purchase and sale orders are concentrated, that is, stop losses and pending orders established in advance. As practice shows, most traders set stop loss in the area of the local ends, being tied to strong or rounded levels of support/resistance. Pending commands can be configured the same way. The market makers oppose the majority, bring the price to the levels at which orders accumulate, and therefore, even if we are forward-thinking, most traders are activated to stop.

For example. Market makers will always want to sell a currency at the best price. You see multiple stop loss higher than the current rates (green horizontal line at the bottom of the screen), which are basically the orders requested. On the other hand, market makers see many orders pending in the same price area, which does not allow the price to rise (volume equilibrium).

The price is pushed with small orders to the necessary level, after which it satisfies your sales volumes through purchase requests (stop loss). Given the number of short requests, it is unlikely that the price will go further.

TIP: There is no point in fighting with market makers. Therefore, you should learn to identify potential areas of command concentration and try to avoid them. It should also bear in mind that indicators cannot anticipate the possible actions of market makers. Therefore, it makes sense to rely less on indicators and pay more attention to levels, patterns, and exchange of information (trading volumes, order table). You can suggest any other risk of technical analysis, write in the comments. Let’s look for more ways to minimize and optimize trading risks together.

With regard to reducing the risks of erroneous forecasts based on fundamental analysis, there are few recommendations:

-Do not blindly trust everything that is reported in the media and be especially careful with “expert” forecasts. Check the official data reported by news agencies and official resources.

-Use complementary analytical tools: economic calendar, action analyzers.

-Evaluate dynamics statistics, comparing them with analysts’ expectations and previous reports.

-And lastly, prepare to react instantly to a force majeure.

Forex Risk Management

How Much Should You Risk on Each Forex Trade?

When it comes to forex trading, it’s a good idea to take advice from seasoned professionals so that we can avoid learning hard lessons for ourselves. One of the biggest lessons that these traders can teach us revolves around risk-management, which has to do with how much we risk on any single trade. For beginners, it might seem like risking more can pay off in the long run, because one large win could increase your investment significantly. Unfortunately, this way of thinking has lead to the end of many trader’s careers before they really even got started. If you risk 15% on one trade, 20% on another, and so on, you’re likely to blow through your account quickly. Its true that you might get lucky with a couple of trades, but it only takes one loss to wipe out all those winnings. 

The well-known trader Bill Lipschutz is a great example of how improper risk-management techniques can be devastating. This trader inherited $12,000 and turned it into $250,000 while in college. While this sounds like an inspiring story, the future millionaire blew his entire portfolio with one bad trade because he did not practice proper risk-management. Imagine building up that much only to lose it all on a single trade! Know that the story went on to have a positive ending despite this setback, as Bill did not give up and went on to open his own investment firm while being regarded as one of the top traders in the world. 

Still, we can always learn a lesson from other’s mistakes so that we don’t have to experience the same heartache. The trader in our example would have only lost a small portion of his portfolio if he had not risked as much. One of the most effective ways to limit your losses is to limit the amount you risk on any one trade. So, how much should you risk? Is the answer 2%, 5%, or higher?

Actually, experts recommend risking no more than 1% on any single trade. This may not seem like much, but it makes sense. For example, if you risk 1% on a $100 trade and lose, then you’ve only lost $1. This obviously won’t be a career ending move and you’ll barely notice the difference. If you were to risk 20% on the same trade, you’d lose $20 out of your $100 investment, leaving you with only $80. You’re far more likely to notice the difference in our second example. Once you apply this same principal on a larger scale, the difference is even more significant. Consider Bill Lipschutz from our above example. If he had only risked 1% on his trade, then he would have lost $2,500 out of $250,000. This might still seem like a large loss, but the smaller risk makes a huge difference. A trader could still walk away from this bad trade with most of their portfolio intact. 

If you take away anything from our article, you should know that managing risk is essential for successful trading results. It’s true that you might miss out on some opportunities, but you’ll have more profits in the end without suffering any career-ending blows. Just imagine how it would feel to lose everything in your account, whether its $100 or $100,000. We shouldn’t let the fear of losing cripple us, but we can take more control of what we can lose by only risking a small portion of our balance. Even if you don’t agree with out 1% recommendation, its always a good idea to keep your risk at a low percentage.

Forex Risk Management

Why You Should Only Risk 1% Per Trade

Some of the best advice that you can be given is to do with your risk management, risk management is often seen as the key to successful trading, it can make or break a trading strategy. One of the most well-known risk management plans is known as the 1% rule. It is quite simple in principle, you will simply risk just 1% of your account with each trade. So if you have a balance of $100, that 1% will be %1, if you have a balance of $1,000 then that 1% will be equal to $10. It could not be any simpler than that, of course, this 1% will be a different value for all traders as most will of course have different account balances, so it needs to be based on your own account and not simply copying someone else. We are going to be looking more into the 1% rule and giving a few ideas as to why so many traders follow it and even live by it.

So why is it the 1% rule? It is simple really, it is because your plan is to be able to trade today, tomorrow, the day after, and so on. Successful trading is all about being able to survive long enough to become profitable, if you are making large trades and taking large risks, then there is a good chance that this might not happen. The 1% rule simply reduces the amount of risk that you are using when you trade, which is paramount should you wish to be able to last as a trader and to survive a number of losses in a row.

The centre of any good trading strategy should be its risk management, I know we have said that multiple times already and we will continue to say it as it is paramount for your trading survival. You need to remember that the aim of forex is not to make a fortune overnight (although many come into it wanting this), the goal is to make a profit over an extended period of time. Trading is not a gamble and should not be treated like it, control your risks. When you make a number of different small trades, it has reduced the risks and the odds of you being successful will have gone up, simply because there are more opportunities to make a profit. Along with that, your account will last longer, and an account that lasts longer is able to make money for longer, it also gives you more opportunities to learn new things. Not to mention that if you lose a trade and it only losses 1% of the account, it will be far easier to make that 1% back than it will to make back the 30% another trader lost.

The 1% rule is a lot more relevant to those that are trading the shorter-term trading styles, things like day trading and scalping due to the fact that they place far more trades. You need to also bear in mind that each trade will have a slightly different amount of risks, yes it remains at 1% but you need to adjust for the previous results. A win would mean that you are trading a little extra, while a loss will mean that you are trading a little less. You should also consider broker fees, many brokers especially on accounts with low spreads will add a little commission on to each trade, if you can, try to take these figures out first, so you know what you will be left to trade with.

One thing to think about is the fact that not every trade needs to follow this rule, there may be times where the opportunity presents itself where it may be better to risk either more or less than the 1% that you usually do. It should also be noted that you should not be making more trades simply because you are risking less. We have seen people put on 3 or 4 identical trades, this is pointless and you may as well have just put on one large trade instead. One other way of implementing this rule is to simply put on a top-loss at 1% below the level that the markets were entered, if they lose the trade then they will have lost just 1%, this is called an equal risk method, as the take profit is normally set approximately 1% above the price that the market was entered.

We briefly mentioned it but you also need to be able to consider your returns or the profits that you are risking this 1% to get. Part of your analysis should be looking at the potential profits, if you have the chance to make a 0.8% gain, then you probably shouldn’t be risking 1% to get it, if you can make a potential 2% then the 1% risk could be worth it and justifiable. Your risk to reward ratio will be what you need it to be, but you should probably be aiming for something around the 1:2 ration, which is 1% risk for a 2% profit, anything less than that and it may not be worth it. Some people go even higher and won’t trade anything under 1:5, but really it is up to you and the style and strategy that you are using.

So you need to consider whether using the 1% rule is right for you because it certainly won’t be right for everyone. It takes a lot of willpower and determination to stick to it as you will be putting a lot of rules and limits on what you are able to do. Having said that, you do not need to follow it exactly every single time, you can have a few variations here and there should your analysis allow it. 1% can seem a little ringing and a little strict to many, if you are finding it hard to stick with the majority of the time then it may not be the right risk plan for you. If you are the sort of person that loves seeing big profit numbers then this may not be for you, there is enough room to make some decent money, but it will come in little bits rather than a big windfall.

Deciding whether the 1% rule is right for you is something that only you can decide. Even if you do not follow it, it is important that you take some of the principles away from it, things like a proper risk to reward ratio, that you are limiting your losses and that you maintain a certain level of discipline within your trading.

Forex Risk Management

Big Trading Mistakes That Will Hurt Your Account Balance

Seasoned forex traders will tell you that there are several mistakes that can keep you from making money, or that could even cause you to lose your investment altogether. For the aspiring trader, the thought of losing hard-earned money on an investment that was meant to help secure their future is a daunting thought. Fortunately, many professional traders have learned about these costly mistakes the hard way – meaning that you don’t have to. Take a look at our list of big mistakes that will hurt your wallet below. 

Mistake #1: Trading Without an Education

If you have a sudden whim to open a trading account, you’ll find that it can be done fairly easy so long as you have a device with an internet connection, you’re 18 years or older, and you have at least $10 or so. This is actually the most common trading mistake that beginners make, as it is quite possible to rush into opening your trading account without any real knowledge. Those that make this mistake learn fairly quickly that without knowledge of what affects the market, risk-management, different strategies and plans, trading mechanics, and other subjects, success is impossible to come by. If you want to become a trader, avoid making this number #1 mistake and spend some time educating yourself first by taking advantage of free resources online. 

Mistake #2: Risking Too Much

With gambling, the idea of risk is fairly simple; the more you risk, the more you stand to gain. It’s easy to carry this mindset over to trading, but that doesn’t mean you should think this way. The truth is that risking too much (think 5% or more) on any one trade is a quick way to lose it all, especially if you don’t have much experience. Even if you feel as though you’re on a “winning streak”, experts recommend limiting the risk you take to 1% or 2% of your total account balance. Think $1 or $2 for every $100 in your trading account. Another pro tip is to actually base this percentage on the amount you’re willing to lose for each single trade, rather than basing it off your total account balance. 

Mistake #3: Being Emotional

Those that haven’t read about the psychology behind trading emotions are usually blind to how much of a role emotion can actually play on trading decisions. There’s really a lot to get into when it comes to the subject, but here are a few examples to paint a general idea:

  • Anxiety can lead traders to spend too much time thinking before entering a trade, causing the trader to enter the trade too late or not at all. 
  • Traders that have experienced a large loss or multiple losses in a row might become fearful of making any trading moves, even if they have information that supports the moves they want to make. 
  • A trader that has made a lot of money or who has experienced multiple wins in a row can become overconfident, which leads to overtrading or making decisions that are based on little fact because one feels they are on a “winning streak”. 
  • If one is trading out of revenge, they are likely to make decisions that are quick and not well-thought-out out of the urgency to make a profit. 

If you aren’t familiar with trading psychology, you should really dive deeper into the above subjects. If you’re already trading, you might want to think about the emotions that you feel while trading, as this can affect the way you make decisions and lead to a loss of money.

Mistake #4: Believing in Magic Answers

When we refer to magic answers, we’re actually talking about automated trading robots or signals that are advertised to be 100% successful. To be clear, a trading robot trades on your behalf, while a signal is a short message that gives you information about a trade you should enter. Don’t take this as a sign that there aren’t working signals and robots out there, however, you should know that 100% success rates cannot be guaranteed. Spend time researching the developers behind these products and reading user reviews before spending your money on them, and always keep an eye on those results. 

Mistake #5: Choosing the Wrong Broker

Choosing a broker is a task that deserves a lot of thought. After all, there’s a lot to think about. What types of fees are charged? What account types are available? Is the customer service up to par? If you choose the wrong broker, you’re going to face a plethora of problems down the road. You’ll likely pay insane fees that eat into your profits, spend a lot of time trying to get in touch with customer service if you have a problem, experience delays with your withdrawals, be stuck with a lackluster trading platform – should we go on? Any of these problems could be a nightmare, so be sure to put in the effort to ensure that you’re choosing the best broker possible.

Forex Risk Management

What’s Your Forex Risk-Tolerance?

In Forex, your risk tolerance refers to how much money you are willing to risk on each trade. In order to limit their losses, traders base the position sizes they take on the amount of money that they are willing to risk. Many beginners make the mistake of taking larger trades than they should, which can really result in a big blow to the account if they incur a loss. If you risk 15% on one trade, 20% on another, and so on, it isn’t hard to run out of money. Of course, the more you risk, the more you stand to gain. So how much should you really risk on each trade?

The answer is different for everyone. In the end, you should only risk an amount that won’t evoke an emotional response from you in the event that you lose. This amount will look different for different kinds of traders, as a billionaire is not likely to blink at the loss of $100, while a newbie/working-class trader would probably feel the sting from such a loss. Here are some tips that might help you decide how much you want to risk:

  • Experts recommend only risking 1-2% of your total account balance on a single trade, for example, you’d only risk a dollar or two on a trade if you had $100 sitting in your trading account. This helps to ensure that your losses remain small.
  • Some professionals say that you shouldn’t go with the 1-2% rule because one-size doesn’t fit all. Instead, they recommend that you determine how much you’re willing to risk to each trade individually. The idea is that you might be willing to risk more on a trade that you feel more confident about, while a smaller risk amount is more suitable for a trade you’re on the fence about. It’s still a good idea to think of smaller percentages here – no more than 5% of your account balance. 

Whichever approach you choose, you should be sure that you’ll be able to accept the money loss should the market move against you. Otherwise, you might fall victim to certain trading emotions or find yourself revenge trading, which typically leads traders to lose even more money as they try to regain their losses. If you’ve already started trading, you should consider how much you’re currently risking and how you feel when you lose. If you haven’t started yet, remember that you might have an idea of how much you’re willing to risk, but you could find that it does upset you once you get started. You can always go back and adjust the amount you risk once you get a better idea of how those losses feel.

Although risking too much might make us think of greed, it’s important to note that some traders do this because they tie their feelings to their self-worth. Winning big makes these traders feel better about themselves, so they are less cautious when setting position sizes. The best way to deal with this problem is to acknowledge it, as those feel-good hormones won’t last long if you lose big. Some traders might have the opposite problem and find themselves extremely worried about risking money to the point that they barely take chances at all. It’s important to find a middle-ground here if you’re on either of the strong ends of the spectrum.

In the end, each trader has to assess their own risk tolerance and decide how they’d like to apply that. Some might risk 1% on each trade, for example, while others might compute the amount for each individual trade. If you find yourself feeling upset after taking a loss, this is a good sign that you might need to reduce the amount you’re risking, as disciplined forex traders shouldn’t feel emotional about losses. If you can define the right risk-tolerance for yourself, you’ll have completed one of several steps that leads to future success as a forex trader

Forex Risk Management

Helpful Habits To Help Reduce Your Trading Risks

Risk management, risk management, risk management, one of the most used phrases in trading, and for a good reason too. This can be based on the number of trades, the trade size and the potential loss of each trade, while it is often built into certain strategies, others do not and so it is important to remember to take it into account. We have come up with a few things that you could do to help you remember to do proper risk management and to ensure that you have done it right.

Have a trading plan:

This one may seem a little obvious, and to be fair it is. Unless you have a set trading plan you should not be trading on a live account. The sad truth is, that a lot of traders still trade on their impulses and their feelings rather than following a plan. Trading on emotion and feelings with no regard for the actual markets or certain risk management techniques like take profits and stop losses is a recipe for disaster, accounts will often blow and the trader will be left frustrated and not understanding what actually went wrong. By trading with a plan, you know exactly what trades you need to make, why you need to make them, and the exact amount of your account that you are willing to risk. Always plan your positions, plan your trades and you will be able to protect your account a lot more successfully.

Take profits:

When people think of risk management, they often think about the losses, but the profits are just as important, in fact, they are equally important to the protection of your account. When a trade is going the right way, itis very tempting to want to continue to ride it upwards, this could involve removing any take profit levels or simply moving them a little higher, however, the dangers of doing this is that the markets can reverse at any moment which could either reduce your overall profit or even take you down into the negatives. Taking profits or at least some of them is vital, by some of them we mean that you can set yourself two take profit levels, at the first one you take the profits of half the trade and then allow the other half to move up, at least this way you have taken some of the profits, you could then move the stop losses to break even to guarantee some profits from the trade.

Withdraw regularly:

This goes along with the taking of profits, regular withdrawals are vital, especially when you are just starting out, the phrase of only trading what you can afford to lose is a vital one and goes along with this point nicely. Many people now aim to trade risk-free, this means withdrawing profits each month until you have withdrawn as much as you put in, so you are trading just with profits and your initial investment is protected. Of course, as the account grows, it is important to regularly take some out, you never know when disaster can strike, so getting some out guarantees you those profits even if the account was to suddenly bow (it won’t with proper risk management).

Double-check your trades:

When you have put in your trade, ready to hit go, do you just hit it or do you double-check it? You should be doing the latter, I am sure that at one stage in their career, everyone has put in a trade far bigger or smaller than they intended, even I have put in a trade of 10 lots when I only meant to put in 0.10 lots. It can happen and it is very easy to do, so for hitting buy or sell, double-check the size, the stop loss and the take profits, even check that it is the right pair that you are trading. The consequences of getting it wrong can be huge.

Take a break:

It is important to be able to notice when you are in a bit of a rut when your motivation and concentration levels have dropped, this is the perfect time to take a step back. Taking a break is a fantastic way to help clear your mind, getting what is frustrating you out of your mind will help you to get a fresher look at the markets. When taking that break, be sure to take a complete break, don’t even look at the markets, get away from it completely, this was when you come back none of the thoughts still lingering in your mind, reset from the start of your strategy and take it from there.

There are of course many other things that you can do, however, these are some of the most obvious as it. If you are feeling frustrated, or your confidence levels are down, then take some of these steps, reset your mind, and start again, this will enable you to get your mojo back and will be able to start fresh and hopefully carry on before the rut starts.

Forex Risk Management

The Best Ways To Keep Your Forex Account Safe

Keeping your account safe is the number one rule when it comes to trading, there are plenty of different ways that you are able to do this. Many of which you may have come across and may seem quite obvious, some others may be a little more secret.

So let’s take a look at what sorts of things you can do to help keep your account safe.

Reducing lot sizes: One of the main ways that you can dramatically reduce the risk to your account is to reduce the trade sizes that you are trading. If you are trading at 0.05 lots then reducing down to 0.03 lots or 0.02 lots will dramatically reduce the amount of risk that there is on your account. Not only does each trade now offer less risk should the markets move against you, but when a trade hits your stop loss it will be taking out a smaller chunk of your account. It could also enable you to place additional trades without increasing your overall positions and margin being used.

Making fewer trades: Sometimes we like to put on a lot of trades, especially if the current market conditions make it easy to put some trades on, the problem is that with each additional trade that you put in, you are risking more of your account and putting more of your equity into the active markets. In order to reduce the risk, you should try to place slightly fewer trades at a time, the fewer trades the less risk that there is.

Alter your strategy: If your strategy is causing you to open a lot of trades, then either it is a high-frequency strategy that can be quite risky to an account or your entry requirements are quite loose. One way to get around this is to add in some additional or tighten up the current entry requirements. This will make each trade a lot more specific and the strategy will end up owning fewer trades at a time.

Don’t copy others: It can be easy to get dragged into the idea of copying someone else as they trade, they are doing all the hard work of trading right? So why would I bother doing all of this work when I can just use theirs? It sounds great on paper, but unfortunately in the real world, it doesn’t always work out so great. When you copy their trade, do you know why they made that trade? Probably not, in fact, you have no way of knowing if even they know why they made that trade. If things go wrong, you do not know how to correct them and so you are pretty much risking your money on something that someone else has said, not really something you should be doing.

Take breaks: This won’t directly affect the risk on your account for the individual trades that you put on, but it will help reduce the risk of you making a mistake or placing too many trades. When we become tired or stressed, our decision-making skills all seem to fly out the window. So taking regular breaks in order to relax and clear your mind is important, not only is it healthy for you but having a calmer mind means that when you come back to make some decisions on what you need to trade, it will be easier to follow your trading plan and you won’t start to take shortcuts due to frustrations that were building. SO take regular breaks, they help you in more ways than one.

So those are a few of the ways that you are able to help reduce the risk to your account, of course, there are other things that you can do. Just remember that risk management is one of the most important parts of a trading plan so being able to reduce the risk is paramount to an account remaining successful.

Forex Risk Management

Monthly Returns: Reviewing and Goal Setting

What is the satisfying rate of return that we can achieve during a period of one month? Do we really need to aim for any kind of speedy results? There are a lot of different types of traders out there, experts, professionals, beginners, people who trade just for fun, or people who think they are doing just great so they want to set some goals for the future. That part of pursuing the goals could be very tricky in forex trading. Naturally, we all want to be better and more successful in areas like trading psychology, money management, and trade entries. We want to acquire wealth and knowledge as well but for that, we need discipline and a killer strategy. Before all of that, we need to achieve patience, because that skill could be our most powerful weapon in most cases.

We are really glad to see people are starting to look at things in terms of percentage return and not pips when it comes to what we are able to achieve over a certain amount of time. Percentage return tells the tale pips probably not. We can hear every once in a while someone saying: “Oh, this robot gave me 350 pips a month, my trading signals generate this many pips every month”. This might be a very misleading number for a couple of reasons. One, we all know that pips have different amounts behind them which means we could make thousands of pips and on the plus side at the end of the year and still only hit 3 or 4 % of the return.

It doesn’t mean a lot. Two, if somebody is going to advertise a robot for example and say: “Hey, this thing made 10.000 pips in the month of November!” That could be true but what we didn’t know is that for example, the ATR of the pair we traded this week, the NZD/AUD was at 60 pips, the ATR for gold usually sits right around 1500 pips a day. It fluctuates up and down but on average that’s about where it sits. So to catch 10.000 pips for a month if we hit a really good trade it’s not impossible but it’s rather pretty improbable. But to tell something like this to an average forex trader might be super misleading.

People who are just getting into the forex world would probably believe anything you are willing to serve for them. Therefore percentage return could be that thing that we want to focus on. The percentage doesn’t lie, especially over a long period of time. The problem is that over a period of one year, for example, we are going to have up months and down months. That doesn’t suppose to be a huge problem. We all have those months, it is important to learn how to play the game. We are all aware of how the market is one crazy inconsistent beast. So to aim for any kind of monthly return might be a silly goal. We might drive ourselves absolutely insane because we are not going to get there consistently. Soon after we might end up frustrated and that emotion could easily lead us to take trades we should not be taken or we might go over leverage.

Traders, why we think trading the daily chart might be a good idea? Why we wait for our indicators to tell us to shoot? It’s because we have this awesome luxury of allowing the market to come to us. If it doesn’t come to us and there are no trades out there, we don’t have to take them. That is one of the biggest advantages that we have. So setting unrealistic profit targets for the month shouldn’t be the path we want to try walking along. A lot of traders and firms do things the wrong way. The traders are trading 15 hours a day on all sources of stimulus, getting very little sleep, and ending up with poor mental capacity because they have to hit these targets every day, every month. This could be short-sighted and pretty foolish because the market isn’t always on our side.

Not having something like patience could lead us to something like trying to have monthly profit targets which could potentially lead us to a lot of mistakes that we don’t want to be involved with. On the other hand, having patience allows us to do things the right way and at the end of 6 months period or even better 12 months period, we might be well-ahead of those people that were tearing their hair out trying to score their monthly profit target. If we want some real figures, if we want a real blueprint we might consider focusing on long-term results. We should never-ever force our trades, instead, we could try to give our systems a decent time of run and they might give us back a decent return. With a good money management structure, an ounce of discipline, and well-shaped trading psychology we could become unstoppable. Traders, think about that.

Forex Risk Management

Why Scaling in Might Be a Bad Idea

If you are already in a winning trade, is there anything else you can do to father navigate its course to your benefit? One of the best techniques in position management used by trading professionals, scaling out, is based on the idea that a trader should withdraw part or half of the money at a particular moment in a winning trade, move the stop loss to break-even, and keep the remainder running until the point when either the trailing stop, exit indicator, or stop loss finally closes the trade. However, what would you do if you faced retracements while going long for example and the price changed direction? Would you put more money in although you are already in the middle of a trade? The answers to all of these questions are closely related to another term – scaling in that, in contrast to scaling out, essentially entails adding another position to an already existing trade. The understanding of this topic is what will help safeguard your trades against some common challenges as well as guide you through a running trade.

If a current trade is doing well and approximately a hundred pips later a retracement occurs, is a trader advised to double down? This question is equally applicable to trades that really take off because it essentially involves doubt about whether anyone should take on more risk. Although the trade in this case is a fruitful one, is investing more money a good or a bad idea? The expert opinion generally advises against entering an additional trade after you are officially in another one. Although some traders may disagree, the facts supporting this standpoint are numerous.

Firstly, if you have developed a system, or working towards designing an algorithm, you probably understand how crucial entering a trade at the best possible time is. A trade that exhibits an unstable and unpredictable behavior 20 or so pips down the line is certainly not the one you should ponder. Traders often feel compelled to make irrational decisions because of the fear of missing out (FOMO). Entering a FOMO trade, however, reveals the psychology of traders who take actions based on emotions, rather than trusting the systems they have worked hard to develop. Such emotion-driven trades inevitably lead to numerous and often repetitive losses, which is the exact opposite of what you need to grow a forex trading account.

As we cannot assume which direction the market is going to take and for how long, we strive to create algorithms on which we can rely. Moreover, since we test out each indicator we use, there should be no fear of trusting a system which has proved to give good results more often than not. Even if you notice some mild changes a while after you entered a new trade, simply allow the system that you built to take care of the trade for you. Therefore, there seems little to no reason why anyone should consider adding on. If such a decision revolves around fear or greed, the prospects of getting far in this market are very low. A trade that appears to be bad right from the start will never render any good results and risking more money at this point would seem like a truly reckless decision leading to a gloomy outcome. Furthermore, with the option of choosing between so many currencies, opting for a pair that cannot bring about any positive results also cannot have a logical explanation.

If you are in a winning trade going long, how would you react if you got another signal from your system? Should you trust your confirmation indicator and take action accordingly? A confirmation indicator signaling you to long is actually telling you that it first went the other way. For example, a zero-cross indicator would give out a signal to go long (above zero) only if it crossed the zero line and went below first. Of course, if this happened, why would you stay in such a trade? As this confirmation indicator told you to short, you actually received a signal to exit (see picture examples below). Although this is not the best option you can find, confirmation indicator can definitely serve as an exit indicator as well, and especially if it is giving you a clear sign to exit, it is in your best interest to recognize it and act upon it. Therefore, no matter how successful a particular trade is, following a signal blindly, without proper interpretation, leads to nothing but failure.

Above, we see two long signals suggesting that we add on in the areas above while, in between, we get another short signal.

Consequently, whether you are adding onto a losing or a winning trade, the result is almost always the same. Instead of being impatient and hungry for money and success, strive to create a sustainable system that will safely operate in the back so you can let go of all the stress. As an alternative to trading fueled by emotions, learn how to base your trade on the system you have invested in creating. What is more, learn to interpret and trust your indicators because their purpose is to protect you and get in and out of trades in the most optimal point of time. As opposed to scaling out, which should become part of all traders’ plans, scaling in is an unwise strategy that leads to loss more often than not.

If you want to earn a profit continuously, you should strive to support yourself with tools that can grant you that. The idea of amassing a fortune overnight, though, will impact your trading and ability to learn and prosper. Leveraging up by adding on to a winning trade only equals more risk that will most probably get your account in a position from which you will hardly be able to get out. Not only is it a risky maneuver, but it also appears not to be a very smart one. If you have a goal you want to reach, you will accept time and effort as two preconditions to fulfilling your dreams. As it appears, there is little room, and certainly little hope, for quick solutions and related mentality.

Forex Risk Management

The Importance of Risk Management in Trading

While forex trading comes with several perks, like being your own boss, flexible hours, and the opportunity to become wealthy, the biggest drawback is the risk factor. There’s always a chance that you’ll lose money, no matter how well-educated you are. If you want to minimize your losses as much as possible, then it is crucial to have a good risk-management strategy working for you. Otherwise, you could quickly become one of the many beginners that walk away from trading for good.

The first mistake many beginners make is overleveraging their trades. If a broker offers a leverage of 1:1000, that means you can multiply every $1 you’ve invested times a thousand. This would allow you to make a $1,000 trade with only $1 in your trading account. Leverage is one of the biggest draws to forex trading since it allows you to increase your investment power. However, you shouldn’t use the highest leverage just because you can, otherwise, it can backfire and cause large losses. Leverage is often referred to as a double-edged sword, and beginners often find themselves on the sharp edge. Resisting the temptation to use higher leverage at first is crucial for beginners to see success later.

Monitoring the size of your positions is another important step. Many professionals recommend that you only risk 1% of your account’s balance on any one trade. This may not equal a large amount of profits, but it helps to reduce losses if things don’t go in your favor. Remember that winning even a small amount is better than losing a lot of money. Setting a stop-loss order is a precaution that causes the trade to close if a certain loss level is reached. Traders would need to figure out how many pips they want to risk and then set their orders. Beginners should also recognize the point of when to take profits. Putting a close order position in place to take profits at the appropriate level of resistance or using candlestick recognition or moving average crossover strategies can help accomplish this.

One of the best things you can do to set yourself up for success is to have a good trading strategy. The internet is filled with different kinds of strategies that suit the needs and skill levels of every different kind of trader. Having a plan to follow will help you know what to look for and you can even monitor and improve your strategy with a trading journal.

Managing your risks in forex trading will keep you afloat where others have failed. Setting a good trading plan without risking more than a small percentage of your capital sets up a firm foundation. Then, you can set stop-loss orders and take profit levels to further minimize your risk. Choosing appropriate leverage is another important factor. If you go into the market without a strategy, risking 10% or 20% per trade, then you will likely wipe out your trading account very quickly. Likewise, if you’re a beginner trading with a 1:1000 leverage, you’re more likely to lose everything. Using the above risk-management strategies (and others) will help you to avoid losing all your money as it provides a cushion against losses.

Finally, know that you shouldn’t base your risk-management plan from this article alone. Do more research online and read about the ways that other traders minimize their risks. You’ll need to read about stop-loss orders, trailing stops, and so. Don’t make the mistake of using leverage that is too high, never risk more than a small percentage on any one trade, and be sure to do more thorough research to help with your strategy and other risk-management precautions.

Forex Forex Risk Management

Swing Trading ATR Risk Management Guide

Risk is essentially one of the crucial factors which have the power to endanger your entire forex trading career. Understanding how poor judgment and unsafe decision-making can impact individual accounts is key for all traders, be they at the beginning of their trading experience, or be they professionals. Because of the topic’s profound importance, this article will also discuss how each trader should address limits or at what point they should stop investing more money. Besides stressing the need for developing a wise and safe approach, we are going to provide practical advice on how to use the ATR indicator in order to assess risk levels in your trading and help you analyze how much pip value you should use in every trade. In addition, you will find out how many trades should be open at the same time as well as discover a comprehensive list of instructions that will save you from overlooking any high-risk aspects of swing type trading in the fiat market.

Processional traders often point out the importance of creating a detailed plan which naturally includes thorough risk assessment. A great number of traders nowadays appear to be focused on trade entries alone, which repeatedly leads to one of the three outcomes – a severe money loss, a break-even, or a barely significant gain. Such an approach neither allows these traders to grow their trading skills and reach the expert level nor does it help them build their finances as they imagined at first. Therefore, to prevent yourself from making the very same mistake as the majority of traders who experienced the above-mentioned scenarios, you need to take an entirely different approach to swing trading and invest in learning about the steps successful traders take to maintain their trading expertise and financial abundance.

Before proceeding to what makes a successful trader, let us first examine the choices that can hinder a forex trading career. Primarily, most of those who fail at forex either do not have a set risk or they opted for a random number without any prior logical analysis. The risk involved in trading is, in this case, a rather loose category as it depends on how traders feel, whether the previous trade was successful, upcoming news events, and other transient factors. To make matters even worse, this group of traders frequently does not stop after a loss, but they continue on to chase another win, thus entering a vicious circle of illogical thinking, occasional wins, and great losses.

When a trader does not include risk in trading, this individual inevitably imperils his/her account. We often see how a trader loses 20% of their account and believes that immediate return to the initial break-even point is possible. This, however, is highly unlikely considering the fact that such percentage equals some of the most successful traders’ average annual return. Bearing in mind the factors that led them to this stage, the probability of these traders suddenly becoming that good is very low. Unfortunately, despite it being a very common scenario, this challenge is one of the most difficult to surpass. Therefore, if your value dropped by half, from 50 to 25 thousand USD for example, you would actually need a 100% return just to get to your break-even, which is very much impossible at this point.

In case you are facing a similar problem, the best step you can take is to withdraw from trading, start all over again, and learn more about this market. This is such a specific situation and such an important signal that some traders should consider moving on to some other markets or businesses. Having this outcome directly indicates that a trader has not developed the necessary mindset which this particular market requires. Both reckless trading and the timid one may equally endanger your account because the risk can never be too high or too low in the forex market. Even if you managed to increase your account by 4% in a single year, it would still not be good enough if you had to go at great lengths to achieve this. Traders need to find that right balance and also think of some other factors, such as time, effort, and profitability, because there may be a safe but much easier, faster, and more lucrative way to seeing your finances grow.

This market is not risk-free, so it all boils down to the question of whether doing trading has a point. If you see that your finances are not developing accordingly, you may consider doing demo trading to learn how to set risk sensibly. If you have yet to do demo trading, you should bear in mind that this will help you build your system, psychology, money management, and trade management skills so that your account reflects these in a positive way and that you can transfer and exhibit the same level of skillfulness in real trading. Both demo and real trading, however, should not be void of risk since the most prosperous traders take many risks, but they know how to manage them properly, successfully minimizing the chance to fail. Consequently, the word risk does not imply that you are acting carelessly, but that you are intelligently assessing where you can invest to have financial benefits.

As risk is a necessary part of this line of business, but also the one that we need to control, we have to consider which percentage of the account any individual should be trading. Most of the available sources advise traders not to go above 2% of their entire trading accounts on each trade. Nevertheless, what this means is that the suggested percentage is the maximum limit, not the average one. While your stop loss should always reflect this, you can feel at ease knowing that most losses rarely exceed this amount. So, if you have 50 thousand USD, the 2% value would equal 1000. Although this may seem like a large quantity of money, and thus a large amount to risk, we need to understand that timid trading will not get you far and that you will not lose the entire thousand even if you happen to fail. Therefore, what understanding risk means is that every trader should allow themselves the opportunity to take risks, but also apply a strategy to minimize those risks.

To successfully track and control the risk level, you can always rely on the ATR, an indicator that tells traders how many pips on average a currency pair moves from the top to the bottom of the candle. While this tool cannot exactly predict the future, it can assist traders with money management, seeing how a currency pair is moving at present and what direction it may take later. Some of the best traders in this market suggest that the stop loss should be set at 1.5 times the ATR (default MT4 settings) value at the moment of position opening to see the greatest benefits, on the daily timeframe. Therefore, if a currency pair’s average true range (ATR) is 80 pips, the stop loss should be 120 pips away from the current price. With the help of this tool, you will always be able to set your stop loss and secure your trading, although once your profit starts to accrue, this limit is going to change.

How can we find out what the pip value is going to be? Even though we cannot expect to have the same pip value across the chart, what you can do is see how much the 2% of your account actually is. As the account will keep increasing and decreasing in value, the risk limit is naturally going to follow these oscillations. Afterward, we will need to count the 1.5 ATR of the currency pair and put the stop loss there. The last step to take here is to divide the risk (a dollar amount) by the 1.5 ATR (pips amount) to learn how much money you should put per pip on each trade. You can rely on this simple calculation for each trade you enter and apply it in your daily chart to get specific insight and information.

Most trades do not involve exact numbers, so let us say that your net account value is 50,263 USD. To estimate the risk, you will multiply this number by 0.02. Upon calculating the 2% of the account (roughly amounting to 1005 USD), we will seek the currency pair we want to trade and find the ATR only to multiply it by 1.5. If your ATR is 86 as in the example below, you should get a pip stop loss of 129.

If you focus on the tip of the pointer, you will see that the price is at 1.1707. We can, in this case, decide to go long, which is why we are going to use this number and deduct 129 (we would do addition if we were going short) to learn where we should enter the stop loss order. Finally, we are going to calculate the pip value by dividing 1005 by 129, which approximately equals 7.7 USD. After acquiring the necessary information, we know that one pip equals $7.7, so we can estimate that the trade unit value should be 78,000 for the EUR/USD currency pair, or 0.78 lots. We will insert the stop loss afterward and enter the trade, as shown in the image below. Note that in the MT4 platform you can use different tools published on the MQL 5 market for this purpose to automate the whole process. There are even some EAs. If you want to really get this easy, try to use Tipu Stops and IceFX Trade Info panel so everything is precalculated for each asset. Just use the drag option to the Stop Loss line on the chart.

While this is a secure way to assess risk, you should always look for the right indicator which will signal you to exit bad trades on time. What is more, you should previously make use of an indicator that can tell you that you are on the right path and inform you that you should stop trading before your price hits your stop loss. By researching and creating your own indicator algorithm, and combining these confirmation and exit indicators as well, you will successfully trade in this market and mitigate the amount of incurring risk.

In terms of how many trades we can do at the same time, the information provided by professional traders suggests that any individual can enter as many trades as they want under the condition that the 2% rule is applied. However, we should also be mindful of the fact that the same currency is not to be traded more than once at the 2% risk. Even if your chart is signaling that you should be investing in a particular currency, you should not by any means be investing in several pairs involving this particular currency (e.g. EUR/USD, USD/JPY, and AUD/USD) long or short at the same time. Should you fail to abide by this rule, you will suddenly have 6% of your account on this one currency (USD) and, having done this, you have actually taken on too much risk all at once. In case this currency goes the opposite direction, you may be damaging your account to an irreversible extent.

Therefore, despite the fact that this approach has been used by various professional traders, you may want to pay close attention not to fall for the trap of over-leveraging. To avoid making this mistake, you should always follow the first signal for that particular currency. Should you, then, receive a long signal on the EUR/JPY pair and another long signal on the EUR/AUD one, you should opt for the one you saw first and follow through. Although we may see the opportunity and potential financial rewards, sometimes less is more in this world. Having said this, you can also apply the half-and-half approach and put 1% on each pair, which can almost function as a hedge saving you from loss should one on the pairs fail to bring you profit. You may also decide to take half the risk and wait for another trade as you can see some favorable progressions coming your way soon, which is not something professionals would advise you to do very frequently because you may be stopping yourself from earning sufficiently by trading timidly.

Risks have often been disregarded as inherently bad, but in the world of forex trading, we know that they are unavoidable and necessary to make a profit. By adopting these practical steps in your everyday trading, even if you are doing demo trading now, you will learn how to set the risk level properly, without protecting you too hard from failure or playing recklessly. A smart trader is thus not the one who fears risk or casts it away as an unimportant factor, but the one who deals with it effectively, applying the strategies discussed in this article intelligently and consistently.

Forex Risk Management

The Overlooked Risks Of FX Trading

There are some very obvious risks when it comes to trading, things like the loss of your account, the stresses that it can put your body under, and unfortunately, the death of a dream to becoming a full-time trader. Along with those more obvious risks, there are some more little hidden risks to both your trading and your overall health, we are going to take a little look at what they could be.

The Risk of Isolation

It is very easy to get yourself wrapped up in both the excitement of trading and also the feeling and need to do better. Trading is a long process and takes a lot of time to learn properly, putting too much time into it could cause you to begin to isolate yourself from those around you. Becoming obsessed with doing better will take up most of your time, taking it away from your job, my family, and your friends. You need to remember to make time for them too, do not spend every waking minute looking at the markets, set time aside to trade, there are other important if not more important things in your life to trading, be sure to give them enough attention too.

The Risk of Boredom

Sat in front of the computer for hours on end is not for everyone, some people can do it no problem and won’t get bored at all, but for most people, it will begin to cause boredom, and boredom can be very detrimental to your trading. When you become bored your concentration levels drop, and so does your motivation. These drops can cause you to stop looking at things in as much detail and can also lead to you making trades that you otherwise would never have made, just based on the fact that you no longer want to be doing that.

The Risk of Overconfidence

Being confident is a good thing, but being overconfident is not. It is easy to get to this stage if you have just had a large number of wins in a row. This can make you feel invincible and unfortunately, you are not. People in this frame of mind will often start putting on additional trades or at a higher trade size increasing the risk to hit the account, they may also stop using all of the criteria that were set out in their trading plan, again, increasing the risk to the account. In the end, this sort of thinking will only lead to an increased number of losses.

The Risk of Sequential Results

By this we simply mean that you can go on runs of wins or losses, both can have negative effects on both your mood and your account balance. We briefly mention in the section above about becoming overconfident when we have a large number of wins in a row and the difficulties that come with that. When you have a string of losses in a row it can have the opposite effect. It can make you start to doubt your own abilities or the strategy that you have created, this can give you a fear of putting on more trades and can make you miss out on some perfectly good trading opportunities.

These sequences can actually occur with both wins and losses, win one, lose one, win one, lose one, and so on. Extended times of these alternating results can put you off as you are not seeing any gains overall, but that is just how the markets are, every trader will experience the sections of their trading careers, it is just about sticking with your plan and getting through them.

So those are a few of the more hidden risks to both yourself and your account when trading, there are more, in fact there re probably hundreds of hidden risks, if you feel that you are doing something or having an emotion that may be putting yourself or your account at risk, simply step away, take a break, refresh your mind and then come back with an open mind ready to move on from whatever was causing the risk.

Forex Risk Management

Finding Your Own Personal Risk Reward Ratio

Risk and reward, how much you are willing to risk to win how much? We ask ourselves this sort of question every day in life. Often it is not something so obvious, taking the risk of crossing the road, there is a risk of getting hit and the reward is getting to the other side, the risks are actually pretty large, getting hit could be devastating, but we do things to help reduce the risks such as looking each way or only crossing at a designated crossing area. We need to make these decisions in trading too, but the outcomes are often much more complicated and so is the decision-making process that we use.

If I was to offer you a 50/50 choice, the markets go up or the markets go down, you will win $10 if correct and lose it if wrong, the markets are random at this point, would you take it? The majority of people would actually say no. So let’s change it up a bit, it was the same 50/50 decision, but this time you will win $20 or lose $10, it’s a bit better but many would still say no. So what about winning $50 or losing $10, for a 50/50 chance the possible outcome of winning an additional $50 is looking quite tempting. So when you take that chance, in reality, it is beneficial to yourself to take the bet when the outcomes are that you can lose $10 but win $10.01, as the monetary value would be in your favour, but the majority of people would not take it.

So let’s change it up a bit, let’s suggest that there are some additional probabilities, you can work them out and it is now a 75/25 percent chance that the markets will go up. At what point would you consider making the same bet, would you do it for the $10/$10 or the $20/$10? This is more in line with how the forex markets work, we are able to limit our loss with a stop loss, but the take profits are where we need to consider how we place our trades.

So let’s assume that we are making a few trades, we are planning to risk 1$ of our account on each trade, with a $1000 account that means that we will be risking $10 per trade. Would you want to risk that $10 for another $10, probably not, many traders aim for a 2:1 ratio. So for every win, they will get twice the amount back that they risked. Some traders like to increase it further, so 3:1 which means that they only need one win out of three trades to be in profit, sounds good, so let’s go higher. A 1:5 ratio means that you can be in profit if just 1 in 5 trades win, however with the reward part being so high, it means that the markets will need to move a lot, and there is a far greater chance of a reversal.

It all comes down to personal choice, if we take a look at a lot of the more popular strategies out there, are they getting a 50% win rate, a lot of them actually aren’t, many are hitting 40% or 30% which may seem quite low, however having a risk/reward ratio of 1:30 means that all of those strategies are actually in profit. Then again, there are those that go even lower, seeing people with a risk-reward ratio of 0.4:1 which means that they would require a win rate of 71%, which is pretty easy right? Not something we would recommend.

It is important to find the ratio that works for you, it will be based on a couple of things, firstly your actual strategy, different strategies will work with different a different ratio, you will also need to take your own risk profile into consideration, if you hate risk then you probably want to go a little higher, but it is entirely up to you. It may take you some time to get used to a certain ratio.

Once you do find the ratio that works for you, it is important to stick with it, do not jump around different ratios, this will only cause issues with your overall results. Keep looking and eventually, you will find the risk-reward ratio that is right for you.

Forex Risk Management

Trade At Your Own Risk, Not Others

One of the main lessons that any new trader gets is how to set out their risk management plans, there are a lot of different ones out there and you would most likely have been told a number of different things yourself by different people. There are people that go by what seems to be a new industry standard of 1% to 2% of your account per trade, however, you still often see people a little more aggressive, going up to 5% or even 10% per trade.

The thing is, that all of these styles and risk management plans are perfectly valid, it can be confusing to see so many variations and you can often wonder if they are all safe. The fact of the matters that you will never know which one is right for someone else, as you would need to be able to access their mind, to be able to work out what their risk tolerance levels are and also what sort of money they are using, expendable money (the stuff you should only be trading with) often comes with a much lower risk threshold, people are willing to risk it more than hey ould with money that they may actually need. It all comes down to personal preference and this is what you should be looking at when working out your own risk management plan.

It is important that we get a basic understanding of what risk tolerance is, we need to be able to know what it is for you and that is what is important. Think back to times where someone may have offered you a gamble, would you take it at 50/50 or would you only take it when it reaches 75/25? Knowing what stage you would take the gamble and how much of your trading account you are willing to risk will help you to create your own risk management plan that suits you and one that you will be comfortable with.

A lot of things in the real work you are often advised to seek financial advice, from an accountant, a lawyer or simply your bank, this is often the sensible thing to do as they know what is best, but the difference between them and reading is that they work in a world where the same advice is relevant for everyone, the same rules apply to everyone. When we are trading, this is not the case. Something that works for one person could be a nightmare for someone else, so this is why we always need to look at things at a personal level when walking about risk management and that is why we say that you should be trading to your own risks and not to what others are risking.

When you started trading you would have created your trading plan and as part of that plan, you should have created your risk management plan. People often look online for help when creating these things, especially when not sure. So let’s assume that you got stuck and went online to see what risk management other people use, you see someone doing quite well risking 5% of their account with each trade, they are doing well so it must work, the problem is that you do not know what their strategy is, it may be completely different to your own, so implementing their risk plan into your strategy could lead to disaster as your strategy is not based around it. The same can go for your own sanity and stress levels, if you are quite a risk-averse person, risking a larger percentage of your account will mean that you will be in a constant state of stress and dread, if you aren’t comfortable with the risk, then you should not be using it.

The experiences that people have had often influence the risks that they are willing to take, those that have a lot of experience within the financial markets or just with finance as a whole are often willing to take larger risks as they have a better understanding of how to manage it, those coming in new are often more reserved, wanting to ensure that they are safe. Of course, there are exceptions to this, some professionals risk very little and some newer people come in with the wrong expectation of being rich and so risk too much, but that us a lesson that they will need to learn by themselves, no amount to telling will stop them from making that mistake as the draw of money is just too strong for them.

A reason why it is so important that you only risk what you are comfortable with is that you will experience losses if every loss makes you lose 10% of your account, it is going to destroy your motivation swing profits wiped out with every single trade, this is why many people go for smaller amounts such as 1% or 2%, a loss will still hurt, but it will not take away a large portion of your account. What is important, is that the risk management is built into your own plan and what it is based on your strategy and your risk tolerance, do not go out there looking for what other people are doing, this will not suit you and will not suit your strategy.

An important aspect of risk management is working out what works for you, this can be done through trial and error or by a lot of planning and demo trading. What you do not want to do is to be suckered into those that are stating that they have made tons of money by risking certain amounts, they are often exaggerated or sometimes completely fabricated. It is great to use others for inspiration or to use their knowledge to help create your trading strategies, but one aspect that you should avoid is the risk plans that they have. This is something you need to create yourself, by yourself, of course, you can use a baseline of 1% or 2% that is often suggested, but only take that information, work out the rest yourself.

One good way to help work out your tolerance levels is to use a demo account, of course, a lot of the emotion won’t be there as you are not risking your own money, but it is a way of working out what sort of risk suits your strategy. If you are consistently profitable with a risk of 2% but not at 1% then your strategy may require the higher risk. Set stop losses, if you find yourself closing off trades manually before it reaches the stop loss, then you may be risking more than you are comfortable with, use the demo account to help alter things, fiddle with things until you come to something that works for both you and your strategy. It can often take quite a long time to find the perfect spot, in fact, a lot of traders never do, but you can always get close. Keep practising, keep adjusting and you will get there in the end.

I know we have mentioned it a number of times, but do not go out there and copy others, it is paramount that you do what is right for you, not what is working for others. They have different circumstances to you and so their plan works for them, but it may be a terrible idea for you. It will take time to work out exactly what you are comfortable with, and that is fine, everyone will have different tolerance levels, you may start too high or too low, you can adjust things as you go to ensure that you eventually come up with the strategy that works perfectly for you.

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Forex Risk Management Guide for Beginners

One of the most important elements of the trade is certainly risk management, even though it can be a neglected point. The traders need to learn as much as possible about the risk management to gain profit. This specific subject will guide you on how the risks could be avoided and implement the strategy to achieve projected goals and profit.

Lots of researches have shown that risk management might be the crucial aspect of any day trader. Sometimes, traders can see 80% of their trades are profitable, while 20% show as a net loss. This is an example that shows incorrect risk management. That is why the good planning and learning about the ways to get your trades protected are so important.

When we mention the strategy we always think of something that is based on the long term. The same goes for the Forex market, where even if the traders can be affected by the loss, it doesn’t mean that they cannot end up in making some profit. That’s why good strategy and planning are so important. Something that the professional traders always emphasize is, “Plan the trade and trade the plan”.

First of all, we should all be aware of the possible risks that can come along with the trades. The majority of the foreign exchange trades consist of foreign exchange swaps, currency swaps, options, futures, spot transactions. Since there is leverage, the risk with forex trades can be big and can cause a certain loss. Those losses could be even bigger than estimated.

Depending on how the leverage is created, the small payment can cause a serious amount of loss. Various issues can also affect the financial markets such as political situations, time differences, etc. Even though the Forex trade market seems to be the most active and frequent, there are always risks that can lead to serious losses. In further writing, we will show some of the most common risk points to understand how they could affect the trader and the market.

We can start with Interest rate risks. There is something that the macroeconomics study shows and that’s how the country’s exchange rates are affected by the interest rates. Proportionally, having an increase in the country’s interest rate is going to make the currency more stable, due to the inflow of investments in the country’s wealth. So, when we have a stronger currency, the higher return is expected. On the other hand, when the interest rate dips, the currency gets weaker since the investors start to pull back their investments. Also, Forex prices can be significantly changed by the difference between the currencies, due to the type of the interest rate and its unavoidable impact on the exchange rates.

Another risk element is known as Leverage risk. It is important to highlight that people join the Forex market because it provides them with higher leverage, which is different from other financial instruments. To even participate in the notable foreign currency trades, you will have to create an account for margin with your broker and it’s something that is strictly required by the leverage in the Forex trade market. When we have a case of the small price swing, it means that the investor needs to put the deposit further cash to cover the losses that may occur. When the trader begins to use the leverage extensively in the situation when the market is inconstant, it will eventually show as a big loss for the trader. The forex prices could be significantly changed with the interest difference between the currencies.

We also need to mention and elaborate on the transaction risks. The definition of the transaction risks is explained as an unbalanced exchange rate from the beginning of the contract until its completion. Something that happens most of the time in the Forex market is the fluctuation of the exchange rate before the contract gets finalized. On trading days we are all aware that the Forex works hours. Therefore, the same currency can be purchased and sold for different prices at different times. In that case, if we have a huge time gap between the beginning of a contract and its closure, the more risk in the transaction we need to take. If we have the change of the rate of exchange caused by the different timezone, the expense of the transaction can be pretty high.

When it comes to the risks we should talk about Counterparty risks. It presents the list of non-payment risks generated by the supplier. It is mainly related to the brokers or suppliers of benefits to investors. We need to mention the two types of contracts regarding this topic. Forex market differentiates spot and forward contracts. Spot contract handles the spot currencies and the risk is always determined by the brokers or market makers. If the situation in the market is not improving, the contract could be broken by the counterparty. The forward contract can be defined when two parties decide to purchase or sell an asset at a determined time in the future by the price that is agreed upon by the finalization of the contract. That price is usually called the future price.

The last on this list but not the least important and its Country risk. When you start to plan your investments, mostly in currencies, please check the strength and standard of the country that is using them. The most of the countries in the world that have just started to develop their economy or countries that still haven’t started to develop it, rely on the currencies of the economically strong countries such as US Dollar or Euro. That is why the central bank has to come up with a set of systematic measures to keep fixed exchange rates. In the case when the currency is undervalued, it negatively reflects on the Forex market. We also have to mention the term of currency devaluation. It starts with there is repeated balance of a deficit in payment, when the country has a higher import than the export rate. It is also important to mention the investments. Mostly, they are rather built on the idea than facts and researchers.

In that case, the investor will take back the assets if he estimates that the currency value will dip. It will seriously affect the currency which will get even lower. Also, it will be hard to get the assets pulled and exchanged. In the Forex market, when the currency crisis occurs, it means that the currency will continue to devalue, credit risk will be higher, and it will be very hard to sell the assets.

Here is what you can use right away as a base for Risk Management in your trading system. One of the most efficient indicators for reading and predicting the changes in this fluctuating market is the ATR. This acronym stands for Average True Range. Most of the professionals reckon that this tool is one of the most reliable to avoid risks and possible loss. It describes how many pips from the top to the bottom, a currency pairs fluctuate on average. The best possible number of pips that you can have as risk is 1.5 times of ATR value (pip value), according to some research for trend following strategies on the daily timeframe.

So what does it mean? It means that the stop loss has to be 1.5 times the ATR away from the current price. The ATR can be very helpful to find the Pip value. You can use the 2% of your current account as your possible risk. Then you divide your risk with the 1.5 ATR and it will show your 1 Pip value in $ if your account is in USD. For example, use your current account and multiply it with 2%, which equals 0.02. This result will present your total risk amount. When you want to calculate your stop loss you will have to pull up the ATR and multiply it with 1.5.

To avoid any stop loss, you will have to find the most suitable indicator that will pull you away from the bad trades. There are a few tips that some of the most proficient traders suggest. The first one would be avoiding the trade more than the one with the 2% risk. In some cases, you can just find the first trade entry and should easily go with the flow. Even better, if you get the long signal for EUR/AUD and the EUR/JPY you can try to split the risk ( 1% and 1% per pair).

Also, you can use the 1% on the one trade, and leave the other trade open for later, where you have half-risk. The first tip is the most common and the most reliable. To gain some profit and to path your way to be a successful trader, you should never fear the risk, but on the other hand, be cautious. Learn as much as possible to even get into risk. Learn how to calculate your risk and try to recognize your exit indicator. In the end, don’t get trapped by the over-leveraging.

Forex Risk Management

You May Lose Money When Trading, and Here’s Why…

You have most likely seen the warnings, every site to do with trading will have a little warning that tells you that trading is risky and that the majority of people that trade it lose money. This is a legal requirement for any service offering Forex or CFDs to show, this is for the simple fact that people look at trading as an easy way to make money, without actually understanding the risks. So why do so many people lose when trading? We are going to look at some of the more obvious reasons as to why they may make some losses.

Being Friends with the Market

When you have made a few good trades in a row, or things are starting to go your way, it is easy to get quite comfortable with the markets, you begin to believe that you have the perfect strategy or that you are able to read the markets. People in this situation often forget that the markets can be quite fragile, anything in the real world could cause it to tumble or jump up in price. Thinking that you and the markets are now friends and moving in the right direction will only cause you to lose once the markets decide to turn, and they certainly will turn at some point.

Too Much Risk

Many traders, especially the newer ones like to take too many risks, this can be in the form of a larger trade size or just an increase in the number of trades that you are going to make. Whichever of these two things you do, it is increasing your risk and is actually negating any risk management plans that you may have put in place. People often do this when they are either on a winning or losing streak, trying to make a bit extra or to win back some of the lost money from previous losses. Increasing the risk on your account is a sure-fire way to lose it, so it is important that once you have a working risk management plan, stick with it and do not change things up, even for the one extra trade.

Not Enough Capital

Starting with a balance that is too long can make it hard to implement some proper risk management into your trading plans. It is great that some brokers are now letting you start trading with low amounts, even $10 with some brokers, but what are you going to do with this? Even a currency trade at 0.01 lots can easily decrease to -$10 which would then blow the account. You are not able to apply risk or money management to such small amounts. It knows you want to learn and start earning, but you will need to invest a slightly more amount if you want to be successful at it.

Greed, Greed, and Greed

This kind of goes along the same lines as taking too much risk, but greed can get the better of anyone, you see trades going well so you want more, or something made a loss so you want to earn that money back. Both of these wants can lead to disaster as it can cause you to increase the amount of risk that you are putting on your account. You need to remember that you are trading with a plan, stick to it or things will only go downhill.

Too Much Guessing

Never guess which way the markets will go, what makes you think that you know what is going to happen but the person next to you doesn’t. The markets can be very unpredictable. In fact, there have been times where all fundamental and technical analysis would indicate that something should go down, but it continues to rise, these things can actually be quite common, so if proper analysis cannot fully predict the movements, there is no reason why you should be able to instead. Stick to a tried and true strategy instead of going on what you think.


When you go on a winning run, it can build up your confidence, and confidence is great until it grows a little too large. Once you have grown in confidence and get into the overconfident stage, things can quickly start to turn south. What do you often do when you have a little too much confidence? You often start to increase your trade sizes or start taking guesses at the movement of the markets, you have been right before so you can definitely be right again. Stop and think about it, you were right because of your strategy and not your own guess. As soon as you step away from that strategy you will only begin to make some unwanted losses.

Using Sub-Par Signals or Trading Systems

Sometimes you just don’t want the hassle of working out a strategy or spending the time to learn yet another aspect of trading, so instead, you decide to purchase an EA or trading signal. Bad idea, not only do you have no control over this signal, there are so many scam ones out there which are only after your money. When a trade comes through, why is that trade there? You have no idea as you do not understand the reasons behind out of how the strategy is working. Not having that knowledge means you have no idea if it is a good or bad trade. It is much better to learn and trade yourself than to rely on others, especially people who you do not know and that have no interest in knowing you.

Those are just some of the ways that you can lose when trading and common reasons why so many do. It is important to learn and to create a trading plan that you can tick to, as soon as you deviate from it disaster will only be one trade away.

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Forex Risk Ratios: A Different Perspective

This article will deal with ration and how they can be misleading. This is just advice coming from professional prop traders in the US. You can take whatever you think is good for you and your trading system. Just know that a lot of Forex traders are using common risk/reward ratios of 2:1 or 3:1. We will try to explain here why using ratios is not really good for you.

As you already know the Forex market is really dynamic and things can change each second on a daily basis. In order to succeed and make a profit trading currencies besides some basic, or more advanced knowledge, depending on your level, and experience, you will need to have one more thing, and that is a really good money management skill.

We will now go back to basics and explain in short what these common 2:1, 3:1 risk ratios mean. Basically, a 2:1 ratio means that you can gain 120 pips, or you can lose 60 pips. A similar thing applies to a 3:1 ratio where you can make 180 pips before you lose 60.
The truth is you can make a profit using ratios mentioned above, but you are not able to see some things that other traders can, and that makes all the difference.

You can ask yourself, “Okay, I am making a profit, what’s wrong with that. It’s something right?”

The most noticeable mistake that a lot of Forex traders, that are using these risk ratios, make is in their approach. The first thing they are looking for is finding out where their Take Profit or TP is going to be. To be able to do that, they are trying to find out if there are a visible support and resistance line or maybe pivot point…

If you look at the chart, for example, EUR/USD daily chart. What happens usually, and you can probably notice it too, is that price can go up, and it stabilizes for some time. Soon, a support line becomes visible. Day after day, month after month there are price fluctuations. The interesting thing is that the price does not fall bellow, above mentioned, support line, or it does just for a short amount of time before it bounces back. In this particular situation, a lot of traders wanted to go long and put the stop-loss somewhere around the support line. Due to a lot of factors that influence the market, the price went below stop-loss, and only then bounced back and that can happen in a matter of days.

You can notice this phenomenon happening all the time. You can certainly make a profit and that is great. What can happen next? Well, some factors, most influential of them being big banks can decide that that support line you saw is no longer valid, it is basically useless. In other words, the price can go a lot further than you think and you are missing a great opportunity to earn even more. Actually, a lot more.

Most Forex traders used the support line, that we discussed, only for reversals. That is why some Forex experts say that using support lines and ratios is “foolish. They could have made a lot more profit if they were searching for trends or breakouts. If you are an experienced Forex trader you could notice everything we talked about until now on basically any daily chart.

What we suggest is that you become a trend trader. That is the key to making more profit, and put more money in your pockets at the end of the year. For a more practical part, we will discuss some guidelines on how to do it. First of all, you need to scale out. You take, for example, TP (take profit) of 60 pips. It may sound strange but, when it hits 60 pips you should take half your trade-off. Whatever you stop-loss is, for example, -12 -20 pips, you just move it up so you can break even. So, you just move it to where you went long or went short. Doing this will often bring you some profit. It is a small profit, but it`s something. The key here is to combine your small profit, let`s say “wins” and minimize your losses.

The next question you can ask yourself is why should you do something just to minimize your losses? Isn`t Forex all about profit and earning money? That brings us to a big mistake Forex traders make when using 2:1 or 3:1 ratios. They just cap their upside. They miss out on 600, 800, 1000 pip trends that happen more than once a year.

If you are a trend trader and did everything right, that means you combined all those small “wins” in order to break even and you were able to hop on a fast train called a trend. Now that is how you make a substantial profit.

If you manage to do as advised here, you will get into a position where there will be more times you win than you will lose. Even using the Aroon up and down indicator can show this.

So after reading this, should you use 2:1, 3:1 risk ratios? It is up to you to decide, although you will not be able to ensure you win more than you lose. You should have a scaling out plan, but you should never cap your upside. You are limiting, blocking yourself from making all that profit that other, trend traders take. Trends are where you make money at the end of the year. Like we said they can happen more than once a year at any given pair. So imagine what you can do if you are practicing this on 10-20 pairs, for example.

Forex Risk Management

Preparing Yourself For Trading Losses

Preparing for losses, it sounds a little counter-intuitive doesn’t it? Yet it is a vital part of trading, losses will happen, being prepared for them can mean that they have a far smaller effect on both your account as well as your psychological state.

When you take a big loss or multiple losses in a row it can put a real strain on your emotional and psychological wellbeing when it comes to trading, you will often feel down, annoyed and lose a lot of your motivation to trade, it could depending on your mentality cause you to make some slightly more reckless trading choices. Sometimes it is even the trades that you had the most confidence in that go against you which can hit you even harder than was “the” trade but it still went wrong.

There is something called emotional trama, this can sometimes happen when there has been a threat to our perceived safety and security, taking a large loss can have this effect on someone as the safety of their account and their own abilities are being called into question. So we know what it is, how do we go about protecting ourselves from it? It sounds a lot simpler than it is, but we need to be able to prepare ourselves for a loss.

The first and primary way to do this is something that you should be doing anyway, having a risk management plan in place, this won’t prevent you from making losses, but it will help to prevent you from making large losses that could have an effect on your confidence. With a risk management plan, with each trade, you know exactly how much you could potentially lose. So when those losses do come, and they will come, it won’t have too much of an effect on you because they have been reduced by the risk management plan that you have put in place.

Take a little look at any successful trading strategy, can you find one that doesn’t have any losses? No, you cannot, because they do not exist, losses are a part of trading, you need to be able to understand that if you are going to have a chance at success if every loss makes you feel bad then you are probably in the wrong business.

So preparing for losses is very negative sounding, do not get it mixed up with aiming for losses, of course, you shoulds till be aiming to win every single trade, but that is just not realistic, that is why the risk management is so important, a loss is when a trade goes wrong, so reducing the effect when it does go wrong is paramount.

Losses are a part of trading, being able to recognize that will help you to prepare for the losses, of course, we should be aiming for wins, no one likes a loss, even the most veteran traders would prefer not to have them, but they are a form to teaching and the way that you bounce back from one is testament to your own psychological well being and the strategy that you have put in place.

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These Are Some Of The Best Position Sizing Techniques You Should Know!


In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which are very important. In this article, let’s determine how one can position themselves in the forex market based on three different models. Each of these has its own merits that impose some sort of position sizing discipline in traders.

The three core position sizing techniques in terms of risk are:

  • Fixed lot per amount
  • Percentage margin
  • Degree of volatility

These models can be applied to all the asset classes and are time frame independent.

We suggest you stick to one model to estimate the position size or at most two position sizing techniques. Following every given method will increase complexity, and that is not good for a trader.

Fixed Lot Per Amount

This is a fairly simple model. It requires a trader to simply state how many lots he is willing to trade for a given amount of capital. For example, let us assume a trader is having $2000 in his trading account, and he trades only the major currency pairs like  EUR/USD, GBP/USD, GBP/JPY, USD/JPY, etc.

The trader simply needs to make a thumb rule that he/she will not trade more than one standard lot of futures (of major currency pairs) per $2000 at any given point.

The lot size can also be determined based on their risk appetite and money management principles. This technique of ‘fixed risk’ is based more on the discipline than strategy.

Percentage Margin

This position sizing technique is more structured than the ‘Fixed lot per amount’ technique, especially for intraday traders. It requires a trader to position themself based on the margin. Here, a trader essentially fixes an ‘X’ percentage of their capital as margin amount to any particular trade. Let’s see how this works with the help of an example.

Assume a trader named Tim has a trading capital of $5000; with this, he decides not to expose more than 20% as margin amount on a particular trade. This translates to a capital of $1000 per trade.

Now, if Tim gets an opportunity in another currency pair, he would be forced to let go of this margin as it would double to 40% (20% + 20%). This new opportunity will be out of his trading universe until and unless he increases his trading capital. Hence, one should not randomly increase the margin to accommodate opportunities.

The percentage margin ensures a trader pays roughly the same margin to all positions irrespective of the forex pair and volatility. Otherwise, they would end up in risky bets and therefore altering the entire risk profile of their account.

Degree Of Volatility

The degree of volatility accounts for the volatility of the underlying asset. To measure volatility, we make use of the ATR indicator, as suggested by Van Tharp. This position sizing technique defines the maximum amount of volatility exposure one can assume for the given trading capital.

Below we have plotted the ATR indicator on to the USD/JPY forex chart.

The 14-day ATR has a peak and then a decline, which shows a decrease in volatility. As you know that high volatility conditions are the best times to trade (less slippage, high liquidity, etc.), you can risk up to 5% of your trading capital on the trade while one should not risk more than 1% when the ATR is at the lowest point. Do not forget the risks involved while trading highly volatile markets. Only use this position sizing technique when you completely trust your trading strategy.


A trader should not risk too much on any trade, especially if their trading capital is small. Remember, your odds of making a profit are high when you manage your position size and risk the right amount on each of the trade you take.

Beginners should trade thin to get experience with open positions, so they can assess the stress of a loss and gradually increase the position size as he is comfortable with the strategy results and performance. As a matter of fact, this is also the right way to proceed when trading live a new strategy, be it a beginner or an experienced trader.


Forex Risk Management

Basics of Risk To Reward Ratio In Forex Trading


The Risk to Reward Ratio is one of the most critical aspects of risk management in Forex trading. Traders with a clear understanding of what RRR is can improve his/her chances of making more profits. In this article, let’s discuss the fundamentals of Risk to Reward ratio with examples and also the ways through which it can be increased while taking your trades.

What is the Risk to Reward Ratio?

Before getting right into the topic, let’s define the meaning of ‘Risk’ here. Risk is the amount of money that a trader is willing to lose in a trade. If you have read our previous money management articles, we mentioned that a trader should not be risking more than 2-3% of their trading capital in each trade. It means when they find a trade setup, they should choose their position size in such a way that if the market hits their stop-loss, they lose a maximum of 2-3% of their trading capital.

Now, the Risk to Reward Ratio is simply the ratio between the size of your stop-loss to the size of your target profit. Let’s say your stop-loss is five pips away from your entry price and your target profit is ten pips away from the entry. In this case, your risk to reward ratio is 1:2 (5 Pips/ 10 Pips).

The larger the profit against the stop loss, the smaller the risk to reward ratio. Which means your risk is a lot smaller than your reward.

What is the recommended risk to reward ratio in the forex market?

Typically, a minimum of 1:1 or 1:2 RRR is recommended for novice traders. There are super conservative traders where they look for a minimum RRR of 1:5.

The risk to reward in every trade cannot be fixed as it varies depending on the market condition. For example, 1:3 or 1:5 RR ratio is achievable when the market is trending, and you enter the market at the right time. Whereas when the market is not very volatile, we should be happy with a risk to reward ratio of 1:1.

How to increase the risk to reward (RR) ratio?

🏳️ Raising target and putting stop-loss to breakeven

A trader can think of raising the target if the market moves to the initial take-profit quickly. This is because when the market moves so fast, it has the potential to move further, thereby increasing the profits.

🏳️ Finding trade setups from the larger time frame

Another way to increase the risk to reward (RR) ratio is by taking the strong trade setups from the higher time frames like daily, weekly, and monthly. We need to wait for such strong trade setups to form. Once formed, the price will move for hundreds of pips, and so we can have wide targets.

Final words

Higher the RRR, the better it is, and of course, higher RRRs are more challenging to achieve. So, do not forget to keep the expectations real and the risks appropriate. You do not have to avoid perfect trades just because the RRR is not as high as 1:5. Make sure to do proper risk management before placing a trade. Never trade with a risk to reward ratio that is too less and try to maximize it as much as possible. Cheers!

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How to determine if your Trading System shows Dependency

How to determine Dependency in your Trading System

As we have explained in our previous article How to be sure your trading strategy is a winner, traders usually apply position size strategies that conform with the belief that future outcomes somehow are influenced by the previous result or results. This phenomenon, in statistical terms, is called dependency, which means the probability of the next event happening depends on the last or past events. 

The example of a card game such as Blackjack or Pocker, can enlighten this concept. In a deck of cards, the odds of getting a particular card, such an ace is dependent on the cards already on the table. So, the first time, with no card drawn, the probability of drawing an ace is 4/52. But the next time we draw a card, the probability changes to 4/51 or 3/51, depending on if an ace was drawn on the last time.

What does dependency mean to Trade

Having dependency on a trading system or strategy would mean that the odds of the next trade being profitable or unprofitable change with the outcome of the last trade. If we really could prove dependency and its kind, we could adapt our trade size accordingly, making the system more profitable than assuming non-dependency.

 As an example, if we devise a system on which a winning trade precludes another winner and a losing trade another loser, we could increase trade size while on a winning streak and decrease it on losing streaks. That way, we could maximize profits and minimize losses. 

How do we determine if a system shows dependency

Dependency on trading has two dimensions. The first dimension is dependency in terms of wins and losses, which is the sequence of wins and losses showing dependence. The second dimension is if the size of wins and losses also show dependency.

The run Test

On events such as drawing cards without replacement, it is evident that there is a dependency. But when we cannot determine if the sequence of results show dependence, we can perform a Run Test.

The run test is merely obtaining the Z-scores for the win and loss streaks of the results. A Z-score tells us how many deviations our data is away from the mean of a normal distribution. We are not going to discuss run tests here, as there is a simpler and more complete method to find out dependency. If interested in this subject, you can find multiple sources by googling the term.

Serial Correlation

Dependency can easily be measured, using a spreadsheet, since dependency is measurable using a CORREL() function between the trade results, and the same data shifted one place. This technique uses the linear correlation coefficient r called Pearson’s r, to quantify dependency relationships. 

As an example, I passed one trade system of mine I backtested some time ago to a through the correlation function CORREL. The system produced 55% winners with 1.7 reward-to-risk factor on the DAX30 Futures contract.

The following image shows the result on this system, with about 250 trades (only the first 30 shown)

Image 1 – Dependency test on a DAX System

If you click on the image, you can see the result is 0.0352, which means the test failed miserably for dependency. That means we should separate our entry decisions from the trade size. Trade size will be a function of the system’s drawdown and our appetite for risk, not a function of the last trade being a winner or a loser.

Another test in an old trade system I devised back in 2016 for the ES futures gave this result:

In this case, the correlation factor was 0.249. That is a relatively high positive correlation for a system. The figure implies that big willers aren’t usually followed by big losses, and also the vice versa: Big losses are seldom followed by big wins.  Using this system, we could improve the results if we increase our trade size after a win, and decrease the trade size after a loss.

A negative correlation can be as helpful as a positive correlation. For example, on a system with a negative correlation, we can expect large wins after a large loss, so it is wise to increase the trade size if that event occurs. Also, we can expect a large loss after a large win, so it is best to reduce the trade size before a large win.

To better determine dependency, Ralf Vince, on its book The Mathematics of Money Management, recommends splitting the total data of your system into two or more parts. First, determine if dependency exists in the first part of your data. If you detect it in that section, then check for dependency in the second section, and so on.  This will eliminate the cases where it seems to be dependency, but in fact, there is not.

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How Be Sure your Trading Strategy is a Winner?

To evaluate, the quality of a strategy is an old quest, and its answer has to do with gambling theory, although it can apply to any process in which the probability of profits is less than 100%. Of course, the first measure to know if our system is winning is when the current portfolio balance is higher than in its initial state. But that does not give very much information.

A better way might be to record winners and losers, and have a count of both so that we could apply some stats. It would be interesting to know the percentage of winners we get and how much is won on average. That also applies to losers.

We could try to find out if our results are independent of each other or they are dependent.

Finally, we could devise a way to obtain its Mathematical expectancy, which would show how profitable the strategy is.

Outcomes and probability statements

No trader is able to know in advance the result of the next trade. However, we could estimate the probability of it to be positive.

A probability statement is a figure between zero and one specifying the odds of the event to happen. In simple terms,

Probability = odds+ / ( odds+  +  odds – )

On a fair coin toss game: odds of heads (against, to one) = 1:1

probability Fair coin toss = 1/(1+1)

= 0.5

Probability of getting a Six on a dice:

odds = 5:1 – five against to one

Probability of a Six = 1/( 1+5) = 0.16666

We can also convert the probability into odds (against, to one) of occurring:

Odds = (1/ Probability) -1

As an example, let’s take the coin-toss game:

Odds of a head = 1/0.5 -1 = 2-1 =1:1

That is very handy. Suppose you have a system on which the probability of a winner is 66 percent. What are the odds of a loser?

System winners= 0.66 so -> System losers = 0.34

loser odds = 1/0.34 – 1 = 2 -> about 2:1.

That means, on average, there is one loser for every two winners, which means one loser every three trades.

Independent vs. Dependent processes

There are two categories of random processes: Independent and dependent.

A process is independent when the outcome of the previous events do not condition the odds of the coming one. For example, a coin toss or a dice throwing are independent processes. The result of the next event does not depend on previous outcomes.

A dependent process is one where the next outcome’s probability is affected by prior events. For example, Blackjack is a dependent process, because when cards are played, the rest of the deck his modified, so it modifies the odds of the next card being taken out.

This seems a tedious matter, but it has a lot of implications for trading. Bear with me.

What if we acknowledge our trades are independent from each other?

If we consider that our trades are independent, then we should be aware that the previous results do not affect the next trade, since there is no influence between each trade.

What if we know our system shows dependency?

If we know that our system’s results are dependent, we could make decisions on the position size directed to improve its profitability.

As an example, let’s suppose there is a very high probability that our system gets a winner after a loser, and also a loser after a winner. Then we could increase our trade size every time we get a loser, and, also, reduce or just paper-trade after a win.

Proving there is dependency on a strategy or system is very difficult to achieve. The best course of action is to assume there is none.

Assuming there is no dependency, then it is not right to modify the trade size after a loser such as martingale systems do since there is no way to know when the losing streak will end. Also, there is no use in trading different sizes after a winning or losing trade. We must split the decision-making process from trade-size decisions.

Mathematical expectancy

The mathematical expectancy is also known as the player’s edge. For events that have a unique outcome

ME = (1+A)*P-1

where P is the probability of winning, and A is the amount won.

If there are several amounts and probabilities then

ME = Sum ( Pi * Ai)

The last formula is suitable to be applied to analytical software or spreadsheet, but for an approximation of what a system can deliver, the first basic formula will be ok. Simply set

A = average profit and

P = percent winners.

As an example, let’s compute the mathematical expectancy of a system that produces 40% winners and wins 2x its risk.

ME = (1+2)*0.4 -1

ME = 3*0.4 -1

ME = 0.2

That means the system can produce 20 cents for every dollar risked on average on every trade.

Setting Profit Goals and Risk

Using this information, we can set profit goals. For instance, if we know the strategy delivers a mean of 3 trades every day – 60 monthly trades- The trader can expect, on average, to earn (60 * 0.2)R, or  12* R, being R his average risk.

If the trader set a goal of earning $6,000 monthly he can compute R easily

12*R = $6,000

R= $6000/12 = $500.

That means if the trader wants a monthly average of $6,000, he should risk $500 on every trade.

Final Words

On this article, we have seen the power of simple math statements, used to help us define the basic properties of our trading system, and then use these properties to assess the potential profitability of the strategy and, finally, create a simple plan with monthly dollar goals and its associated trade risk.


Forex Daily Topic Forex Risk Management

Basic Math Skills Traders Needs – Average and Chevyshev’s Inequality Explained!

Most of the people wanting to profit from the Financial Markets think that the secret to success lies in knowing the price turns to start a new trend and also detects when to get out of the trade. They might be right if there were a mathematical formula or crystal ball to show us the right timing. But the truth is the Financial Markets are chaotic and random. Thus, there is no sure way to be right.

The good news is that we don’t need to be right, but be profitable. That can be achieved by taking small losses when the trade goes against us and let profits run when the trade goes as we projected. And the key knowing if we are on the right track is measurements and analysis.

This article deals with how to extract information out of a set of results by computing an average. And also, by measuring the deviation from the norm extract wisdom hidden in the data collection.


Averages have the purpose of determining the typical value or center of a set. For instance, the mean profit achieved in a month or a year. We assume that the majority of the samples are located near the average, and, also, that the number of cases away from it decreases with the distance to the average.

The computation of an average is simple. We add all elements and divide them by the number of items in the set.

As an exercise, if we have a collection of trading results X, with elements x1 = $1, x2=$-1 and x3=$3 which is our average profit?

Average of X (M) = (x1+x2+x3 )/3 = (1+(-1) +3)/3 = 3/3 = 1 dollar.

The Sample Standard deviation (SD)

It is interesting also to measure how far could we expect the following trades to be away from this mean. There are several ways to measure errors, but the most used is the Standard Deviation. SD for short.

Computing the standard deviation is a bit more complicated than the average, but not much.

1.- We take the difference between the mean and every element, creating a new set of differences.

dxi = M-xi 

2.- Differences may be negative or positive, so we square them to get dxi^2, creating a set of squared differences.

dxi2 = dxi^2

3.- We add all elements of this last set and divide by its n-1, the number of items minus one. This result is called variance

Var = Sum(dxi2)/(n-1)

4.- Take the square root of the variance.

SD = √ Var

let’s do it with our example:

1.- dx1 = 1-1 =0;  dx2 = 1-(-1) =2; dx3 = 1-3 =-2

2.- dx1^2 = 0; dx2^2 =4; dx3^2 =4

3.- Var = (0+4+4)/(3-1) = 8/2 = 4

4.- SD = √4 = 2

After that, we can conclude that our system’s future performance will be one dollar plus or minus 2 dollars.

The Standard Deviation can be thought of as the average of the dispersion of the results.

Chebyshev’s Inequality

Once getting these results, we know a bit about our trading system. Chebyshev’s inequality gives us another handy piece of information. It addresses the question of how many of our samples will lie within a certain distance from its mean.

There are many classes of probability distributions. One of them is the Normal Distribution, with its typical Gauss or bell curve. The Normal distribution is very nice indeed, and many physical phenomena conform with it, such as the length of people or the distance from the target on a dart game. Unhappily, trading results do not conform to it.

The good news is that the Chebyshev’s inequality works with a wide variety of distributions, and guarantees that no more than a certain fraction of values can be farther away than a certain distance from the mean.


No more than 1/k^2 values can be farther away than k* SD

We can say it the other way around:

At least 1-1/k^2 of the values of a distribution are within k*SD from its mean. If we create a spreadsheet using these formulas we get:

Table 1 – Chebyshev’s Inequality

This table provides a lot of information.  We see, for instance, that only 11.11% of the trades are farther than 3 SD from its mean.

  • That means close to 90% of the profit on future trades in the above calculation will be between -5 and 7 dollars.
  • Also, 75% of them will lie within 2 SD – between -3 and 5 dollars.

Since it can be applied to most of the distributions, we could use it with prices. That way, we could determine how far a price is away of its mean and assess overbought and oversold conditions with statistically relevant tools.

Final words

  • Knowing how to compute averages and the standard deviation will help traders quantify and qualify their performance.
  • It is interesting to know how to find the odds for a value to be at a determined distance from the mean value of the distribution.