Tag: Forex Risk

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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.

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.

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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Forex Basics

Is There Such A Thing As Risk-Free Forex Trading?

Risks are the first thing to consider by anyone who wants to undertake a role as a trader/ investor. The risks of losing money due to force majeure, due to manipulations of Forex by market makers, this is due to a mistake of technical analysis or if lose something in the fundamental analysis. It is […]

Risks are the first thing to consider by anyone who wants to undertake a role as a trader/ investor. The risks of losing money due to force majeure, due to manipulations of Forex by market makers, this is due to a mistake of technical analysis or if lose something in the fundamental analysis. It is […]

Risks are the first thing to consider by anyone who wants to undertake a role as a trader/ investor. The risks of losing money due to force majeure, due to manipulations of Forex by market makers, this is due to a mistake of technical analysis or if lose something in the fundamental analysis. It is not possible to avoid 100% risk, but it can be optimized or minimized. Read the article and learn how to minimize/optimize trading risks and how to create a balanced investment portfolio.

On Thursday, 15 January 2015, the Swiss Central Bank shocked the market when it announced that the fixed exchange rate of the Swiss franc could no longer be maintained against the euro, as it had for more than 3 years. After the announcement of the Central Bank, the rate of the franc rose by more than 30% against the US dollar and the euro, the Swiss stock market, on the contrary, plummeted by 10%, which affected the exporters. The consequences for traders were catastrophic. Those who made short on the franc (keeping the pair in short positions), simply in a second lost their deposits due to the stop out. The brokers also had a hard time, because a good number of them announced liquidity problems.

On Saturday, September 14, 2019, Saudi Arabia’s oil facilities were attacked by drones, which reduced approximately 50% of the country’s total oil production, which is more than 5% of the world’s oil supply. At the start of Monday’s day, the futures of Brent oil skyrocketed by 19-20%. The intraday jump was the largest since the Gulf War of 1991. Those who failed to close short transactions before the weekend lost a lot.

Both examples are trading risks. It is impossible to fully foresee them, because, as always, there is the probability of force majeure. But it is possible to minimize the risks. Also, as the risk increases, the probability of profit is higher. Let’s take the same example of oil: if short traders made losses, those who bet on growth earned about 20% in a single day.

From this summary, you will learn:

  • What are trading risks and what types of risks exist.
  • Methods to minimize trading risks,
  • Types of diversification of the investment portfolio.

In the summary, I will try to present two main aspects of risk minimization: errors in employing technical analysis and general risks in foreign exchange trading and the creation of an investment portfolio. My opinion is partly subjective, so I suggest addressing it and discussing it in the comments.

Types of Trading Risks

Trading risk: The risk of losses arising from market factors affecting price direction or errors in the analysis (forecasting) of the market situation.

Technical risks: Risk of loss due to technical problems: platform failures, order failures, broker fraud, etc.

Psychological (behavioural) risks: Risk of error due to a person’s emotional state: stress, emotion, fatigue, euphoria, fear, greed, etc.

Trading risk is uncertainty about future price movements as a result of market and non-market factors. So, if we have an open position, we are facing a unique risk, that risk is that we have erred in identifying the price trend. If the price is directed in the opposite way to the open trade, the trader will lose.

If the transaction has not yet been opened, the risk is in the incorrect prognosis of the trend direction or its reversal. We have to admit there’s no clear definition of the concept of “trend”, so traders understand it in their own way. Traders themselves determine the value of the critical amplitude (price reversal), which is called the risk limit and this risk will always depend on the amount of capital in the deposit. In other words, a trader is willing to endure, for example, a 100 point reduction, another no more than 20 points. They all determine the level (limit) of risk themselves but must understand the nature of the trading risks.

Where Risks 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. The best question we have to solve first is whether the investor knew how to correctly examine 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 be presented in different ways: a humanitarian disaster, an unexpected political decision, or a terrorist attack, discovery of new mineral deposits, release to the market of a new product that has not been previously announced, sudden bankruptcy. Force majeure often leads to immediate and generally long-term 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 must be said that there are people who were able to make a profit from the crisis. (I recommend watching the American film “The Big Short”, which describes this situation quite well).

The 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. We have already said what are the reasons for the most important risks in the section we call “Force Majeure”, and I will dwell on more details on the risks resulting from errors in technical analysis.

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 goes against you, you must be psyched that you can lose more than you usually win. The data of the indicators are relative, as well as the data of the volatility calculators.

Tip: Identify volatility visually. The price range can be referred to as the distance between opposite fractal ends or candle accumulation. For starters, you can train 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 transactions at this time.

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 really make sense to put him at risk?

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 simplest and wisest advice is that when starting an operation at the beginning of the trend, don’t do what most. Be careful when interpreting the signals of the indicators, there are no perfect and impeccable indicators.

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 flat. It is difficult, especially inexperienced. To identify the flat end, as it often does not have a clear beginning or end.

Tip: I suggest again using 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.

Incorrect indicator parameters: This will lead to 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.

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. We will always have to take the risk that the price will leave the area, touch the order and then move in the opposite direction.

Tip: To reduce risk, avoid using pending orders.

Abrupt reduction of contributions when a long position is opened. There are several examples when the price changed by 800-1000 points in just a few minutes. Of course, hardly anyone could react, make a decision and make a compromise.

Tip: Always use a stop loss.

Market makers. A particular trader is only a tiny part of a much bigger game. The creators of the market are therefore great players, who 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, push the price to the area where the orders are accumulated, then, even taking into account all the forecasts, most traders are activated to stop.

For example. Market makers want to sell a certain currency at the best possible 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 prepare to react instantly to a force majeure.

Hedging and Blocking

Coverage and blocking mean the same thing, go into two opposite operations (I won’t dig too deep into the big difference between them). Let’s imagine that a trader opens a buying position, but unfortunately, the price drops. Then, the trader has opened a selling position with the same volume. The loss from the first position is offset by the gain from the second operation.

Advantages of blocking a position:

If you set the locks correctly and unlock the positions on time (cancel the unprofitable or secure position), you can even make profits this way. There is even a trading strategy based on the creation of an order grid.

The lock allows you to manage the floating loss that does not affect the balance or spoil the trading statistics. But, there is always a defect in the locking positions. In the event of incorrect opening and closing of insurance and major positions, the trader is more likely to receive the loss resulting from both the transactions and the spread. Therefore, blocking is a high-risk strategy for a novice trader, such as trading in a similar way to Martingale, but an advanced trader can protect against unprofitable trading employing blocking and hedging.

The strategy and blocking rules should be highlighted in a separate article. If you want to do so, write in the comments.

How to Minimize Trading Risks

Diversification: So far, this is the best recommendation you can take into account when protecting your investment from certain business risks. But it is a kind of art to properly diversify its portfolio of investments and rebalance it regularly.

Types of diversification:

Asset division: It is the most widespread among the community to make a diversification. In addition, you can allocate your funds not only between different currency pairs or shares but also between deposit accounts, precious metals, cryptocurrencies, antiques, real estate, etc.

Diversification by risk level: There are assets that, in case of force majeure, increase in price (for example, gold). There are assets that, even in the midst of strong market fluctuations, hardly change prices. We have assets at our disposal with volatility, for example, of 5% per day. The way we distribute investments among assets with different volatility rates, risk (and, consequently, profitability) is the diversification of risks. I suggest you read the article on protective assets.

Applied diversification: Distribution of investments between strategies with different levels of risk: Martingale and conservative negotiation, scalping and long-term strategies, manual and algorithmic negotiation.

Institutional diversification: Here it is about working with multiple counterparts: Forex, Exchange and different brokers, trust management, etc. If we’re in a force majeure situation (we already discussed the case of the Swiss franc) a counterparty fails, it can withdraw at least the rest of the money from the second.

Statistical diversification: This is a direct and inverse correlation. For example, corn and wheat futures often have the same price direction, USD and gold trends often go the opposite way. A portfolio composed of reverse-correlated assets. will be logically less profitable, but safer because at the time when a low-priced asset, an increase in the price of a different asset offset the loss.

The diversification of investments is limited only by the imagination of the trader and his ability to conduct a market analysis, as well as the appetite for risk. The greater the risk, the greater the potential benefit. That’s why trading risks are often intertwined with psychological risks.

Trade risk insurance:

Stop-loss placement: At this point, we could comment on an example of drivers who ignore the mandatory driving rules of fastening seatbelts. It’s not easy to guess because some people don’t want to use means of protection. On the one hand, market makers can determine the areas where many stops are concentrated and can deliberately push quotes to catch them. Also, a stop loss will be very helpful if a large price difference happens as a result of a force majeure event. We can find another argument, that a trader is not able to react in a volatile market, and a stop loss may save at least part of their deposit.

Close transactions before the weekend: Sometimes, the situation in the Forex market changes drastically for an hour. From Monday to Friday (suppose a trader works 24 hours a day), one could still react to a force majeure. But the weekend, when markets are closed, can bring unpleasant surprises. One example is drone strikes in Saudi Arabia. And it’s even worse if the market opens with a price gap after the weekend.

The moderate use of leverage: That’s logical. If you use high leverage, a negligible force majeure will close your positions due to the stop out.

Calculation of the volume of the lot according to the volume of your deposit, level of risk of the transaction and deposit, and other factors More information in this article.

Conclusion

No risk-free Forex strategies. Is it necessary to minimize Forex trading risks? My opinion is no. Those who want to eliminate or minimize risks cannot participate in trading and invest their capital in a bank deposit. Risks must be optimised by properly assessing their opportunities and the capacity to withstand losses. The risk limitation and balancing policy is a risk management policy, which must be drawn up before trading in a real account begins. Only you can develop a risk management system yourself because in reality there are no recommendations that are good for everyone and that can be perfect for all investors regardless of their condition in all cases.

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Forex Basics

How To Practice Forex Trading Without Any Financial Risk

Let’s make something perfectly clear before we say anything else, you cannot trade without risk, there is no way to make any money without there being any form of risk. Risk is what enables us to have rewards and so when you trade there will be risks. Now that we have made that clear, there […]

Let’s make something perfectly clear before we say anything else, you cannot trade without risk, there is no way to make any money without there being any form of risk. Risk is what enables us to have rewards and so when you trade there will be risks. Now that we have made that clear, there […]

Let’s make something perfectly clear before we say anything else, you cannot trade without risk, there is no way to make any money without there being any form of risk. Risk is what enables us to have rewards and so when you trade there will be risks. Now that we have made that clear, there are of course a number of different things that you can do to help reduce the risks that you will be taking when you trade. Managing your risk is one of the key elements for being a successful trader and so it is certainly something that you should be putting a lot of emphasis on when you create your trading plans and of course when you actually begin trading.

The first thing that you can do is to work out how large the trades that you are going to be putting on are. Of course, this needs to be decided in line with your overall account capital. If you have a balance of $1,000 and a leverage of 100:1, there is no point in trying to put on huge trade sizes like 1 lot or even 0.5 lots, this will only result in disaster. You need to limit your trade sizes, the lower they are, the less risk you are putting your account under. If you are looking for the lowest amount of risk, then you will want to go for the lowest trade size which for many brokers is 0.01 lots. Of course, this will then limit your profit potential, so really you are going to want to look for a happy medium, somewhere with low risk but somewhere that also offers returns. In relation to just risk though the lower the trade size the better.

You then need to work out where your stop losses are going to be, yes you will be using stop losses. They are the primary way and method that we as traders can use to help limit our potential losses. If we do not use them, then even the smallest trade has the potential to blow an account, it will take a lot but it is possible, so why take the risk? Putting in your stop losses is a sure-fire way to protect your account, when your trade goes the wrong way and reaches the level of the stop loss, the trade will automatically close. Yes, it will be at a loss, but it is a controlled loss and one that was taken into consideration before the trade was even placed. What is important is that we removed any potential risk for further losses and have limited things to be within our strategy criteria.

We spoke about leverage near the start of this article, it is important to get a good understanding of how it works and if you want to keep the risks on your account as low as possible, then you will also want to keep your leverage as low as possible. Leverage allows you to trade with more spending power than the capital in your account, this, in turn, increases the profit potential of the account, which is the main selling point of leverage. What they don’t tell you is how this leverage also increases the loss potential of your trades too, the more leverage that you use the higher the losses can be with each trade and a loss can take away a much larger sum of money than it would have with less leverage. So if you have the balance for it, go for a lower leverage in order to keep risks low.

Pick the right currency pair to trade, it’s probably not a surprise to you that different currency pairs offer different levels of risk, there are three main categories, the majors, minors (crosses), and exotics. The major pairs have the least volatility and the most liquidity, the minors are in the middle and the exotics offer the most volatility and least liquidity. Due to this, it is far more profitable and also risks to trade the exotic pairs, but it takes a lot more skill to do it successfully. Due to this, it is recommended that those looking for lower levels of risk should look to trade the major pairs, things like EURUSD are extremely liquid which means that their movements are less rapid and sudden. They are easier to predict and if something does happen, you often have more time to react than with the exotics. So if you are looking to trade with lower risk, go for the major currency pairs.

One of the riskiest things that you can do as a trader is to trade during times of economic news, there are certain news events that new traders are warned away from, things like the US non-farm payroll, you should not be trading during the times of these announcements. They have the ability to cause large movements in the markets and even economic experts get their predictions wrong on a regular basis, if they get it wrong, then there is a good chance you will too. In order to avoid this risk completely, simply do not trade during the news events Obviously there is unannounced news that comes up every now and then which is unavoidable, but as long as you avoid what you can, you will be reducing the risk that you account is being put under.

The last point that we quill look at is the fact that you need to ensure that your expectations and your goals are realistic. If you have come into trading thinking that you will make thousands each month with a small starting balance then you are mistaken. Many people make it seem like you can and many people probably have, but they are risking a lot with every single trade in order to do this and have most likely lost countless accounts in the process of getting their one successful one. Bring your expectations down and you will remain motivated and feel less like you need to risk more to achieve those goals.

Those are some of the things that you can do to help reduce the risks that your account is being put under, remember that it is impossible to trade with no risks at all, there will always be some otherwise there would be no way to make any money. If you hate risks, then you will need to do what you can to help reduce them, but remember that by reducing your risks you are also reducing your profit potential, so the key is to find the middle ground where you are happy with both the risks and the potential profits that you can make.

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Forex Basics

The Correct Way to View and Approach Forex Risk

If you’re looking for an extra way to make money in your spare time, chances are that you’ve probably stumbled upon the subject of forex trading during your search. Many people overlook this option because they don’t understand what forex trading is, but the term simply refers to the buying and selling of foreign currency […]

If you’re looking for an extra way to make money in your spare time, chances are that you’ve probably stumbled upon the subject of forex trading during your search. Many people overlook this option because they don’t understand what forex trading is, but the term simply refers to the buying and selling of foreign currency […]

If you’re looking for an extra way to make money in your spare time, chances are that you’ve probably stumbled upon the subject of forex trading during your search. Many people overlook this option because they don’t understand what forex trading is, but the term simply refers to the buying and selling of foreign currency online. With all forms of investment comes some level of risk, and Forex is no different. How we deal with this risk is what makes the difference between failure and success. 

Traders open an account through a broker and attempt to make a profit off of the differences in pricing for the currencies they are buying or selling. Prices are controlled by the forex market, which is affected by many different factors. For example, large financial institutions including big banks have a significant impact on the market, along with economic factors, news releases, political events, and other important information that shapes trader’s opinions. 

If you want to become a forex trader, it’s fairly simple to open a trading account online. All you need to do is find a brokerage firm or commercial bank that offers online forex trading through a trading platform, like MetaTrader 4 or 5. There are also many other suitable platforms out there and some brokers offer their very own trading platforms. 

Is Forex Regulated?

Different regulatory bodies are responsible for regulation standards in certain countries. For example, the United States is monitored by the Commodity Futures Trading Commission (CTFC) and the National Futures Association (NFA). US regulations are known for being strict, which is one reason why some international brokers avoid working with US clients. Brokers located in other countries deal with separate regulators, some of which have more lenient rules. In some cases, brokers choose not to become regulated at all, but this does pose a potential risk to clients that sign up with these companies. For example, in the event that an unregulated broker was to go bankrupt, their clients would be at risk of losing the money they had invested in their trading account.

How to Get Involved

In order to open a trading account, you simply need to be 18 years old with access to an internet connection on a device like a phone, computer, or tablet. You’ll need to find an online trading platform as well or sign up through a bank’s platform. Pepperstone, XTB, EagleFX, FP Markets, and IC Markets are some of the most popular options, but you can find hundreds more to choose from as well.  

What Are the Benefits? What About the Risks?

Forex trading can provide a good source of income for those that put in the effort. This means you’ll need to spend a lot of time doing research, developing a trading plan, and honing your skills in order to be successful. Trading also provides other benefits like flexible hours, the ability to be your own boss, and the option to start with a low investment. A few high-profile investors have managed to become billionaires thanks to trading alone. Aspiring traders should know that the potential to make a lot of money as a trader is real and that it isn’t as difficult as one might think. The best traders learn to master self-discipline and are extremely active in planning and managing their trading plans.

When it comes to weighing the risks, one of the biggest downsides is that profits aren’t guaranteed. There’s always a chance that you could lose everything you invest, from a hundred dollars to thousands. On the bright side, traders can take more control of this by only risking what they are willing to lose and incorporating strict risk-management rules into their trading plan. Having knowledge and experience on subjects like microeconomics and geopolitics can also help to increase your chances of success, while you’re more likely to fail if you don’t understand the factors that affect prices. In the same ways that a disciplined trader is likely to be successful, a laid-back approach can lead to financial losses, therefore, the risk depends largely on the trader’s knowledge and attitude. 

The Bottom Line

Forex trading can be a great way to earn some extra income and can even take the place of a full-time job for those that are determined and hard-working. Like with most investment opportunities, there are risks involved with trading forex, with results depending heavily on one’s understanding of how the market works and what affects prices. Although forex does involve risk, traders can take more control by only risking money they are willing to use while using risk-management precautions, like using a stop loss on every trade. It’s surprisingly easy to get started as a forex trader, as you’ll simply need to find a regulated broker and open a trading account through that entity. 

Categories
Forex Basic Strategies

Low-Risk (Yet Profitable) Forex Trading

One of the main things that attract many people to Forex is the potential to make significant gains in a relatively small time due to the use of leverage. However, the profit potential comes a significant potential for losses that should not be overlooked. To protect your account, it is a good idea to look […]

One of the main things that attract many people to Forex is the potential to make significant gains in a relatively small time due to the use of leverage. However, the profit potential comes a significant potential for losses that should not be overlooked. To protect your account, it is a good idea to look […]

One of the main things that attract many people to Forex is the potential to make significant gains in a relatively small time due to the use of leverage. However, the profit potential comes a significant potential for losses that should not be overlooked. To protect your account, it is a good idea to look at the big picture, which means not only looking for potential benefits but looking for ways to operate in a way that is less risky. Its rewards may be smaller in the short term, but with a low-risk Forex trading strategy, we expect you to be more successful in the long run.

There’s always a risk, and that’s okay. Think about it this way: there’s no business you can get into that doesn’t have a certain risk. For example, if you decide to open a convenience store, there is also the possibility that you may not be able to earn enough money to keep your doors open. But, if you conduct a proper investigation and consequently make the right business decisions, it increases your chances to build a profitable business. In this sense, your business is very similar. You should conduct proper market research to make sound trading decisions. You will still have some risk when you make transactions, but the risk will be diminished by its own understanding of financial markets and the way they move.

A great thing about Forex trading is that it can be in or out of the market at its own time of choice. For example, if the markets are too erratic and too volatile for you to feel comfortable, you just don’t do trades. Unfortunately, most novice Forex traders don’t understand what it is okay to put aside when needed. But if you make the decision to manage your risk, don’t be afraid to sit down. You may miss some winning trades, but you will probably also skip the lost trades.

Another way to manage your trading account and operate with less risk is to properly manage the size of your position. At the same time that Forex traders can use leverage to increase their earnings on winning trades, leverage is also a tool that can cause excessive losses and has to be used with care. Don’t let your desire for quick cash drive you past your account. You are in control and should always be careful to trade responsibly. Low-risk Forex trading.

Finally, you can control the size of your position and the time of your trades to take a lower risk. For example, if you work full-time and don’t have much time for forex trading, you can reduce the size of your position and the trade of the daily deadlines. You only need to devote a few minutes a day to setting loss stop settings and limits, and this trading strategy will allow you to continue your normal life while your money works for you. If you have time to sit on the computer for hours and hours, short-term trading may also be a possibility.

Pay attention to the psychology of commerce. Forex psychology is probably the most underrated tool a Forex trader has. The longer I trade, the more I realize this is true. For example, a market will rise or fall in the long run. That being the case, it would theoretically have about a 50% chance of success in any particular trade. What do you do with these odds? Take an example: you decide to shorten the USD/ CHF pair. When you press the sales button, the market spins and goes up almost immediately. You got a 50-pipe stop loss that’s in danger of getting hit pretty fast.

Do you let it happen? Or does he move his stop loss even higher in the hope that the market will back up in his favor? Unfortunately, too many traders will do the latter. You should remember that you set your loss limit for a reason, and the reason is still no matter how the market moves.

The worst thing is that the biggest mistakes often occur immediately after the initial loss. Too often too many people seek to “get their money back” from the market. Not only will they reverse the trade, but they will also double the size to get that money back quickly. Murphy’s law explains almost 100% of the time that trade will not work. You have increased your losses rather than minimized them.

Risk management is crucial and the key. Risk management is by far the first trader’s job. You must understand that losses are part of the game and that you must be able to tolerate them. For example, if you have a loss as described above and risk 10% of your account, you need to get 11% just to make up for the next transaction. You have also received a significant amount of damage to your account. However, think of trading in terms of risk of 1%. You still have 99% of your seed money, which is a lot easier to digest. In fact, I know many merchants who will risk only 0.5% per operation.

It is not the established trade. There is no magic trading configuration that creates high-profit, low-risk trades. The reality is that your trading system is not the only thing that will dictate your success. You must also manage your risk, pay attention to psychological triggers, and keep abreast of the market, even with an established business plan. The best way to keep a low risk in your foreign exchange operations is to keep your leverage reasonable, focus on your objectives, and not let stress or greed dictate your business decisions. With these gold keys, your low-risk strategy should deliver solid results in a long commercial career.

Categories
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.

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.

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:

Consistency

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.

Stability

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.

Categories
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 […]

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 […]

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.

Categories
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 […]

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 […]

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.

Categories
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 […]

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 […]

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. 

Categories
Forex Basics

Do You Trade or Do You Gamble?

If you ask someone that doesn’t know much about sport or anything to do with Forex trading, they will tell you that it is exactly the same thing, and from an outside view, we can see why they would think that. There are however huge differences between those that gamble on the markets and those […]

If you ask someone that doesn’t know much about sport or anything to do with Forex trading, they will tell you that it is exactly the same thing, and from an outside view, we can see why they would think that. There are however huge differences between those that gamble on the markets and those […]

If you ask someone that doesn’t know much about sport or anything to do with Forex trading, they will tell you that it is exactly the same thing, and from an outside view, we can see why they would think that. There are however huge differences between those that gamble on the markets and those that trade.

The majority of people get into Forex trading for a simple reason, to make money, if we look at it at a base level, there is no reason to trade apart from gaining money. So we all have the same goal, so why do people go about it differently. Ultimately it comes down to mindset, some people have the patience to learn, the drive to improve, while others want the easy get rich quick version, which the vast majority of the world will see as gambling.

So what would the differences be? Let’s take a look at EURUSD, it’s the worlds most traded currency pair, its currently moving horizontally, a trader will have a strategy with certain criteria that need to be met, the majority of strategies won’t take a trade while it is moving in a horizontal manner, however to a gambler, it doesn’t really matter, it is a 50/50 to them, in terms of gambling, those are pretty good odds, you only need one trade more in the right direction than the wrong to make money. Of course, the forex markets are not that simple, there are thousands of different things that can have an effect on the markets, things a trade will know but a gambler will not.

Trading and gambling are not exclusive from one another, a trader can very easily be sucked into the world of gambling, you just made a losing trade, you may want to win that money back , so you trade with a little bit extra, this is a form of gambling. You see someone make a lot on a trade, you want the same so you put in trade following them or that does not work with your own strategy in the hope to make a bit more money, again this is gambling.

The main difference between the two is the patience and learning that comes with trading, having your own strategy with strict entry and exit criteria will make you a trader, each trade that you make is calculated and is not fuelled by the thought of making some extra money.

Trading takes a loot at the probabilities that are within the markets, they are are always more likely to move one way or another, these probabilities are the driving force for the prices. News events add probabilities, technical and fundamental analytical information add probabilities, the market consensus adds probabilities, you get the point. A trader will take all of these into consideration before making a trade, so it is no longer a 50/50 trade it is not an 80/20 trade. That is where the main difference comes from, taking the probabilities and only taking trades that are in your favour rather than trading ad hoping.

You can create the mindset of a trader rather than a gambler by using tools such as trading journals, learning from past trades one of the best things a trader can do, recording entries, exits and reasons for the trade, while a gambler will simply trade without any records being kept.

So are you a gambler or a trader, do you plan your trades, do you record things? Or are you just here to try and make a bit of quick and easy money?

Categories
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.

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.

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.

Categories
Beginners Forex Education Forex Basics

Forex Ponzi Schemes To Be On the Look Out For

You have probably heard about Ponzi schemes or at least the fact that a lot of people have lost a lot of money to them. To the outside world, they are an opportunity to make a lot of money very quickly, however in reality they are a ticking time bomb that will only make money […]

You have probably heard about Ponzi schemes or at least the fact that a lot of people have lost a lot of money to them. To the outside world, they are an opportunity to make a lot of money very quickly, however in reality they are a ticking time bomb that will only make money […]

You have probably heard about Ponzi schemes or at least the fact that a lot of people have lost a lot of money to them. To the outside world, they are an opportunity to make a lot of money very quickly, however in reality they are a ticking time bomb that will only make money for the owner and no one else.

A Ponzi scheme is basically a financial service or activity that aims to give you a very high above market return on your investment. In reality, they simply use investments from newer investors to pay the older ones. The percentage being offered is often far beyond anything reasonable with things like 1% to 5% per day being offered. A Ponzi scheme will ultimately fail once the number of investors starts to slow down, at this point, they are no longer able to payout the earlier investors, at this point the owner normally shuts up shop and runs, leaving all those that have invested with the loss.

So how do you tell whether something might be a Poni scheme? There are a number of warning signs that you should look out for, some of them include the following.

Guaranteed High Returns – Anything that is offering you guaranteed returns is a bit of a red flag, what makes it even more obvious is when the returns are far higher than most reputable places such as banks or building societies.

Consistent Returns – If you have already traded, you will know that you do not make exactly 1% per day or week, each day is different as it depends on the markets, so when someone is offering the exact same return every day it can send out a few warning signals.

Not Licensed – The majority of Ponzi schemes will not have any regulations around them and they won’t have been registered with any governing bodies, so if you are thinking of investing somewhere, be sure to take a look to see if they are in fact regulated, you could also call the regulator to double-check as some have been known to put that they are regulated even when they are not.

No Information Of Strategy Or Process – If a scheme is using the Ponzi method of paying their investors, then there may not actually be a strategy or process available. Not knowing how they will be generating their money to pay back investors should be a huge red flag and something that should certainly make you think twice.

So what makes a Ponzi scheme different from a Pyramid scheme? Both are primarily built around the idea of recruiting new people into the system in order to make money, both often have a product attached to it which is pretty much nonexistent or useless to the customer. The main difference between the two is that for a Pyramid scheme, recruitment is done at all levels, while with a Ponzi scheme, it is normally just those at the top that do the recruitment. So there isn’t much difference between them, and they should both be avoided as much as each other.

If you are ever in doubt or you see any of the warning signs, the best advice that you can be given is to stop and find something else, investing into such a scheme will only result in a loss of everything you have put in.

Categories
Forex Education Forex Risk Management

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. […]

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. […]

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.

Categories
Forex Basics

Reasons Why Your Forex Losses Might Actually Be A Blessing

Out in the real world, telling someone that your losses are a blessing might get you a few funny looks. However, in many walks to life, a loss can be one of your greatest tools, it can teach you far more about yourself and the performance than a win ever could. Some of the worlds […]

Out in the real world, telling someone that your losses are a blessing might get you a few funny looks. However, in many walks to life, a loss can be one of your greatest tools, it can teach you far more about yourself and the performance than a win ever could. Some of the worlds […]

Out in the real world, telling someone that your losses are a blessing might get you a few funny looks. However, in many walks to life, a loss can be one of your greatest tools, it can teach you far more about yourself and the performance than a win ever could.

Some of the worlds most famous investors, Warren Buffet, George Soros and many more have made some pretty huge losses, but that didn’t discourage them, instead, it taught them, after those losses they became a lot more successful at what they do and in the long run, they are thankful for those mistakes that they made.

When you make a loss in Forex, it is important to treat that loss with respect, this means not just shrugging it off as a loss, this will not benefit you at all. Instead, it needs to be treated as a blessing, it is a chance for you to fully understand why it went wrong, why the trade lost and what you did wrong, then again, you may not have done anything wrong, it may be something in the markets, but the only way to know that is by looking at and analysis why that trade lost.

It is important to remember not to get too high or low over a losing trade, keeping your emotions in check and stable will allow you to properly develop your strategy and style in line with the loss.

Many traders will pick a strategy that they like, they will trade with it for a while and it’s great, it is making some decent profits, then the first loss comes, then another, now the strategy is trading negatively so the trade gets rid of it and picks up a new one which is profitable for a while, then it starts to make losing trades, the trader will drop it and pick up another one. You can see the cycle, and it is a never-ending cycle.

Most strategies are created with the current market conditions in mind, they will work while the markets remain consistent to the strategy, but as soon as thing start to change, and they always will, the strategy starts to make losing trades, instead of getting rid of the strategy and getting a new one that works now, we need to start looking at what has changed and why the strategy has stopped working. We know the strategy works, so why get rid of it, instead we need to start adopting it.

You should be keeping a journal of your trading, this is a fantastic source of information and we should be able to analyze it and work out exactly why the trades are now going wrong. Using this, you can adapt the strategy to the changing markets, change certain parameters, entry points, exit points and so forth, it is a much more economical way of doing it and it will increase your knowledge of the markets far more than just starting over with a different strategy that you hardly know.

Forex will always be changing, that is a given, it is important that you understand that you need to be moving with it, this means learning and adapting from your losses, it is the best way to learn and those losses truly are a blessing in the long run.

Categories
Forex Psychology

Desperation: The Destroyer of FX Trader’s Dreams

We have seen people burning up on jobs, screaming “I can’t work on this job anymore I have to get out!” We’ve also seen people losing large sums of money trading on Forex. You could see the desperation and you could read on their faces. “How do I get this money back?” or “My expenses […]

We have seen people burning up on jobs, screaming “I can’t work on this job anymore I have to get out!” We’ve also seen people losing large sums of money trading on Forex. You could see the desperation and you could read on their faces. “How do I get this money back?” or “My expenses […]

We have seen people burning up on jobs, screaming “I can’t work on this job anymore I have to get out!” We’ve also seen people losing large sums of money trading on Forex. You could see the desperation and you could read on their faces. “How do I get this money back?” or “My expenses are $2,000 dollars a month, how long do I have to trade to make that sum?” Most people don’t understand that answer to these questions comes with – patience. Which is critical in the trading game.

The lack of patience, it’s something that we all are affected with, more or less. There is one feature of impatience, that is the killer – desperation. That is what is blocking us from achieving success. Something that we need to discard. It is, more than anything, negative that is impeding progress in trading. Desperation causes us to make irrational decisions. Extreme decisions. What would you do if someone would offer you a job that would satisfy you professionally and economically, but only after 5 years building on it with lots of crashes and self-doubts? Would you still be interested?

This article is conceived in such a way to help you get there faster, relieved from impatience. Understand that when you start trading professionally, even after all tests from trading firms, it is just the beginning and there is limited money for the trading accounts. It takes a strong work ethic. That is not to torture you for fun, it is there with a purpose, to see how you handle real money, as training with demos is worlds apart from real trading. You cannot rely on luck and trading firms are there to make money, thus, they are good at managing risks, so you have to get the right to be able to earn more, to show them you are a good investment, consistently. And being consistent is really hard, as the market itself, is always fluctuating. That’s a big step, reliability.

Acknowledge that 90% of traders cannot escape that constant, dull tick of desperation in their heads, that interferes with their trades. Being able to place calculated, disciplined trades with low risk, at the right moment with constant desperation chaining you is impossible, and it gets worse with years. You have lost accounts again and again, but you know Forex is a place where millions can be made, and you are getting anxious and frustrated with your Forex trading endeavors. That gets people in a panic mode, pushes them into making irrational decisions and, not just, financial mistakes.

Impatience, creating unrealistic expectations for yourself, the desperation to get good results, it all leads to disasters. Don’t invest more money that you can’t handle, hunger is good when it is calculated. For those that endure and survive, those disasters can be a catalyst to expand their knowledge on trading. And don’t believe in the myth of quick recovery. Sure, some people are very lucky, odds are that somebody has to win lottery eventually, but that’s not a smart move. Desperation for funds recovery leads to even more losses, like gravity pull into the losers pit.

To some degree, traders who in the beginning use the emotions to resist the acceptance of failure are the ones who win at the end. After a while, they become more like scientists, objectivity, research, experiments, tests, and trying out new things are infused in their minds. But, it cannot be done instantly. Train yourself, stop being desperate. Try to think in this manner “So, you lost an account, man up, don’t cry about it and don’t chase it, learn from it.” Most other problems in trading can be fixed by placing a good system to work and learning how to uphold it. It is great to have the drive, to look forward to something when you wake up in the morning, but that has to be backed up by having realistic expectations. Motivation is great until it turns into desperation, when that happens, it is just a push in the wrong direction. Always think about what went wrong, analyze your trades, trade based on rules that keep you emotionally solid.

This all applies to all stages in life. If you are young, and you heard that trading on Forex is easy money, and you are desperate for independence, that is great motivation, but it can mislead you. Go to college instead if you can, you can practice Forex and learn something in college. At the end of school, you can be ready for a Forex job. If you are contemplating leaving your day job and desperate on living a luxurious lifestyle, you are digging into every chance to make trades on Forex. Stop and think, am I having realistic expectations, am I being hazardous? If you are a pro Forex trader, in a streak of bad trades you will become desperate to compensate losses.

This is the game where you cannot cheat to be successful, it is long. It needs time invested and it is rough. If you see yourself living off Forex trading, you must learn to deal with desperation and maintain healthy motivation. That is the way to be responsible with your money and money entrusted in you. You have no options here.

Categories
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 […]

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 […]

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.