A stop loss is an order placed by a trader on any underlying asset, the order remains until the price action reaches that specific point, then it automatically executes a buy or sell order in the market. Trading the markets without a stop loss is dangerous. However, by placing the stop loss, traders can easily […]
A stop loss is an order placed by a trader on any underlying asset, the order remains until the price action reaches that specific point, then it automatically executes a buy or sell order in the market. Trading the markets without a stop loss is dangerous. However, by placing the stop loss, traders can easily […]
A stop loss is an order placed by a trader on any underlying asset, the order remains until the price action reaches that specific point, then it automatically executes a buy or sell order in the market. Trading the markets without a stop loss is dangerous. However, by placing the stop loss, traders can easily eliminate the emotions from their trading decisions. In your trading carrier, you will often hear about the traders who never use the stop-loss orders, and they continually make money in the market. They rely on the no-stop loss forex trading strategy, and some of the traders succeed, and some don’t. The traders who win consistently in the markets are emotionally intelligent; also, they spent an endless amount of hours on demo trading to master the strategy well. Another most critical skill they learn is Accurate Thinking, and they don’t see things the way they are, they see things the way things are.
Not Using The Stop Loss Have Some Advantages In The Market
In dead markets hours when none of the trading sessions is active, at that time, most of the forex brokers wider their spreads so that they can avoid the scalpers to move the market. In that time, if your strategy gives you the trading opportunity, a widening spread can easily trigger your stop loss. During the opening hours or the high political news events, markets are quite volatile, which sometimes prints unexpected spikes in the market that ends up closing your positions and markets happily moving in the directions you predicted.
No Stop-Loss Trading Strategy
Keep in mind that trading without the stop loss is only applicable for intraday trading only, and it is advisable that use this strategy only on the lower timeframes because markets are random and it’s risky to let your positions to run overnight in the market. Like a gambler, you need to keep watching your trades until your trades hit the take profit. If you are beginner traders, then we don’t recommend you to use this strategy to trade in the live market, first of all, spend two to three months on the demo account to master this strategy and then give it a try on live markets.
Trading The Markets With The Moving Average
From beginners to advanced to chartists to market movers, everyone uses the moving average once in their lifetime. Even chartists and professional traders use this indicator in their everyday market analysis. Moving average defines the current market trend, spot trend reversals; also, it indicates the buy and sell signals. When the indicator is above the price action, it means that the trend is down, and then the indicator goes below the price action, which shows that the trend is up. Many traders and chartists use some other form of technical analysis in conjunction with the moving average to identify the trading signals. You can pair it with other indicators; also, you can use the higher period average with the lower period average to find the best entries. This strategy only works in the trending market, and we suggest you avoid using it in the dead, volatile, and consolidation phases.
Buying Rules
In an uptrend, go long when the 7 MA crosses the 14 MA to the upside.
Exit your position when the red candle closes below the 14period MA.
No need to place the stop loss.
As you can see in the below image of the USDCAD 15 minute forex chart, the markets were overall in an uptrend. Our strategy gives the first trading opportunity around the 27th of February, and exits were also the same day. Our early trade gives us 30+ pips profit. After our position exiting the market provides us with a trading opportunity in the US session, we took this example from the recent market conditions, so our second trade in still running. By now, our second trade is up by 100+ pips. By following the flow of the market, you can easily make money, without placing the stop loss. You can see in the below image that the market is not even dead and volatile; the markets were moving in a relaxed and calm manner, find these kinds of markets to spotlighting the outstanding trading opportunities.
Selling Rules
In a downtrend, go short when the 7 MA crosses the 14 MA to the downside.
Exit your position when the green candle closes above the 14period MA.
No need to place the stop loss.
The below NZDCHF forex pair indicates the selling opportunities by using the Doube moving average. The markets were in a strong downtrend, and it gives us the first trading opportunity on the 25th of February around the London session. After our entry price action dropped immediately and printed the brand new lower low. The very next day market gives the second selling opportunity in the London session. On the same day, the opening of the New York session indicates us to close both buying positions when a green candle closes above the 24 periods MA. Both trades help us to milk 80+ pips in just two working trading days.
The below image represents the 3rd and 4th trading opportunities in the NZDCHF forex pair. We activate the 3rd trade in the New York session on the 27th of February, and the last trade was taken in the Asian session on the 28th of February. Both of these trades are running successfully, and we are in profits of nearly 200 pips. Now, all we need is to wait for the green candle to close above the 14 periods MA so that we can book profits. You can use this way to exit your position, or you can use the significant support resistance areas to book the profits. The MA lines also act as a dynamic support resistance to the price action, and the more, the higher the period we choose, the stronger the S/R will be. So when the price action crosses the 14 periods MA, it indicates our trading party loses its power, { buyers in buying side, sellers in selling side } so it’s the best time to close our position.
Conclusion
We believe that by now, you can understand that it is possible to trade the market without using the stop loss. All you need to do is to put in the extra work required to find one of the best trading opportunities to make some consistent money. In short, Activate your trades only in active trading hours, no trade in dead or volatile market conditions also avoid choppy or ranging market conditions. Find out the super smooth trend in any instrument and wait for the price action to meet the rules of strategy to take trades.
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 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.
Money management is generally the most important factor determining profit or loss in Forex trading strategies. This fact is so often overlooked that it must be repeated again and again. It is one of the key commercial essentials. The management of money itself will not give you a margin of victory-you need a good entry […]
Money management is generally the most important factor determining profit or loss in Forex trading strategies. This fact is so often overlooked that it must be repeated again and again. It is one of the key commercial essentials. The management of money itself will not give you a margin of victory-you need a good entry […]
Money management is generally the most important factor determining profit or loss in Forex trading strategies. This fact is so often overlooked that it must be repeated again and again. It is one of the key commercial essentials. The management of money itself will not give you a margin of victory-you need a good entry into trade and effective exit strategies for that-However, without smart fund management practices, a profit margin will not see your profit potential, and there is even the risk of a total loss.
There are two elements in money management that Forex traders must consider carefully: how much of their account is risked per transaction and the percentage of their account that must always be at risk, measured in full or by some kind of sector. There are no absolute answers to those questions, the best for you will largely depend on your own appetite for risk and your tolerance of loss, temporarily or permanently.
Risks in Your Account
Every time you open an operation you’re risking money. Even if you have a stop-loss, you could suffer a negative slide and lose more than you anticipated. Clearly, if you have many open trades at the same time, even if the whole holds a sense at the individual level, together can contribute to having an unacceptable level of risk. Similarly, if you keep many open trades betting all towards the same currency and in the same direction, you run the risk of a sudden loss beyond what is acceptable. So, it’s a good idea to determine a maximum number of open operations simultaneously; and repeat, but by coin.
For example, it is possible to determine that you will never have more than 2% of your risk account size in open trades or more than 1.5% at risk in a single currency. You should also be very careful when trading in currencies that are linked to another currency by your respective central banks. For example, someone who was short in the Swiss franc last January using even a relatively small amount of leverage of 4: 1 has probably had his account deleted, and this will be independent of whether you have any stop loss, as the movement has been dramatic.
Also, if you are trading with Forex or other instruments that maintain positive correlations, you may also need to put a limit on the total of open transactions that are strongly correlated. This becomes more important if you are operating beyond Forex, for example, oil and the Canadian dollar have a high positive correlation.
The exact amount of maximum risk you must take is up to you but bear in mind that once your account has been reduced by 25%, you need to increase it by 33% just to get back to square one. The lower it gets the worse it gets: a loss of 50% requires a 100% increase!
How Much Risk Per Transaction?
Now that you have some risk limits set for your account in general and by currency type, you must address a different issue as to the amount you must risk per transaction. Of course, it is okay to risk different amounts per operation, but this must be determined systematically.
There are different reasons that need to be analyzed in order to determine the size of the position in your Forex strategies, but any risk per transaction must be calculated as a percentage of its total capital. The capital of the total account can be determined by looking at the amount of cash obtained in your account-you must assume the worst-case scenario, that is, that each open transaction will result in losses.
There are two advantages to this method instead of simply risking the same amount and again this is independent of performance, which is the case when using a predetermined fixed batch size or a fixed amount of cash:
Forex strategies tend to produce payoffs or losses and not a uniform distribution of results. Using a share of capital to quantify the size of each trade, which means you will risk less when you lose and more when you are earning, which tends to maximize winning streaks and minimize bad streaks. You can never completely delete your account! Using a fixed batch size or cash amount could end your account, or at least cause a decline from which you can never recover.
Here are some of the essential elements to consider in determining the amount to be risked per operation:
– What would be the worst performance you could have and what would it look like? Could it deal psychologically with a reduction of 10%, 20%, or even worse? Should it go that far in negative territory?
– The frequency with which you negotiate will also be a factor, as this will have an impact on your maximum fall.
– What are your expected profit and loss percentages? Try your trading again. Let’s take an example, if you have a foreign exchange trading strategy where you plan to lose 80% of your trades, but earn 10 times the risk in the remaining 20%, your transaction risk should be lower than if you were planning to do 3 times your risk in 40% of your operations. And clearly, if you maintain an exit strategy that is flexible, immediately, just make a brief approximation of how it’s likely to turn out over time.
– Is it possible with the size of your account to negotiate as little as possible? Let’s take another example, if you have a $100 trading account, and what you want to risk is 1% for operation, you will have to risk a single penny per pip with a stop-loss of 100 pips. This could be impossible, depending on your broker. However, what you should do is capitalize up or otherwise change your business strategy instead of increasing your risk per transaction if that is the case.
– Is your trading account a savings product or a small amount of venture capital? If your total equity is $25,000 for example, and you have a $10,000 account, you could have less tolerance to falls by comparing it to a $1,000 account.
Always remember that your capital management strategy will act statistically with your earnings rate and the average size of your earnings to directly affect your gains or losses over time.
Stop Loss and Position Size
The stop loss should never be determined based on the minimum that can be allowed. Let’s look at an example… If you want to risk a maximum of $20 per operation, but the minimum size of the position with your broker is allowed to be $1 per pip, therefore this is a horrible reason to put a stop loss of 20 pips and a batch size of $1 per pip! What you could accomplish in this case is look for another broker or increase your trading account balance if you have enough venture capital to invest, or else find a Forex trading strategy that usually uses a stop loss of 20 pips, if you are comfortable with it.
However, it is legitimate to determine the stop loss by measuring average volatility, and, especially in trend trading, this in itself can be a very powerful money management strategy. For example, using a multiple of the average 20-day range to determine the cap, and then basing the size of the position on the percentage of account capital is a very common money management method within the trend strategies of Forex trading.
Even if you base your stop loss on technical levels, it may still be worth using a good measure of volatility to calculate the size of the position. For example, if the average range of 20 days is twice the range in a very long term, you can risk half of the reference risk per pip related to your account’s capital.
Risk, something that you are either afraid of or something that you love, whichever one is you, controlling it is vital if you want to become a successful trader. When you first started you probably created something along the lines of a risk management plan, this will tell you what you should be trading with […]
Risk, something that you are either afraid of or something that you love, whichever one is you, controlling it is vital if you want to become a successful trader. When you first started you probably created something along the lines of a risk management plan, this will tell you what you should be trading with […]
Risk, something that you are either afraid of or something that you love, whichever one is you, controlling it is vital if you want to become a successful trader. When you first started you probably created something along the lines of a risk management plan, this will tell you what you should be trading with each trade, what your stop losses should be and all sorts of other important information, its purpose is to protect your account from losses so that you are able to survive a number of losses before losing your account.
The thing is though, a lot of people make one, but make a small one, one with not a lot of information in it, or they simply decide to just ignore the rules that they have worked out. Whichever way they do it, they are avoiding the controlling of their risk, and eventually, this will lead to disaster and the possibility of a completely blown account. When the risk involved starts to rise, we often end up doing things that we would;t ordinarily do, such as closing out trades early, closing out for losses, or simply coding everything through a panic. We will promise to learn from these mistakes, but as soon as we get into a similar situation, we will normally do the exact same thing, not learning from the past, simply because we are not using proper risk management.
The issues start to arise when the risks that you are taking are larger than your risk tolerance levels allow, some of us love the risk others hate it. A lot of traders, especially newer ones will spend all of their time looking and working out when to enter a trade, but they often don’t put a lot of thought into when they will get out, this is where risk management needs to come into play. It is all about working out when you need to get out of your trades, both in winning and losing positions, but of course, being able to limit your losses when your trades are going the wrong way is vital and one of the most important aspects of your trading. So while it is important to know when to get into trades, you need to also work out when you will get out, prior to actually getting into it.
You need to work out where your risk tolerance lies and then adjust your risk management to suit it, the last thing that you want is to be a nervous wreck every time that you put on a trade. It is the same the other way around too though, you want to have some form of caring with each trade, if you do not care about the risk then you will be making silly trades, making trades you probably shouldn’t a risking far too much with each trade, simply because you do not care about the consequences. So it is a bit of a balancing act, but we are now going to look at some of the things that you can do to help manage your risk.
Trade Sizes
Trading with a large trade size can mean that you can make a lot more profit on each trade, on the flip side, you can also make much larger losses, the volatility will go through the roof the larger the trade size you use. So while it can be exciting, especially for those with good risk tolerance, it can be a nightmare for those without, and potentially a disaster for your account. You need to bring your trade sizes more in line with your account balance. Many people decide to risk between 1% or 2% per trade, this gives you a lot of leeway for losses, a loss will only cause you to lose up to 2% of your account and so when you do lose, it is limited and sustainable. If you aren’t able to work out what your trade size should be then it would be best to start small and then work your way up until you reach the appropriate level.
Holding Trades
For many there is only short-term trading, something only becomes long-term trading when one of the short-term trades stays in the red, people just don’t want to close out trades when they are in the red and this is an extremely risky move to make. The longer that you hold onto a trade, especially when it is in the red, the more volatility it is exposed to, this volatility is what is dangerous to your trade and can continue to take it in the wrong direction. You need to be able to limit how long to hold onto trades. If your average trade length is 10 hours, then why would you suddenly hold on to one for 7 days? You shouldn’t and so you need to set a limit to your trade times, try to keep them relatively the same, there is no harm going a little over now and then, but do not suddenly start holding on to them for 10 times your normal length.
Stop Losses
Stop losses! Use them! That is about all we need to say. Stop losses can save an account, they are that important, if you aren’t quite sure what they are yet, they are a limit that you put on each trade, a certain level, when the markets reach that level the trade will automatically close. If you are trading a strategy that requires longer-term trades then you won’t want to be in the position where you need to sit in front of the computer for the next 12+ hours, so instead, in order to protect your account you will put on a stop loss to ensure that you only risk the amount that you are willing to risk. This is a fantastic way of protecting your account and something that you should certainly use.
To go along with the stop losses and take profits, these work in exactly the same way but instead of closing out losing trades, they will close out trades that are positive. This is a way of ensuring that you take the expected or wanted profits, often when a trade goes positive it will eventually return back to a negative figure, this is a way of ensuring that you take the profits even when you are not at your trading terminal.
Risk to Reward Ratio
Your risk to reward ratio details how much you should be winning and how much you should be losing on each trade, this also dictates where you put your stop loss and take profit levels that we mentioned up above. It is important that you understand how this works, it can make or break a strategy as having a bad risk to reward ratio can make your strategy unprofitable. If you are trading at a 1:1 ratio then it can be quite hard to be profitable, you will need more winning trades than losing to be profitable, something far easier said than done. Instead aim to have a reward ratio of at least 2:1, some go as high as 10:1, which would mean that you would only need one trade to be profitable out of every 10 in order to be in profit. Work out what works well for your own risk tolerance as well as your strategy.
Those are a few of the things that you can do to help control your risk when trading, there are of course far more things that you can do, these are just some of the basics. What is important for you to take away is that you need to manage your risk, without doing so you will end up losing a lot more than you expected, so get on top of it and you will be in a good position for being a profitable trader.
Novice traders are often surprised to learn that when it comes to being profitable in the long run, controlling risk is as fundamental as making good trades. Position size, Risk, and money management are no less fundamental than entry strategies and trade exit strategies and must be considered scientifically and completely. If you succeed, then […]
Novice traders are often surprised to learn that when it comes to being profitable in the long run, controlling risk is as fundamental as making good trades. Position size, Risk, and money management are no less fundamental than entry strategies and trade exit strategies and must be considered scientifically and completely. If you succeed, then […]
Novice traders are often surprised to learn that when it comes to being profitable in the long run, controlling risk is as fundamental as making good trades. Position size, Risk, and money management are no less fundamental than entry strategies and trade exit strategies and must be considered scientifically and completely. If you succeed, then as long as you can maintain a trading margin (which is not so complicated, there are several well-documented trading margins), you will have a solid model to make a lot of money. You don’t need to choose spectacular trading operations to make large amounts of money, you just have to keep doing the right thing constantly, and let the magic of managing money be composed of snowballs growing from your bottom line. To get it right, start by asking the right questions.
How much money should I put into my trading account?
You have hired an account with a broker, and are ready to start trading. Just deposit some cash. How much should you put? You should be honest with yourself, and consider how much money you have that is available for wealth creation. It should not include assets such as a house or car in that calculation, or pensions: the correct question would be, how much free cash can you get in your hands, without debt, and use it to try to increase your profits? When you have this figure, you should be thinking of placing between 10% – 15% of it in something risky, like Forex Trading. You may think this is a small amount, but it really isn’t – please read on and I’ll explain why.
The risk or “Barbell”
Imagine that there are two traders, trader A, and trader B. Both have USD 10,000 in liquidity, which is all the cash that each of them can get to invest in creating wealth. After opening brokerage accounts, Trader A invests its $10,000, while Trader B invests 10% of the same amount, $1,000, while the remaining $9,000 is invested in United States-guaranteed Treasury bonds that pay a low interest rate.
Consider your respective positions. Trader A will be at a psychological disadvantage, as the account represents all the money he has, so the losses will probably be painful for him. You also need to worry about the broker, lest he files for bankruptcy and be unable to repay any of his funds back unless the broker is backed by a government deposit insurance program and obviously as we always recommend, will have to be a regulated broker.
Even then, its capital could be held back for over a year before he could get any insurance. Because of his fears, even though he knows that the best risk per trade for his trading strategy is 2% of his share account per trade (explain the issue of how to calculate later), he decides to risk less than this. He decides to risk only one-tenth of the total amount, so he will risk 0.2% of his capital on each operation.
Trader B feels much more relaxed than Trader A. She has $9,000 parked with lots of security in US Treasury bonds and has $1,000 in her new brokerage account. Even if he loses the entire account, in the end, he would have lost only 10% of his investment wealth, which would not be fatal and could be recovered. It is the collections over 20% that are challenging to recover. Trader B is psychologically more prepared for risk than Trader A. She has calculated that the ideal risk by trading for your trading strategy is 2% of the capital of your account per trade, just like Trader A, but unlike Trader A, She’s gonna risk that amount in full.
Both Trader A and Trader B will start by risking the same amount per cash transaction, $20.
Trader B, with the account under $1,000 and the $9,000 in US Treasury bonds, ends up with a total profit of $811, of which $117 is interest received at the end of the year on US Treasury bonds. Trader A, with the largest account of $10,000, ends up with a total profit of $627. Although they initially start with the same risk, if they diversify risk capital between a very conservative fixed income and a more risky investment, it pays Trader B a significant profit and gives her the peace of mind to aggressively play the risk as it should be.
How much money should I risk?
This is not a difficult question to answer if you know the average or average benefit you can objectively expect to make in each transaction and are only interested in maximizing your total long-term benefit: use a fixed fractional money management system based on the Kelly Criteria (a formula to will be explained in more detail in the next paragraph). A fixed fractional system has the risk that the same percentage amount of the value of your account in each trade, as shown in the above example of Traders A and B using 0.2% and 2%.
Fixed fractional money management has two major advantages over other strategies. First, you risk less during losing streaks, and more during winning streaks, when the effect of composition really helps to build the account. Second, it is virtually impossible to lose your entire account, as you are always risking X% of the remaining, and never everything.
The last question is, how is the size of the risk fraction calculated? The Kelly Criterion is a formula that was developed to show the maximum amount that could be risked in a trade and would maximize the long-term benefit. If you know your approximate odds for each operation, you can easily calculate the optimal amount using a Kelly Cries calculator. In the best Forex strategies, the amount advised by Kelly’s formula is typically between 2% and 4% of the capital account.
A warning: the use of the total amount suggested by Kelly is bound to result in large reductions after losing the veins. Some veteran traders, such as the prominent Ed Thorp, have suggested using half the amount suggested by a Kelly Criteria calculator. This generates 75% of the long-term benefit, but only 50% of the reduction, produced by the full Kelly criteria.
Monetary management: Part of “Holy Grail”
It’s no exaggeration to say that the main reason why traders still fail, even when they’re following the trend and getting their inputs and exits mostly right, is because they are not following the money and risk management techniques set out here in this article, as part of a global trading plan. Forget the trade result you take today and worry about the overall results of the next 200, 500, or 1000 trades you will take in your place. If you are able to make a profit of only 20% of your average risk by trade, which is feasible using a trend-tracking volatility-breaking strategy, it is totally possible to turn a few hundred into a million within a few years.
Working out how to set up your risk management plan is quite a big question. In fact, there are a hell of a lot of things to think about and different aspects to implement. Due to that fact it will be impossible for us to tell you about all of them, as some are individual […]
Working out how to set up your risk management plan is quite a big question. In fact, there are a hell of a lot of things to think about and different aspects to implement. Due to that fact it will be impossible for us to tell you about all of them, as some are individual […]
Working out how to set up your risk management plan is quite a big question. In fact, there are a hell of a lot of things to think about and different aspects to implement. Due to that fact it will be impossible for us to tell you about all of them, as some are individual to each trader. We can, however, go over some of the different things to think about when it comes to your risk management plan. It is up to you how much you do, but remember, one of the keys to being a successful trader is that you have a proper risk management plan in place, to protect your trades, your accounts, and your overall capital. So let’s take a look at some of the things that we should be thinking about when we are setting up our risk management plans.
The first thing that you are going to need to do is simply gain an understanding of what trading is and how it works. There is no bigger risk than to try a trade without actually understanding how it works. So while this won’t exactly go into your risk management plan, you can’t really start to create your plan without actually understanding what it is that you are creating. Trading and forex is a never-ending learning hobby, you will be constantly learning and will never know everything, this also means that you will be constantly learning new ways to reduce risks, so be sure that you are aware of this and always willing to learn more about forex and trading.
You then need to understand how leverage works, it can be a gift but also a curse. Leverage basically allows you to trade with more capital than you have in the account, sounds fantastic, but with this increased trading power also comes increased risks. With leverage of 100:1, you can use a $1,000 account to trade the equivalent of $100,000. This enables you to increase the trade sizes that you can put on, increasing your profit potential, but these larger trade sizes also mean that you have the potential to lose far more with each trade. Ensure that you know the risk of the leverage that you are using, do not go too high, as this can cause issues depending on your strategy, we would suggest not going over 500:1 for any strategy.
You then need to get your trading plan sorted, you need to decide on a strategy that you wish to use, there are hundreds of them out there, try and find one that suits you, something that goes along with your personality. If you hate waiting then go for a shorter time frame strategy like scalping, if you do not have much time to sit at the computer then go for a longer-term one like position or swing trading. This trading plan should also act as a sort of decision-making tool for you when you wish to place a trade. To set out some rules that you need to follow, they will help you work out the right entry and exit price for you to place your trades with. When you do this, you should also keep your trading journal to detail the trades that you make to ensure that they are all in line with your strategy.
You can also set a risk to reward ratio, this is basically detailing how much you are going to risk in order to make a certain amount of money. Many people go for at least 1:3, this means that for every $1 that you risk you will want to try and make $3. For a $100 trade would potentially lose $100 but will have a potential profit of $300. This sort of strategy will mean that you can be wrong more times than right and still be in profit. It is important to set this out correctly as it can make it far easier to work out where to place stop loss and take profit levels.
We briefly mentioned them but you need to learn to use a stop loss and take profits with every single trade that you take. If you place a trade without a stop loss then you are potentially risking the entire account balance on a single trade with a risk to reward ratio of infinite losses. These are paramount to protecting your account from trades gone bad, we don’t need to explain the importance, but any sort of successful trader will be using stop losses.
Learn to control your emotions, something that you have probably heard before, but it is important when it comes to being consistent and minimising losses. Emotions such as greed and overconfidence can really hurt your trading efforts, causing you to place trades that you probably shouldn’t or placing trades that are larger than your account or risk management can take. Try to avoid using these emotions to trade with, if you feel them coming on then work out some coping mechanisms, even if that is as simple as simply walking off and going outside for a bit. If you are feeling emotional or have clouded vision, then try to avoid trading at those times.
Keep an eye out for the news, the news can cause huge movements and spikes in the market, so knowing what news events are coming up and how they may affect the markets can give you an advantage and the opportunity to get out of the markets before they happen. It is always advised that you do not trade during news events or disasters, so knowing when they are coming up (news events that are) will give you the opportunity to get out before they cause the markets to move. It is impossible to see them all coming but knowing some of them will at least be helpful.
You should also get to know the limits of your account, if you have a balance of $1,000 you will have very different limits to someone with an account of $10,000. There will be different possibilities when it comes to trade sizes and the risk management that you can do, as well as different profit potentials. This isn’t a large point, but just be aware of your limits so you do not over-trade on your account.
The final thing that you should be doing is using a demo account, every change that you make to your strategy or your plans you should demo the changes first, this ensures that you are not risking your own money on an untested change. Try the change for a period of time before you do anything else on a live account. Demo demo demo, that is the moral of the story and if you don’t there is a very good chance that your account will eventually blow.
So those are some of the things that you can do and that you should be thinking about when it comes to creating your risk management plan and policy, there are of course other things to think about, but doing at least these things will give you a good starting point for it.
Quantifying risk when trading has become one of the biggest concerns (or at least should be) as traders. The volatility, volatility of exchange rates, interest rates, etc. have made the study of risk increasingly important. In this article, we will show you how to use VaR and CVaR to assess your risk levels with a […]
Quantifying risk when trading has become one of the biggest concerns (or at least should be) as traders. The volatility, volatility of exchange rates, interest rates, etc. have made the study of risk increasingly important. In this article, we will show you how to use VaR and CVaR to assess your risk levels with a […]
Quantifying risk when trading has become one of the biggest concerns (or at least should be) as traders. The volatility, volatility of exchange rates, interest rates, etc. have made the study of risk increasingly important. In this article, we will show you how to use VaR and CVaR to assess your risk levels with a high degree of accuracy.
Another important issue that has enabled us to improve the study of risk, among those associated with our operation, has been the exponential increase in the computing capacity we currently have. Currently, as a trader, you have at your fingertips, from your laptop or smartphone, databases with all the necessary price history information for almost any financial asset you want to trade.
When developing a trading strategy or system we should not only focus on clearly establishing the rules for entering and leaving the market, but we should also objectively analyze the results of our trading system.
To achieve an objective analysis, a wide variety of metrics have been developed that evaluate different aspects of our operation. In this article, we will teach you to use two metrics based on risk control: Value at Risk (VaR) and Value at Risk (CVaR). These risk assessment measures have different methodologies and techniques for their estimation.
Before entering directly into the study of them, it is important that we have some basic concepts, such as what is financial risk and what are the types of risk.
What is Financial Risk?
In the investment context, the risk is the probability of loss due to events that can produce significant changes, and that affect a financial asset. Therefore, it is important that when we decide to make an investment, we identify and quantify the various types of risks to which we will be exposed when making the investment.
All investments carry an associated risk, but when we manage risk well we can find great opportunities for significant returns. Surely you’ve heard of “risk aversion”. Risk aversion refers to an investor’s attitude or preference to avoid financial uncertainty or risk. This leads him to invest in safer financial assets, even if they are less profitable.
Types of Financial Risk
Although there are many risks in the investment world, financial risk can be classified into three main categories:
Market risk: this type of risk refers to loss risk arising from price movements of a financial asset or the market in general.
Credit risk: the inability of a party to respond with the obligations of an issue or with the strict terms of the issue (amount, interest, etc.), thus producing a loss for the counterparty.
Operational risk: This type of risk is defined as loss risk due to insufficiencies or failures of processes, personnel, and internal systems.
Now that we have clarified these basic concepts, let’s see what VaR and CVaR are all about.
Value at Risk (VaR)
Value at Risk is a statistical metric used to assess the risk of a given asset position or portfolio. VaR is the maximum expected loss, under normal market conditions, in a portfolio or trading system, with a probability (usually 1% or 5%) and a known time interval (usually a day, a week, or a month).
The VaR is measured through three variables: amount of loss, probability of such loss occurring (confidence level), and the time interval of occurrence. It is important to note that VaR does not seek to describe or predict worst-case scenarios, but rather to provide an estimate of the range of potential gains or losses.
Ways to calculate VaR
There are three main methodologies or approaches to calculating VaR:
Parametric method: when we calculate the VaR using the parametric method, we assume that profitability has a normal distribution and the portfolio is a linear function of the factors. For the parametric calculation, it is necessary to have the main statistical parameters (mean, variances, covariance, standard deviations, etc.) of the financial asset or portfolio that we are analyzing.
The formula for calculating VaR using the parametric method is as follows:
VaR = F * S * σ *
Where:
F = Value determined by the confidence level (also known as Z value).
S = Amount of portfolio or financial asset at current market prices.
σ = Standard deviation of asset returns.
t = Time horizon in which the VaR is to be calculated.
Historical simulation method: uses a large amount of historical data to estimate VaR, but makes no assumptions about probability distribution. One of the greatest limitations of this approach is that it assumes that all possible future changes in asset prices have already been observed in the past. The value of the VaR will depend on the source of the data and the size of the series (time frame of the data).
Monte-Carlo VaR Model: The calculation of VaR using the Monte-Carlo method is based on generating hundreds or thousands of hypothetical scenarios based on the series of initial data entered by the user. The accuracy of the VaR will depend on the number of scenarios we simulate, the higher the accuracy. The validation of the model is fundamental, for this it is recommended to carry out backtest tests to verify that the estimated VaR is verified with the historical series.
A practical example of how to calculate VaR:
I will do this by setting an example to calculate in VaR in actions to simplify calculations of pips and lots:
Suppose we have a portfolio composed of 1000 shares of the company ABC and the current price per share is 12$, the daily standard deviation is 1.8%. How can we calculate VaR with a 95% confidence level for a day?
The formula for calculating VaR is:
VaR = F * S * σ *
To calculate the value of F, we use the “DISTR.NORM.ESTAND.INV (probability)” function of the Excel spreadsheet.
F = DISTR.NORM.ESTAND.INV (confidence level) = DISTR.NORM.ESTAND.INV (95%) = 1.6448
S is the total amount invested in the portfolio and is calculated as follows:
As we want to calculate the VaR for a day, then t = 1.
We replace the values in the VaR formula and have:
VaR = 1.6448 * $12
This VaR value tells us that the investor has a 95% confidence level that their investment will not lose more than $355.28 in a day.
What if we increase the level of confidence to 99%? In this case, the VaR would be:
VaR = 2.3263 * $12,000* 1.8% * = $502.48
This VaR value tells us that the investor has a 99% confidence level that their investment will not lose more than $502.48 in a day, or what’s the same, the probability of suffering losses greater than $502.48 during a day, is only 1%.
Advantages of VaR
Some very significant benefits of using VaR for the quantification of financial risk without the following:
-The VaR is a highly recognized standardized risk measure among traders and regulators. It has become a standard in the financial industry.
-It adds all the risk of an investment into a single number, making it very easy to assess the risk.
-It is probabilistic and provides us with useful information about the probabilities associated (confidence level) with a specific amount of losses (maximum loss).
-It can be applied to any kind of management and also allows you to compare risks of different portfolios regardless of their composition, whether fixed income or equities.
-The VaR allows you to add risks from different positions taking into account the way in which they correlate with each other, the different risk factors.
-It takes into account multiple risk factors and can focus not only on individual components but also on the overall risk of the entire portfolio.
-Because it is expressed in the loss of money (base currency; dollar, euro, etc.) it is simpler and easier to understand than other indicators that measure financial risk.
Disadvantages of VaR
But VaR, like any other metric used for trading systems, has its disadvantages:
-Generally depends on the quality of the historical data used for its calculation. If the data included is not accurate or correct, the VaR will be of little use.
-Although the interpretation of the values of VaR is very simple, some methods to calculate it can be very complicated and expensive, for example, the Monte Carlo method.
-It can generate a false sense of security in traders. Any measure of probability should not be construed as a certainty of what will happen. Remember that as traders, we only handle uncertainty scenarios never certainty scenarios, we do not make predictions.
-It does not calculate the amount of the expected loss remaining in the probability percentage.
Conditional Value at Risk (CVaR)
The conditional risk value (CVaR) is the mean of observations in the distribution queue, that is, below the VaR at the specified confidence level. Therefore CVaR is also known as expected deficit (Expected Shortfall, ES), AVaR (Average Value at Risk), or ETL (Expected Tail Loss).
The CVaR is the result of taking the weighted average of observations for which the loss exceeds the VaR. Therefore, the CVaR exceeds the VaR estimate, as it can quantify riskier situations, thus complementing the information provided by the VaR.
CVaR is used for the optimization of portfolios because it quantifies losses that exceed VaR and acts as an upper bound for VaR.
Properties of CVaR
CVaR stands out for having better mathematical properties than VaR, being a consistent measure of risk because it meets the criteria of:
Mono tonicity: If one financial asset performs better than another in any time horizon its risk is also lower.
Positive homogeneity: Refers to the proportionality between position size and risk.
Invariance to Transfers: By adding capital to a position your risk decreases in direct proportion to the capital added.
Sub-additivity: Asset diversification decreases the risk of a global position.
In summary, the most important message that CVaR is a consistent measure of risk is the following: the risk of two or more assets that make up a portfolio is less than the sum of the individual risks.
Interpretation of the conditional value at risk (CVaR)
The choice between CVaR and VaR is not always straightforward, since the conditional value at risk (CVaR) is derived from the value at risk (VaR). Generally, the use of CVaR rather than just VaR tends to lead to a more conservative approach in terms of risk exposure.
While VaR represents a maximum loss associated with a defined probability and time horizon, CVaR is the expected loss if you cross that worst-case threshold (maximum loss). In other words, CVaR quantifies the expected losses that occur beyond the VaR breakpoint.
As a rule, if an investment has maintained stability over time, the risk value could be sufficient for risk management in a portfolio that keeps the investment active. However, we must bear in mind that the less stable the investment, the greater the chances VaR will never display a complete image of the risk. In practice, trading systems rarely exceed VaR by a significant amount. However, more volatile systems may exhibit a CVaR many times larger than the VaR.
Finally, if we create a trading system and calculate your VaR, this VaR tells us what the maximum loss is with a certain level of confidence and time horizon. But if the loss is greater than VaR, how much should we expect to lose? This is where the conditional-at-risk value (CVaR) comes into play, which will tell us what the conditional average expected loss is if more is lost than the VaR.
Drawdown is an extremely important benchmark of one’s development as a forex trader which is why it is the topic of today’s article. Shortly defined as an investment or fund decline, drawdown is in fact a much broader term that requires additional attention. While definitions range from less to more detailed, they generally confirm one […]
Drawdown is an extremely important benchmark of one’s development as a forex trader which is why it is the topic of today’s article. Shortly defined as an investment or fund decline, drawdown is in fact a much broader term that requires additional attention. While definitions range from less to more detailed, they generally confirm one […]
Drawdown is an extremely important benchmark of one’s development as a forex trader which is why it is the topic of today’s article. Shortly defined as an investment or fund decline, drawdown is in fact a much broader term that requires additional attention. While definitions range from less to more detailed, they generally confirm one thing – that drawdown is an important element for performing account measurements.
The challenges concerning this subject do not truly stem from the inability to understand what the term essentially represents, but they do have a lot to do with its scope. The existing variations anyone can find on the internet may not do enough justice to the topic of drawdown and, thus, forex traders as well who want to do things the right way. Due to these nuances in interpreting drawdown, we are exploring how to properly measure it and set some healthy boundaries in order to fight vagueness, prevent future problems, and boost traders’ careers right from the start.
Drawdown Loss
Some definitions state that drawdown is the loss expressed in percentages that one has taken over a specific period of time. Therefore, should an individual’s account drop from $50,000 to $48,000, it could be interpreted as a 4% yearly drawdown. Nonetheless, what would happen if a trader only had experienced wins in the beginning, without ever going below the initial $50,000? This question is both interesting and necessary because the odds of backtesting and forward testing processes being predominantly positive experiences are not that low at all. This further makes the initial definition void of depth, as it is likely to mislead those curious to improve their trading and accurately measure their performance.
If any trader is offered an opportunity to trade on behalf of another individual, receiving an exorbitant sum of $2 million as a part of the deal, what is the right drawdown percentage that he or she should offer on their end? Interestingly enough, if the trader suggests a 0% drawdown, the investor will probably walk away, feeling that the other party is trying to pull off a scam. The reason for this likely scenario lies in the differences in understanding how to calculate drawdown. Therefore, we will not see drawdown as a percentage of an account’s total number of losses but as the number of drops a trader experiences at any point in time within a year.
This piece of information is something any investor would like to know in advance so as to properly assess the likelihood of growth and the overall progression. Hence, if you state that your value equals zero, you would come off as fraudulent and insincere, if not even silly, because the big players understand the natural oscillations of the market, accepting the decline as part of the game.
Maximum Peak-To-Through
Most investors will always be interested in discovering what maximum peak-to-trough decline is, so the right question to ask oneself would be as follows: What is the highest percentage you have ever lost before you started to win again? Your account may go from $50,000 down to $49,000 only to go back up to $53,000 and drop again to $51,000, which then points to a drawdown of $3000 or 5.5% as your maximum account declines. Aside from this piece of information, those in demand of your trading services may also be inquiring about how much time it took you to recover the drawdown, so you may want to start recording this data as well.
In addition to proper measurement and interpretation, traders may be curious as to know what acceptable or appropriate drawdown may be. For example, if a person spirals down from $50,000 to $40,000, we are talking about a staggering 20% drawdown, which would require skills better than those Warren Buffet can offer. In this case, one would then need to achieve a 25% return just to reach break-even, which is not only practically impossible but also points to a bigger problem in the person’s trading system.
If someone manages to experience a 20% drop, this should immediately signal that their risk management is out of control. This further points to a very real possibility of a trader wasting away all of the client’s money, which is opposite from their requirement of receiving a consistent return each year. If you are currently experiencing a similar problem, it is time you stopped trading and started to reevaluate in order to make some important conclusions. On the other end of the spectrum, a drawdown that we can find to be acceptable is that which equals up to 10% at any point in time, understanding that if the limit ever goes beyond this value, you will need to look into what caused the major losses in the first place.
Minimizing Future Losses
The process of striving to make things right is crucial for trading in every way possible, and if a trader is capable to stop and isolate each case where he/she could have done better, the prospect of minimizing future losses is immediately boosted. You may discover here how your volume indicator has been misleading you or how your exit indicator is not telling you the best possible time to exit, so any attempt to improve will inevitably lead to debunking false beliefs that caused poor judgment and the drop in the account. An additional piece of advice that each trader should take into considerations is related to the time and testing ratio – we need to go back and forth with testing and not be impatient or superficial because the amount of time and focus we assign to our testing will be proportionate to the success we get afterward.
You will also find that some forex prop traders who boast about their experience in trading currencies online came forward with their less-than-glorious experiences with some other markets, where their drawdown almost reached 10%. These testimonials are exceptionally valuable because we get to learn that developing a new system, or improving an existing one, takes a lot of adjustment and patience as well. While we can all make mistakes in trading, it is absolutely necessary to understand where these problems stem from, despite how grave or minute they seem to be.
Last but not least, it is of vital importance that all traders take the standpoint of trying to always minimize the damage because no matter how great your wins can get, it is your losses that hold the power to destroy your account and possible business deals. Therefore, whether you are a beginner or an experienced forex trader, always aim for a maximum drawdown of 10% or less at any given point. While people at the beginning of their trading careers may be more aware of these numbers, this topic is in fact relevant for all traders, regardless of the width of their portfolios or their capacity and skill range. While measuring may pose a challenge for some, understand that the willingness and ability to correct what is faulty is your one way to experience the lucrative side of this business.
One of the phrases that you have probably heard the most since starting out with trading is risk management, but what does that actually mean, and do you do it? To put it into simple terms, risk management is about reducing the potential risks to your account and protecting your account from dangers and large […]
One of the phrases that you have probably heard the most since starting out with trading is risk management, but what does that actually mean, and do you do it? To put it into simple terms, risk management is about reducing the potential risks to your account and protecting your account from dangers and large […]
One of the phrases that you have probably heard the most since starting out with trading is risk management, but what does that actually mean, and do you do it? To put it into simple terms, risk management is about reducing the potential risks to your account and protecting your account from dangers and large losses. This sounds simple enough and quite an obvious thing, but you will be surprised at how many people throw it out of the window on their quest for bigger profits.
Risk a Set Amount
One way that people reduce the amount of risk that they have on each trade is to limit the potential losses of each trade, they do this by setting stop losses on each trade that they make. A number that we see a lot of 2%, people seem willing to risk 2% of their overall account on each trade that they make, this would mean that the account would be able to survive up to 50 losing trades on a row without any wins, something that is very unlikely if a proper strategy is being implemented properly. It is important that if you set yourself a maximum loss per trade that you stick with it or if you deviate, only to deviate lower, going higher will put your strategy out of sync and could potentially damage your account equity quite a bit.
Adding to Trades
Something that a lot of people do is to add positions to an already winning trade. This basically means that when a trade is going the right way, you add in an additional trade to make the overall trade size a little larger. While this may work for some, a lot of strategies have not taken this into account so you should be careful when considering it. When you do add an additional trade, you need to bear in mind that your overall risk is increasing, do you stick to a maximum 2% loss on that trade, or do you increase or reduce it? Unless your strategy has already taken these additional trades into consideration we would advise against adding to existing trades as it could mean you can lose more than you had anticipated on that trade.
The Right Trade Size
How are you working out your trade sizes? Is it based on your account size or your strategy? Whichever method of working it out that you use, you need to stick with it. More often than not, your trade size would be based on the percentage of the account you are willing to risk with each trade. There are trade size calculators available all over the web that can help you to work out the exact size of each trade that you should be using based on the pair being traded and the percentage of the account that you are willing to risk. It is important to stick to regular and similar trade sizes for each trade, as suddenly adding larger trades could completely throw your risk management out the window and could be endangering more of your account equity than you would normally be willing to risk.
Taking Profits
Something that people often don’t associate with risks is taking profits, knowing when to come out of trades is just as important to protect your account as restricting your losses. To put this into perspective, a trade has gone into profits, you feel that it may reverse but it is in profit so you will let it run to see if it goes any higher, it suddenly reverses and you are now back to a break-even level or even in the negatives. In order to protect your account, it should have been taken in profit, many people use take profit levels, others have a certain percentage where they move the stop loss levels into profits to guarantee the profits. The importance of doing this is that you will have wins and losses, but it is important that you are able to take those wins as they are there to help cancel out the losses, having them also become losses will put your account in danger.
So those are a few things to think about when looking at the risks you have to your account, there are of course many other things to think about, but those are some of the bigger ones. Think about whether you do these things, if you do, think about how you can improve on your own risk management for the future to help protect your account.
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.
Risk, something that people either love or hate, it is something that is there in everything that we do, every single day. When it comes to trading there are of course a lot of risks, the majority of the risks that we put ourselves under are in relation to the money that we have put […]
Risk, something that people either love or hate, it is something that is there in everything that we do, every single day. When it comes to trading there are of course a lot of risks, the majority of the risks that we put ourselves under are in relation to the money that we have put […]
Risk, something that people either love or hate, it is something that is there in everything that we do, every single day. When it comes to trading there are of course a lot of risks, the majority of the risks that we put ourselves under are in relation to the money that we have put into our accounts, there are, however, a number of different risks including those to our health and more importantly mental health. There are many different things that you can do when it comes to trading to help mitigate some of the risks, and when you have negated some of the risks you will also open the doors to better profits, so we are now going to be looking at some of the things that you can do to help reduce the risks that you are taking for a hopefully more safe and consistent trading experience.
One of the things that are being pushed out a lot in advertising and by various social media influencers is the leverage that you are able to use. To put things simply, the higher the leverage that you are using, the higher the risk that you are putting onto your account. Think about it, if you have $100, and a leverage of 100:1, this means that you will be trading with $10,000, you will be able to place larger trade sizes up to example 0.10 lots. But if you had leverage of 1000:1 you would be trading with a balance the equivalent of $100,000, allowing you to put on a trader of 1 lot. If the markets move a single pip in the wrong direction. With the 1000:1 account, you will lose $10, with the other $1. So it will take a much smaller movement for the account to blow on the 1000:1 account than it would with the 100:1 account, so keeping the leverage at a sensible level will limit your trade sizes but at the same time help to protect your account from bigger losses.
Stop losses, use them, their functionality is in their name, they help to stop further losses, they are one of the primary tools that you can use to help prevent losses and to protect your account. Stop losses are incredibly easy to implement when placing a trade. You can input the stop loss at the same time, the way it works is simple: you set a price in the market, if the markets fall down to that level, then your trade will be automatically closed. It is a fantastic way to protect your account, especially if you are not able to sit at the computer, it will allow you to walk away knowing that your account is still safe, even with a loss. Your trading strategy should have a risk to reward ratio built into it, this is the loss site of that ratio and ensures that your trades remain within your strategy, it also helps to take awesome of the psychological stress away from the trades, as you have already decided what the maximum loss is and so do not need to stress when deciding whether or not you need to close the trade or not.
Volatile conditions can be amazing for your profits, but also for your losses. Trading during times where there is a lot of volatility can make things a little more risky to your account, this is mainly due to the fact that the markets and the prices will be jumping up and down quite a bit more as well as there being higher spreads from the brokers. Trading during these moments can help you to produce some incredible profits, but there is also the risk, putting on stop losses during these times would be vital, but when there are huge amounts of volatility, the markets could actually pass through those levels for greater losses, so it is often a good idea to simply avoid trading during these conditions in order to remain safe.
Try to limit the amount that you are trading with each trade, if you are only risking 2% of your account with each trade, then you will be able to survive quite a few losses in a row without putting your account in danger. This can be limited through the use of stop losses that we mentioned above as well as limiting the trade size that you are using. Being able to limit the losses with each trade is one of the fundamental parts of a risk management plan. Of course, you will still need to put the proper analysis in motion in order to put on your trades, just because the account is protected from larger losses does not mean that you can simply put on any trade that you want, this will ultimately lead to losses.
Another option that you can use is to use a higher time frame of chart. Doing so will enable you to take slightly longer-term trades and to better view what trends are taking place. The higher p the time frame is on the charts, the longer term that you are looking to trade for, this also means that you will be putting in smaller trades and holding them for longer. When you trade on a lower time frame, you will be looking for quicker profits, so the trade size will be larger to make it more worthwhile, but you will only hold the trade for a short period of time. So a way of limiting your trade size is to trade on the target timeframe, the profits can be just as big, they will just come a little later down the line.
Those are some of the things that you can do to help overcome some of the risks that come with trading, there are of course some other things that you can do too, you should always be looking to help improve your own risk management and to protect your account, how you do it is up to you, but take some of what is written here and you will be on a good path in order to protect your forex trading account.
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.
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.
When it comes to forex trading, it’s a good idea to take advice from seasoned professionals so that we can avoid learning hard lessons for ourselves. One of the biggest lessons that these traders can teach us revolves around risk-management, which has to do with how much we risk on any single trade. For beginners, […]
When it comes to forex trading, it’s a good idea to take advice from seasoned professionals so that we can avoid learning hard lessons for ourselves. One of the biggest lessons that these traders can teach us revolves around risk-management, which has to do with how much we risk on any single trade. For beginners, […]
When it comes to forex trading, it’s a good idea to take advice from seasoned professionals so that we can avoid learning hard lessons for ourselves. One of the biggest lessons that these traders can teach us revolves around risk-management, which has to do with how much we risk on any single trade. For beginners, it might seem like risking more can pay off in the long run, because one large win could increase your investment significantly. Unfortunately, this way of thinking has lead to the end of many trader’s careers before they really even got started. If you risk 15% on one trade, 20% on another, and so on, you’re likely to blow through your account quickly. Its true that you might get lucky with a couple of trades, but it only takes one loss to wipe out all those winnings.
The well-known trader Bill Lipschutz is a great example of how improper risk-management techniques can be devastating. This trader inherited $12,000 and turned it into $250,000 while in college. While this sounds like an inspiring story, the future millionaire blew his entire portfolio with one bad trade because he did not practice proper risk-management. Imagine building up that much only to lose it all on a single trade! Know that the story went on to have a positive ending despite this setback, as Bill did not give up and went on to open his own investment firm while being regarded as one of the top traders in the world.
Still, we can always learn a lesson from other’s mistakes so that we don’t have to experience the same heartache. The trader in our example would have only lost a small portion of his portfolio if he had not risked as much. One of the most effective ways to limit your losses is to limit the amount you risk on any one trade. So, how much should you risk? Is the answer 2%, 5%, or higher?
Actually, experts recommend risking no more than 1% on any single trade. This may not seem like much, but it makes sense. For example, if you risk 1% on a $100 trade and lose, then you’ve only lost $1. This obviously won’t be a career ending move and you’ll barely notice the difference. If you were to risk 20% on the same trade, you’d lose $20 out of your $100 investment, leaving you with only $80. You’re far more likely to notice the difference in our second example. Once you apply this same principal on a larger scale, the difference is even more significant. Consider Bill Lipschutz from our above example. If he had only risked 1% on his trade, then he would have lost $2,500 out of $250,000. This might still seem like a large loss, but the smaller risk makes a huge difference. A trader could still walk away from this bad trade with most of their portfolio intact.
If you take away anything from our article, you should know that managing risk is essential for successful trading results. It’s true that you might miss out on some opportunities, but you’ll have more profits in the end without suffering any career-ending blows. Just imagine how it would feel to lose everything in your account, whether its $100 or $100,000. We shouldn’t let the fear of losing cripple us, but we can take more control of what we can lose by only risking a small portion of our balance. Even if you don’t agree with out 1% recommendation, its always a good idea to keep your risk at a low percentage.
Some of the best advice that you can be given is to do with your risk management, risk management is often seen as the key to successful trading, it can make or break a trading strategy. One of the most well-known risk management plans is known as the 1% rule. It is quite simple in […]
Some of the best advice that you can be given is to do with your risk management, risk management is often seen as the key to successful trading, it can make or break a trading strategy. One of the most well-known risk management plans is known as the 1% rule. It is quite simple in […]
Some of the best advice that you can be given is to do with your risk management, risk management is often seen as the key to successful trading, it can make or break a trading strategy. One of the most well-known risk management plans is known as the 1% rule. It is quite simple in principle, you will simply risk just 1% of your account with each trade. So if you have a balance of $100, that 1% will be %1, if you have a balance of $1,000 then that 1% will be equal to $10. It could not be any simpler than that, of course, this 1% will be a different value for all traders as most will of course have different account balances, so it needs to be based on your own account and not simply copying someone else. We are going to be looking more into the 1% rule and giving a few ideas as to why so many traders follow it and even live by it.
So why is it the 1% rule? It is simple really, it is because your plan is to be able to trade today, tomorrow, the day after, and so on. Successful trading is all about being able to survive long enough to become profitable, if you are making large trades and taking large risks, then there is a good chance that this might not happen. The 1% rule simply reduces the amount of risk that you are using when you trade, which is paramount should you wish to be able to last as a trader and to survive a number of losses in a row.
The centre of any good trading strategy should be its risk management, I know we have said that multiple times already and we will continue to say it as it is paramount for your trading survival. You need to remember that the aim of forex is not to make a fortune overnight (although many come into it wanting this), the goal is to make a profit over an extended period of time. Trading is not a gamble and should not be treated like it, control your risks. When you make a number of different small trades, it has reduced the risks and the odds of you being successful will have gone up, simply because there are more opportunities to make a profit. Along with that, your account will last longer, and an account that lasts longer is able to make money for longer, it also gives you more opportunities to learn new things. Not to mention that if you lose a trade and it only losses 1% of the account, it will be far easier to make that 1% back than it will to make back the 30% another trader lost.
The 1% rule is a lot more relevant to those that are trading the shorter-term trading styles, things like day trading and scalping due to the fact that they place far more trades. You need to also bear in mind that each trade will have a slightly different amount of risks, yes it remains at 1% but you need to adjust for the previous results. A win would mean that you are trading a little extra, while a loss will mean that you are trading a little less. You should also consider broker fees, many brokers especially on accounts with low spreads will add a little commission on to each trade, if you can, try to take these figures out first, so you know what you will be left to trade with.
One thing to think about is the fact that not every trade needs to follow this rule, there may be times where the opportunity presents itself where it may be better to risk either more or less than the 1% that you usually do. It should also be noted that you should not be making more trades simply because you are risking less. We have seen people put on 3 or 4 identical trades, this is pointless and you may as well have just put on one large trade instead. One other way of implementing this rule is to simply put on a top-loss at 1% below the level that the markets were entered, if they lose the trade then they will have lost just 1%, this is called an equal risk method, as the take profit is normally set approximately 1% above the price that the market was entered.
We briefly mentioned it but you also need to be able to consider your returns or the profits that you are risking this 1% to get. Part of your analysis should be looking at the potential profits, if you have the chance to make a 0.8% gain, then you probably shouldn’t be risking 1% to get it, if you can make a potential 2% then the 1% risk could be worth it and justifiable. Your risk to reward ratio will be what you need it to be, but you should probably be aiming for something around the 1:2 ration, which is 1% risk for a 2% profit, anything less than that and it may not be worth it. Some people go even higher and won’t trade anything under 1:5, but really it is up to you and the style and strategy that you are using.
So you need to consider whether using the 1% rule is right for you because it certainly won’t be right for everyone. It takes a lot of willpower and determination to stick to it as you will be putting a lot of rules and limits on what you are able to do. Having said that, you do not need to follow it exactly every single time, you can have a few variations here and there should your analysis allow it. 1% can seem a little ringing and a little strict to many, if you are finding it hard to stick with the majority of the time then it may not be the right risk plan for you. If you are the sort of person that loves seeing big profit numbers then this may not be for you, there is enough room to make some decent money, but it will come in little bits rather than a big windfall.
Deciding whether the 1% rule is right for you is something that only you can decide. Even if you do not follow it, it is important that you take some of the principles away from it, things like a proper risk to reward ratio, that you are limiting your losses and that you maintain a certain level of discipline within your trading.
If you’ve recently started trading forex and you’ve found yourself losing money, you’re probably feeling discouraged and you might even feel like quitting. After all, articles and information online make trading sound easy, which likely led you to develop expectations. Losing your initial investment can be a huge disappointment and it often leads traders to […]
If you’ve recently started trading forex and you’ve found yourself losing money, you’re probably feeling discouraged and you might even feel like quitting. After all, articles and information online make trading sound easy, which likely led you to develop expectations. Losing your initial investment can be a huge disappointment and it often leads traders to […]
If you’ve recently started trading forex and you’ve found yourself losing money, you’re probably feeling discouraged and you might even feel like quitting. After all, articles and information online make trading sound easy, which likely led you to develop expectations. Losing your initial investment can be a huge disappointment and it often leads traders to give up entirely. But it isn’t too late if you’re in this spot – we can help.
The first thing you need to do is to figure out if you spent enough time educating yourself about forex trading before you jumped into it. While trading, did you have issues navigating on the trading platform and performing simple tasks like placing orders? Did you ever find yourself confused by the terminology? Do you feel that you have a good understanding of concepts like risk-management and different types of trading strategies? If not, then your biggest problem likely stems from the fact that you simply need to spend more time online reading articles, watching videos, and taking advantage of other free resources that will teach you everything you need to know. You should also practice on a demo account to gauge your progress. If you feel confident that you know everything you need to know, then you’re ready to move on to the next step.
Instead of freaking out over your past mistakes, you have to learn from them as a trader. Yes, losing money hurts, but it is part of trading. What really matters is that you make more money than you lose. If successful traders gave up after their first couple of losses, then nobody would make it as a trader. One of the best things you can try is keeping a trading journal to log every trade you make, along with the reasons why you made the trade and how much you made or lost. Then, you can start to analyze this data to look for patterns or identify issues that are affecting your trades. Maybe you’ve been forgetting you opened a trade, getting distracted around a certain time of day, suffering from trading anxiety – logging all of this data is the best way to figure out what’s going wrong.
A lot of traders suffer once they resume trading after taking a large loss. Even if the trader is confident in their strategy, they may be afraid of making trades because they don’t want to suffer another loss. Anxiety is a good example in this situation, as the trader might feel overly anxious, which leads to a problem known as analysis paralysis. Traders suffering from analysis paralysis make delayed decisions or fail to enter trades altogether because they are too anxious about the outcome. Anxiety and fear often affect traders that have recently taken a loss, but it’s important to overcome these emotions so that you can make level-headed trading decisions. The first step is to realize whether this is a problem that is affecting you, and then you can find multiple resources online to help you deal with it.
To summarize, there are a few main problems that can cause problems with your trading, especially if you’ve lost money in the beginning:
Not having a proper trading education
Fearing failure
Fixation on mistakes rather than learning from them
Feeling anxious, fearful, or overwhelmed once you resume trading
Failing to keep a trading journal to log your progress
Feeling less confident in yourself
Successful traders understand that losing money is just part of trading and don’t spend time fixating on their losses. It may seem difficult to move on, especially if you don’t have a lot of money to invest. If you’ve had difficulty with trading thus far, you shouldn’t give up yet. Try to figure out which of the above problems is affecting you so that you can fix these issues without walking away from your trading career.
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.
Discipline is often listed as one of the most important traits that a successful forex trader should have. After all, without discipline, one is likely to make decisions based on their emotions and might not stick to a trading plan at all. This makes trading more like gambling and guarantees that success will be hard […]
Discipline is often listed as one of the most important traits that a successful forex trader should have. After all, without discipline, one is likely to make decisions based on their emotions and might not stick to a trading plan at all. This makes trading more like gambling and guarantees that success will be hard […]
Discipline is often listed as one of the most important traits that a successful forex trader should have. After all, without discipline, one is likely to make decisions based on their emotions and might not stick to a trading plan at all. This makes trading more like gambling and guarantees that success will be hard to come by. The disciplined trader has it all – they can keep their emotions in check (even after large losses or a bad day), they set a plan and follow it consistently, and they don’t spend time worrying about past mistakes. Instead, they learn from their mistakes and move on.
Of course, being a disciplined forex trader is easier said than done. Anyone who has traded before has likely felt a rush of emotions, considered deviating from their trading plan when the market was unpredictable, and they might have even thrown some of their self-imposed rules out the window. If you’ve been there before, then there are some things you can do to help yourself stay disciplined.
Tip #1: Practice
Controlling your emotions can be difficult when money is on the line. This is why you need to practice keeping your cool in the beginning until it feels more natural. It’s normal to be more on edge in the beginning of your trading career, or perhaps after changing something about your trading plan or strategy. You can always start by practicing on a demo account to make yourself feel more confident about your plan or abilities – but be aware that a demo account can’t prepare you for the rollercoaster of emotions that come with trading. This is because a demo uses fake money, so while it might show you that your plan needs some work, it isn’t the best if you’re working on managing your emotions. When practicing on a real account, try taking smaller position sizes and risking less so that the emotional fallback is less if you lose money. Then, you can slowly work your way up to larger trades once you feel that you won’t take those losses to heart.
Tip #2: Critique Yourself
Go back and take a look at your results once you’ve been trading for a while. Have you made money or lost it? The best way to do this is to keep a trading journal and write in it religiously. This means you’ll log every trade you make and include details like how much you made or lost, the reasons why you entered or exited the trade, and so on. This helps you to understand your strengths and weaknesses and shows you where your strategies do and don’t work. Once you tweak your trading plan to perfection and have data that proves it is trustworthy, it will be easier to stick to it in the long run.
Tip #3: Stop When You Need to
Sometimes, you might just need to stop trading altogether. This could be applied to two different situations; in the first, the market might just not be right for trading. They don’t say that it’s better to trade less for no reason, this saying actually has to do with the fact that traders come out better when they know when to sit out. If you force trades, you aren’t doing yourself any favors. The second scenario could come into place when your emotions are just too overwhelming and you can’t calm down. The best traders know that it’s ok to step away from your computer and take a breather if this happens, rather than to continue allowing yourself to make clouded trading decisions. Take as much time as you need to and come back once your level-headed. This will make it easier to stay true to your plans and strategies without making cost worthy mistakes like revenge trading.
Risk management, risk management, risk management, one of the most used phrases in trading, and for a good reason too. This can be based on the number of trades, the trade size and the potential loss of each trade, while it is often built into certain strategies, others do not and so it is important […]
Risk management, risk management, risk management, one of the most used phrases in trading, and for a good reason too. This can be based on the number of trades, the trade size and the potential loss of each trade, while it is often built into certain strategies, others do not and so it is important […]
Risk management, risk management, risk management, one of the most used phrases in trading, and for a good reason too. This can be based on the number of trades, the trade size and the potential loss of each trade, while it is often built into certain strategies, others do not and so it is important to remember to take it into account. We have come up with a few things that you could do to help you remember to do proper risk management and to ensure that you have done it right.
Have a trading plan:
This one may seem a little obvious, and to be fair it is. Unless you have a set trading plan you should not be trading on a live account. The sad truth is, that a lot of traders still trade on their impulses and their feelings rather than following a plan. Trading on emotion and feelings with no regard for the actual markets or certain risk management techniques like take profits and stop losses is a recipe for disaster, accounts will often blow and the trader will be left frustrated and not understanding what actually went wrong. By trading with a plan, you know exactly what trades you need to make, why you need to make them, and the exact amount of your account that you are willing to risk. Always plan your positions, plan your trades and you will be able to protect your account a lot more successfully.
Take profits:
When people think of risk management, they often think about the losses, but the profits are just as important, in fact, they are equally important to the protection of your account. When a trade is going the right way, itis very tempting to want to continue to ride it upwards, this could involve removing any take profit levels or simply moving them a little higher, however, the dangers of doing this is that the markets can reverse at any moment which could either reduce your overall profit or even take you down into the negatives. Taking profits or at least some of them is vital, by some of them we mean that you can set yourself two take profit levels, at the first one you take the profits of half the trade and then allow the other half to move up, at least this way you have taken some of the profits, you could then move the stop losses to break even to guarantee some profits from the trade.
Withdraw regularly:
This goes along with the taking of profits, regular withdrawals are vital, especially when you are just starting out, the phrase of only trading what you can afford to lose is a vital one and goes along with this point nicely. Many people now aim to trade risk-free, this means withdrawing profits each month until you have withdrawn as much as you put in, so you are trading just with profits and your initial investment is protected. Of course, as the account grows, it is important to regularly take some out, you never know when disaster can strike, so getting some out guarantees you those profits even if the account was to suddenly bow (it won’t with proper risk management).
Double-check your trades:
When you have put in your trade, ready to hit go, do you just hit it or do you double-check it? You should be doing the latter, I am sure that at one stage in their career, everyone has put in a trade far bigger or smaller than they intended, even I have put in a trade of 10 lots when I only meant to put in 0.10 lots. It can happen and it is very easy to do, so for hitting buy or sell, double-check the size, the stop loss and the take profits, even check that it is the right pair that you are trading. The consequences of getting it wrong can be huge.
Take a break:
It is important to be able to notice when you are in a bit of a rut when your motivation and concentration levels have dropped, this is the perfect time to take a step back. Taking a break is a fantastic way to help clear your mind, getting what is frustrating you out of your mind will help you to get a fresher look at the markets. When taking that break, be sure to take a complete break, don’t even look at the markets, get away from it completely, this was when you come back none of the thoughts still lingering in your mind, reset from the start of your strategy and take it from there.
There are of course many other things that you can do, however, these are some of the most obvious as it. If you are feeling frustrated, or your confidence levels are down, then take some of these steps, reset your mind, and start again, this will enable you to get your mojo back and will be able to start fresh and hopefully carry on before the rut starts.
You can make small mistakes in trading without it having too much effect on your account or your overall trading plan. There are however mistakes that could end up costing you the entire balance in your account or even your livelihood. If you are guilty of any of these then you need to ensure that it was a one-off. So let’s look at what some of these mistakes are and the consequences that can come with them.
You can make small mistakes in trading without it having too much effect on your account or your overall trading plan. There are however mistakes that could end up costing you the entire balance in your account or even your livelihood. If you are guilty of any of these then you need to ensure that it was a one-off. So let’s look at what some of these mistakes are and the consequences that can come with them.
You can make small mistakes in trading without it having too much effect on your account or your overall trading plan. There are however mistakes that could end up costing you the entire balance in your account or even your livelihood. If you are guilty of any of these then you need to ensure that it was a one-off. So let’s look at what some of these mistakes are and the consequences that can come with them.
Trading too Much
Otherwise known as over-trading, this is where you simply trade too many times. You need to ask yourself a question before putting on every single trade you do, is this a good trade? If you are certain that it is then you can trade it, but if you are placing a lot of trades, it is most likely that some of them are not, and if they are not, you should not be making the trade. When you place too many trades you are putting a lot of risk onto your account.
There are different reasons why you may be making too many trades, if you have just set up a new trading plan or strategy then you may be making the trades to test it out, but you should be doing this on a demo account. You should only be trading trades that are exactly in line with an already complete trading plan. You may also be trading because you are bored, do not do that, stick to your pan, and only trade when it is relevant, even if that ends up being just once a week.
Risking too Much
This can be done in a couple of different ways, primarily when we think about risking too much it is based around using lot sizes that are too large, f your strategy (as long as you have one) suggests that you should be making trades at the size of 0.05 lots, making trades at the size of 1 lot is not exactly the smartest idea you can come up with. More often than not, trading at sizes too large is a result of either trying to make up for previous losses or by giving in to greed in order to try and make more money. You can also risk too much by making too many trades which we have already outlined in the section above regarding making too many trades.
Thinking too Much
When doing most things in life, not thinking is normally the issue, but with trading, it can often be the opposite, if you decide to think about each trade too much, then this is where the issues can arise. Thinking too much can potentially self-sabotage your own trading strategy. Think about why you made that strategy, it was to make things simple, and to keep your account safe. So the rules that you set up with the strategy were put in place to ensure that you stick to them. Sticking to them keeps things on track, second-guessing them and thinking about the possible reasons why the trades may not work, or whether you should change something can only hinder the overall results.
Thinking too much can also cause delays, delays in your trade can cause you to miss those trading opportunities that you would have normally taken. Do not try to read into the markets too much, doing so also causes delays but may also cause you to start double guessing your trading strategies and current trades. Overthinking can also have an effect on current trades, causing you to take losses or profits too which will ultimately start to mess up the entire profit and reward ratio of the strategy that was created. So it is important that you trust the system that you are using and do not overthink the trades that you are making.
Gambling
Gambling can be exciting, it can cause something that is boring to become quite exciting, however it has no place in trading. When we think about gambling in a trading sense, it is simply when we place a trade without doing the usual analysis or using our trading plan. We are simply guessing whether the markets will move up or down. The unfortunate thing about gambling is that it is often not just a one-off. If you win, it’s easy, let’s do another one, if you lose, you want that money back so let’s put on another one and win, it is a vicious cycle and something that you should do everything you can to avoid. Always stick to the rules of your trading plan and do not start to gamble without it.
Trading Based on Articles and Opinion Pieces
Opinion pieces and articles are just that, an opinion. A lot of them do not necessarily have the information or knowledge to back up their opinions, what is worse is that a lot of them are simply regurgitating information that they may have seen elsewhere. Be sure that you are doing your own analysis along with your trading plan is the best source of information that you can get.
Not Paying Attention to Economic News Events
Some news events do absolutely nothing to the markets, others however can have dramatic effects, if you are trading then you need to know what news events are coming up and how they may potentially affect the markets and your current open trades. Many accounts have been blown in the past due to people not knowing about upcoming news events or by people who have been trying to trade the news, which again is not a smart thing to do unless you really know what you are doing. If you have doubts about the effect that an upcoming news event is going to have, it would be advisable to not be trading at the time shortly before or after that news event.
Reading too Many Websites at Once
It’s a great idea to continue to try and learn, however, you need to be careful how you do it and you need to choose your sources carefully. How many websites should you read from? One or two at the most. As soon as you start looking at too many, you will begin to cloud the information that you are taking in, the more opinions and discrepancies that you come across the more confusing it can be. It is very easy to start to mix things up as there is so much information out there with very small variations in it. Once you have found a website that has information that suits you, and they provide it in an appropriate manner, stick with it, do not just between it and lots of other sites at once.
Not Continuing to Learn
Forex and trading is a constantly evolving business, there are new things being developed and new things being understood about the way it works. What works for you now, may not work in 6 months, when it stops working, what are you going to do? You need to be constantly learning and working out what you can do in different situations, keep learning, you will begin to learn new things that can help with your own trading plan and strategy and could help you to become more profitable now, and in the future.
Overconfidence
Being overconfident can be a dangerous thing, it can cause you to make mistakes or to take risks that you probably should not be doing. Overconfidence normally comes from having a number of successful trades in a row, once you have this feeling of overconfidence the next trade may be made at a larger lot size or you may begin to put in additional trades that aren’t necessarily related or in line with your trading plan. If you are starting to feel this emotion, it is important that you step back and remind yourself why you are currently being successful, it is because of your trading plan, so continue to stick with it and do not take any additional risks.
So those are some of the worst mistakes that you can make when trading, are you guilty of any of them? They are very easy to fall into, most traders would have experienced at least one of them during their careers, what is important is that you are able to recognize if you are doing any of them so you can then begin to move away from them.
Consistency, one of the main roads that you see thrown about as something that you want to be, you need to be consistent if you want to be profitable, if you aren’t consistent with your trading you will only lose. Those are all phrases that you have most likely seen before, most likely multiple times. […]
Consistency, one of the main roads that you see thrown about as something that you want to be, you need to be consistent if you want to be profitable, if you aren’t consistent with your trading you will only lose. Those are all phrases that you have most likely seen before, most likely multiple times. […]
Consistency, one of the main roads that you see thrown about as something that you want to be, you need to be consistent if you want to be profitable, if you aren’t consistent with your trading you will only lose. Those are all phrases that you have most likely seen before, most likely multiple times. So what does consistently actually mean? It is defined as “acting or done in the same way over time, especially so as to be fair or accurate”, so this would mean that we need to trade the same way over a long period of time before we can be sure that our strategy works properly and that our strategy is actually profitable. This needs to be an extended period of time, not just a couple weeks that a lot of people think.
We are going to be looking at some of the different things that you can do which may help you to become more consistent. Some may work for you, some may not, some may seem completely irrelevant but that may be true for you, but not for others. As long as you can use some of these tips to help you stay consistent with your trading, it will be a big benefit to your overall profitability and can ultimately help lead you to trading success.
Know Your Limits
You need to have a good understanding of what your own limits are, this is more in regards to the money that you have available to trade. You often see horror stories of people borrowing money in order to trade, this is never a good idea and is something that you should never do. You need to be able to trade within your own means. In order to work out how much you can trade, think about losing the money that you are wanting to trade with, if it would have a negative effect on your life, such as not being able to do things you would normally do then this is too much, you need to reduce it down to an amount that if you lost, you could still continue to live the way you currently are.
You also need to be able to limit your total loss, at the start of each month, think about the maximum amount that you would be willing to lose that month, this should be less than your total account balance. If you were to hit that amount during the month, you should stop for the month and then use any remaining time to analyze and evaluate the trades that you have made in order to hopefully work out exactly where things went wrong and what you can change for the next month in order to hopefully be more successful. Once the next month comes you can begin again with a new loss limit, when you do become profitable, ensure that you are putting a bit aside each month in order to act as a reserve, helping to keep your account safe in the future should you reach our loss limits again.
Limit Your Losses
This goes hand in hand with the point we made above, successful trading often comes down to being able to limit your losses, this does not mean that you won’t take losses, those are inevitable. What it means is that when you do have a loss, it takes a smaller hit on your account capital rather than a big one. This is required if you want to be profitable in the long run, it’s simple really, limit your losses so that your profits can grow. If you are only losing a small amount with each trade then it will take multiple losses in order to overturn one of the wins, so you can technically have more losses than wins and still be profitable. This is how a lot of strategies work and how a lot of traders become profitable, even with an under 50% win rate, you can be a profitable trader.
You can use things like trailing losses in order to help reduce potential losses and to help you close trades at a minimum of break even, there are a number of other ways to protect yourself against reversals too and these are things that you should certainly be taking advantage of.
Trade with a Suitable Strategy
Understanding your strategy, the advantages of it, and the weaknesses of it is vital, but it is also just as vital that you trade a strategy that suits your own style of trading. If you are a relatively impatient person and like to take smaller and quicker trades (known as scalping) then there is no point in trying to use a swing trade strategy, it just won’t gel with your personality and you will begin to make some mistakes.
There are a lot of other aspects that you need to think about, things like the amount of risk that you are comfortable with, if you do not like risk, then risking a larger amount with each trade will cause you to stress, and a lot of it, s you need to be able to have a strategy that matches your risk preferences too. What would be beneficial would be to develop a number of different strategies that each suit your own trading style, this way you will be able to trade with whatever conditions there are with a strategy that you are comfortable with. It is sometimes good to get out of your comfort zone, but you do not want to do it with every single trade you make.
Be Patient
A virtue that a lot of people seem to lack, patience can be an incredibly powerful tool when it comes to trading, not just for making profits but also for avoiding losses. If things are quite in line with your strategy then you need to be able to wait. If the markets are very quiet and there is nothing to do, you need patience in order to not push yourself to make trades when you know you should not be making them. Sometimes it can go hours, days, or even weeks without a proper setup, are you prepared to wait that long? If you want to be consistent then you may well need to.
Stick with Your Plan
A nice simple one here, if you have a plan stick with it. If you do not, then what was the point in actually creating the plan? You made it for a reason so stick with it, as soon as you deviate from it, you will begin to start making bad trades and this will only lead to losses in the long run. So once you have made a plan, stick to it.
Those are a few of the things that you can do to help yourself become more consistent, some you probably already do so it is important that you stick with them. As long as you do these things, stick to your own plans and strategies, you will be in a good position for being more consistent in the future.
There are some very obvious risks when it comes to trading, things like the loss of your account, the stresses that it can put your body under, and unfortunately, the death of a dream to becoming a full-time trader. Along with those more obvious risks, there are some more little hidden risks to both your […]
There are some very obvious risks when it comes to trading, things like the loss of your account, the stresses that it can put your body under, and unfortunately, the death of a dream to becoming a full-time trader. Along with those more obvious risks, there are some more little hidden risks to both your […]
There are some very obvious risks when it comes to trading, things like the loss of your account, the stresses that it can put your body under, and unfortunately, the death of a dream to becoming a full-time trader. Along with those more obvious risks, there are some more little hidden risks to both your trading and your overall health, we are going to take a little look at what they could be.
The Risk of Isolation
It is very easy to get yourself wrapped up in both the excitement of trading and also the feeling and need to do better. Trading is a long process and takes a lot of time to learn properly, putting too much time into it could cause you to begin to isolate yourself from those around you. Becoming obsessed with doing better will take up most of your time, taking it away from your job, my family, and your friends. You need to remember to make time for them too, do not spend every waking minute looking at the markets, set time aside to trade, there are other important if not more important things in your life to trading, be sure to give them enough attention too.
The Risk of Boredom
Sat in front of the computer for hours on end is not for everyone, some people can do it no problem and won’t get bored at all, but for most people, it will begin to cause boredom, and boredom can be very detrimental to your trading. When you become bored your concentration levels drop, and so does your motivation. These drops can cause you to stop looking at things in as much detail and can also lead to you making trades that you otherwise would never have made, just based on the fact that you no longer want to be doing that.
The Risk of Overconfidence
Being confident is a good thing, but being overconfident is not. It is easy to get to this stage if you have just had a large number of wins in a row. This can make you feel invincible and unfortunately, you are not. People in this frame of mind will often start putting on additional trades or at a higher trade size increasing the risk to hit the account, they may also stop using all of the criteria that were set out in their trading plan, again, increasing the risk to the account. In the end, this sort of thinking will only lead to an increased number of losses.
The Risk of Sequential Results
By this we simply mean that you can go on runs of wins or losses, both can have negative effects on both your mood and your account balance. We briefly mention in the section above about becoming overconfident when we have a large number of wins in a row and the difficulties that come with that. When you have a string of losses in a row it can have the opposite effect. It can make you start to doubt your own abilities or the strategy that you have created, this can give you a fear of putting on more trades and can make you miss out on some perfectly good trading opportunities.
These sequences can actually occur with both wins and losses, win one, lose one, win one, lose one, and so on. Extended times of these alternating results can put you off as you are not seeing any gains overall, but that is just how the markets are, every trader will experience the sections of their trading careers, it is just about sticking with your plan and getting through them.
So those are a few of the more hidden risks to both yourself and your account when trading, there are more, in fact there re probably hundreds of hidden risks, if you feel that you are doing something or having an emotion that may be putting yourself or your account at risk, simply step away, take a break, refresh your mind and then come back with an open mind ready to move on from whatever was causing the risk.
Risk and reward, how much you are willing to risk to win how much? We ask ourselves this sort of question every day in life. Often it is not something so obvious, taking the risk of crossing the road, there is a risk of getting hit and the reward is getting to the other side, the risks are actually pretty large, getting hit could be devastating, but we do things to help reduce the risks such as looking each way or only crossing at a designated crossing area. We need to make these decisions in trading too, but the outcomes are often much more complicated and so is the decision-making process that we use.
Risk and reward, how much you are willing to risk to win how much? We ask ourselves this sort of question every day in life. Often it is not something so obvious, taking the risk of crossing the road, there is a risk of getting hit and the reward is getting to the other side, the risks are actually pretty large, getting hit could be devastating, but we do things to help reduce the risks such as looking each way or only crossing at a designated crossing area. We need to make these decisions in trading too, but the outcomes are often much more complicated and so is the decision-making process that we use.
Risk and reward, how much you are willing to risk to win how much? We ask ourselves this sort of question every day in life. Often it is not something so obvious, taking the risk of crossing the road, there is a risk of getting hit and the reward is getting to the other side, the risks are actually pretty large, getting hit could be devastating, but we do things to help reduce the risks such as looking each way or only crossing at a designated crossing area. We need to make these decisions in trading too, but the outcomes are often much more complicated and so is the decision-making process that we use.
If I was to offer you a 50/50 choice, the markets go up or the markets go down, you will win $10 if correct and lose it if wrong, the markets are random at this point, would you take it? The majority of people would actually say no. So let’s change it up a bit, it was the same 50/50 decision, but this time you will win $20 or lose $10, it’s a bit better but many would still say no. So what about winning $50 or losing $10, for a 50/50 chance the possible outcome of winning an additional $50 is looking quite tempting. So when you take that chance, in reality, it is beneficial to yourself to take the bet when the outcomes are that you can lose $10 but win $10.01, as the monetary value would be in your favour, but the majority of people would not take it.
So let’s change it up a bit, let’s suggest that there are some additional probabilities, you can work them out and it is now a 75/25 percent chance that the markets will go up. At what point would you consider making the same bet, would you do it for the $10/$10 or the $20/$10? This is more in line with how the forex markets work, we are able to limit our loss with a stop loss, but the take profits are where we need to consider how we place our trades.
So let’s assume that we are making a few trades, we are planning to risk 1$ of our account on each trade, with a $1000 account that means that we will be risking $10 per trade. Would you want to risk that $10 for another $10, probably not, many traders aim for a 2:1 ratio. So for every win, they will get twice the amount back that they risked. Some traders like to increase it further, so 3:1 which means that they only need one win out of three trades to be in profit, sounds good, so let’s go higher. A 1:5 ratio means that you can be in profit if just 1 in 5 trades win, however with the reward part being so high, it means that the markets will need to move a lot, and there is a far greater chance of a reversal.
It all comes down to personal choice, if we take a look at a lot of the more popular strategies out there, are they getting a 50% win rate, a lot of them actually aren’t, many are hitting 40% or 30% which may seem quite low, however having a risk/reward ratio of 1:30 means that all of those strategies are actually in profit. Then again, there are those that go even lower, seeing people with a risk-reward ratio of 0.4:1 which means that they would require a win rate of 71%, which is pretty easy right? Not something we would recommend.
It is important to find the ratio that works for you, it will be based on a couple of things, firstly your actual strategy, different strategies will work with different a different ratio, you will also need to take your own risk profile into consideration, if you hate risk then you probably want to go a little higher, but it is entirely up to you. It may take you some time to get used to a certain ratio.
Once you do find the ratio that works for you, it is important to stick with it, do not jump around different ratios, this will only cause issues with your overall results. Keep looking and eventually, you will find the risk-reward ratio that is right for you.
One of the main lessons that any new trader gets is how to set out their risk management plans, there are a lot of different ones out there and you would most likely have been told a number of different things yourself by different people. There are people that go by what seems to be […]
One of the main lessons that any new trader gets is how to set out their risk management plans, there are a lot of different ones out there and you would most likely have been told a number of different things yourself by different people. There are people that go by what seems to be […]
One of the main lessons that any new trader gets is how to set out their risk management plans, there are a lot of different ones out there and you would most likely have been told a number of different things yourself by different people. There are people that go by what seems to be a new industry standard of 1% to 2% of your account per trade, however, you still often see people a little more aggressive, going up to 5% or even 10% per trade.
The thing is, that all of these styles and risk management plans are perfectly valid, it can be confusing to see so many variations and you can often wonder if they are all safe. The fact of the matters that you will never know which one is right for someone else, as you would need to be able to access their mind, to be able to work out what their risk tolerance levels are and also what sort of money they are using, expendable money (the stuff you should only be trading with) often comes with a much lower risk threshold, people are willing to risk it more than hey ould with money that they may actually need. It all comes down to personal preference and this is what you should be looking at when working out your own risk management plan.
It is important that we get a basic understanding of what risk tolerance is, we need to be able to know what it is for you and that is what is important. Think back to times where someone may have offered you a gamble, would you take it at 50/50 or would you only take it when it reaches 75/25? Knowing what stage you would take the gamble and how much of your trading account you are willing to risk will help you to create your own risk management plan that suits you and one that you will be comfortable with.
A lot of things in the real work you are often advised to seek financial advice, from an accountant, a lawyer or simply your bank, this is often the sensible thing to do as they know what is best, but the difference between them and reading is that they work in a world where the same advice is relevant for everyone, the same rules apply to everyone. When we are trading, this is not the case. Something that works for one person could be a nightmare for someone else, so this is why we always need to look at things at a personal level when walking about risk management and that is why we say that you should be trading to your own risks and not to what others are risking.
When you started trading you would have created your trading plan and as part of that plan, you should have created your risk management plan. People often look online for help when creating these things, especially when not sure. So let’s assume that you got stuck and went online to see what risk management other people use, you see someone doing quite well risking 5% of their account with each trade, they are doing well so it must work, the problem is that you do not know what their strategy is, it may be completely different to your own, so implementing their risk plan into your strategy could lead to disaster as your strategy is not based around it. The same can go for your own sanity and stress levels, if you are quite a risk-averse person, risking a larger percentage of your account will mean that you will be in a constant state of stress and dread, if you aren’t comfortable with the risk, then you should not be using it.
The experiences that people have had often influence the risks that they are willing to take, those that have a lot of experience within the financial markets or just with finance as a whole are often willing to take larger risks as they have a better understanding of how to manage it, those coming in new are often more reserved, wanting to ensure that they are safe. Of course, there are exceptions to this, some professionals risk very little and some newer people come in with the wrong expectation of being rich and so risk too much, but that us a lesson that they will need to learn by themselves, no amount to telling will stop them from making that mistake as the draw of money is just too strong for them.
A reason why it is so important that you only risk what you are comfortable with is that you will experience losses if every loss makes you lose 10% of your account, it is going to destroy your motivation swing profits wiped out with every single trade, this is why many people go for smaller amounts such as 1% or 2%, a loss will still hurt, but it will not take away a large portion of your account. What is important, is that the risk management is built into your own plan and what it is based on your strategy and your risk tolerance, do not go out there looking for what other people are doing, this will not suit you and will not suit your strategy.
An important aspect of risk management is working out what works for you, this can be done through trial and error or by a lot of planning and demo trading. What you do not want to do is to be suckered into those that are stating that they have made tons of money by risking certain amounts, they are often exaggerated or sometimes completely fabricated. It is great to use others for inspiration or to use their knowledge to help create your trading strategies, but one aspect that you should avoid is the risk plans that they have. This is something you need to create yourself, by yourself, of course, you can use a baseline of 1% or 2% that is often suggested, but only take that information, work out the rest yourself.
One good way to help work out your tolerance levels is to use a demo account, of course, a lot of the emotion won’t be there as you are not risking your own money, but it is a way of working out what sort of risk suits your strategy. If you are consistently profitable with a risk of 2% but not at 1% then your strategy may require the higher risk. Set stop losses, if you find yourself closing off trades manually before it reaches the stop loss, then you may be risking more than you are comfortable with, use the demo account to help alter things, fiddle with things until you come to something that works for both you and your strategy. It can often take quite a long time to find the perfect spot, in fact, a lot of traders never do, but you can always get close. Keep practising, keep adjusting and you will get there in the end.
I know we have mentioned it a number of times, but do not go out there and copy others, it is paramount that you do what is right for you, not what is working for others. They have different circumstances to you and so their plan works for them, but it may be a terrible idea for you. It will take time to work out exactly what you are comfortable with, and that is fine, everyone will have different tolerance levels, you may start too high or too low, you can adjust things as you go to ensure that you eventually come up with the strategy that works perfectly for you.
One of the most important elements of the trade is certainly risk management, even though it can be a neglected point. The traders need to learn as much as possible about the risk management to gain profit. This specific subject will guide you on how the risks could be avoided and implement the strategy to […]
One of the most important elements of the trade is certainly risk management, even though it can be a neglected point. The traders need to learn as much as possible about the risk management to gain profit. This specific subject will guide you on how the risks could be avoided and implement the strategy to […]
One of the most important elements of the trade is certainly risk management, even though it can be a neglected point. The traders need to learn as much as possible about the risk management to gain profit. This specific subject will guide you on how the risks could be avoided and implement the strategy to achieve projected goals and profit.
Lots of researches have shown that risk management might be the crucial aspect of any day trader. Sometimes, traders can see 80% of their trades are profitable, while 20% show as a net loss. This is an example that shows incorrect risk management. That is why the good planning and learning about the ways to get your trades protected are so important.
When we mention the strategy we always think of something that is based on the long term. The same goes for the Forex market, where even if the traders can be affected by the loss, it doesn’t mean that they cannot end up in making some profit. That’s why good strategy and planning are so important. Something that the professional traders always emphasize is, “Plan the trade and trade the plan”.
First of all, we should all be aware of the possible risks that can come along with the trades. The majority of the foreign exchange trades consist of foreign exchange swaps, currency swaps, options, futures, spot transactions. Since there is leverage, the risk with forex trades can be big and can cause a certain loss. Those losses could be even bigger than estimated.
Depending on how the leverage is created, the small payment can cause a serious amount of loss. Various issues can also affect the financial markets such as political situations, time differences, etc. Even though the Forex trade market seems to be the most active and frequent, there are always risks that can lead to serious losses. In further writing, we will show some of the most common risk points to understand how they could affect the trader and the market.
We can start with Interest rate risks. There is something that the macroeconomics study shows and that’s how the country’s exchange rates are affected by the interest rates. Proportionally, having an increase in the country’s interest rate is going to make the currency more stable, due to the inflow of investments in the country’s wealth. So, when we have a stronger currency, the higher return is expected. On the other hand, when the interest rate dips, the currency gets weaker since the investors start to pull back their investments. Also, Forex prices can be significantly changed by the difference between the currencies, due to the type of the interest rate and its unavoidable impact on the exchange rates.
Another risk element is known as Leverage risk. It is important to highlight that people join the Forex market because it provides them with higher leverage, which is different from other financial instruments. To even participate in the notable foreign currency trades, you will have to create an account for margin with your broker and it’s something that is strictly required by the leverage in the Forex trade market. When we have a case of the small price swing, it means that the investor needs to put the deposit further cash to cover the losses that may occur. When the trader begins to use the leverage extensively in the situation when the market is inconstant, it will eventually show as a big loss for the trader. The forex prices could be significantly changed with the interest difference between the currencies.
We also need to mention and elaborate on the transaction risks. The definition of the transaction risks is explained as an unbalanced exchange rate from the beginning of the contract until its completion. Something that happens most of the time in the Forex market is the fluctuation of the exchange rate before the contract gets finalized. On trading days we are all aware that the Forex works hours. Therefore, the same currency can be purchased and sold for different prices at different times. In that case, if we have a huge time gap between the beginning of a contract and its closure, the more risk in the transaction we need to take. If we have the change of the rate of exchange caused by the different timezone, the expense of the transaction can be pretty high.
When it comes to the risks we should talk about Counterparty risks. It presents the list of non-payment risks generated by the supplier. It is mainly related to the brokers or suppliers of benefits to investors. We need to mention the two types of contracts regarding this topic. Forex market differentiates spot and forward contracts. Spot contract handles the spot currencies and the risk is always determined by the brokers or market makers. If the situation in the market is not improving, the contract could be broken by the counterparty. The forward contract can be defined when two parties decide to purchase or sell an asset at a determined time in the future by the price that is agreed upon by the finalization of the contract. That price is usually called the future price.
The last on this list but not the least important and its Country risk. When you start to plan your investments, mostly in currencies, please check the strength and standard of the country that is using them. The most of the countries in the world that have just started to develop their economy or countries that still haven’t started to develop it, rely on the currencies of the economically strong countries such as US Dollar or Euro. That is why the central bank has to come up with a set of systematic measures to keep fixed exchange rates. In the case when the currency is undervalued, it negatively reflects on the Forex market. We also have to mention the term of currency devaluation. It starts with there is repeated balance of a deficit in payment, when the country has a higher import than the export rate. It is also important to mention the investments. Mostly, they are rather built on the idea than facts and researchers.
In that case, the investor will take back the assets if he estimates that the currency value will dip. It will seriously affect the currency which will get even lower. Also, it will be hard to get the assets pulled and exchanged. In the Forex market, when the currency crisis occurs, it means that the currency will continue to devalue, credit risk will be higher, and it will be very hard to sell the assets.
Here is what you can use right away as a base for Risk Management in your trading system. One of the most efficient indicators for reading and predicting the changes in this fluctuating market is the ATR. This acronym stands for Average True Range. Most of the professionals reckon that this tool is one of the most reliable to avoid risks and possible loss. It describes how many pips from the top to the bottom, a currency pairs fluctuate on average. The best possible number of pips that you can have as risk is 1.5 times of ATR value (pip value), according to some research for trend following strategies on the daily timeframe.
So what does it mean? It means that the stop loss has to be 1.5 times the ATR away from the current price. The ATR can be very helpful to find the Pip value. You can use the 2% of your current account as your possible risk. Then you divide your risk with the 1.5 ATR and it will show your 1 Pip value in $ if your account is in USD. For example, use your current account and multiply it with 2%, which equals 0.02. This result will present your total risk amount. When you want to calculate your stop loss you will have to pull up the ATR and multiply it with 1.5.
To avoid any stop loss, you will have to find the most suitable indicator that will pull you away from the bad trades. There are a few tips that some of the most proficient traders suggest. The first one would be avoiding the trade more than the one with the 2% risk. In some cases, you can just find the first trade entry and should easily go with the flow. Even better, if you get the long signal for EUR/AUD and the EUR/JPY you can try to split the risk ( 1% and 1% per pair).
Also, you can use the 1% on the one trade, and leave the other trade open for later, where you have half-risk. The first tip is the most common and the most reliable. To gain some profit and to path your way to be a successful trader, you should never fear the risk, but on the other hand, be cautious. Learn as much as possible to even get into risk. Learn how to calculate your risk and try to recognize your exit indicator. In the end, don’t get trapped by the over-leveraging.
You have most likely seen the warnings, every site to do with trading will have a little warning that tells you that trading is risky and that the majority of people that trade it lose money. This is a legal requirement for any service offering Forex or CFDs to show, this is for the simple […]
You have most likely seen the warnings, every site to do with trading will have a little warning that tells you that trading is risky and that the majority of people that trade it lose money. This is a legal requirement for any service offering Forex or CFDs to show, this is for the simple […]
You have most likely seen the warnings, every site to do with trading will have a little warning that tells you that trading is risky and that the majority of people that trade it lose money. This is a legal requirement for any service offering Forex or CFDs to show, this is for the simple fact that people look at trading as an easy way to make money, without actually understanding the risks. So why do so many people lose when trading? We are going to look at some of the more obvious reasons as to why they may make some losses.
Being Friends with the Market
When you have made a few good trades in a row, or things are starting to go your way, it is easy to get quite comfortable with the markets, you begin to believe that you have the perfect strategy or that you are able to read the markets. People in this situation often forget that the markets can be quite fragile, anything in the real world could cause it to tumble or jump up in price. Thinking that you and the markets are now friends and moving in the right direction will only cause you to lose once the markets decide to turn, and they certainly will turn at some point.
Too Much Risk
Many traders, especially the newer ones like to take too many risks, this can be in the form of a larger trade size or just an increase in the number of trades that you are going to make. Whichever of these two things you do, it is increasing your risk and is actually negating any risk management plans that you may have put in place. People often do this when they are either on a winning or losing streak, trying to make a bit extra or to win back some of the lost money from previous losses. Increasing the risk on your account is a sure-fire way to lose it, so it is important that once you have a working risk management plan, stick with it and do not change things up, even for the one extra trade.
Not Enough Capital
Starting with a balance that is too long can make it hard to implement some proper risk management into your trading plans. It is great that some brokers are now letting you start trading with low amounts, even $10 with some brokers, but what are you going to do with this? Even a currency trade at 0.01 lots can easily decrease to -$10 which would then blow the account. You are not able to apply risk or money management to such small amounts. It knows you want to learn and start earning, but you will need to invest a slightly more amount if you want to be successful at it.
Greed, Greed, and Greed
This kind of goes along the same lines as taking too much risk, but greed can get the better of anyone, you see trades going well so you want more, or something made a loss so you want to earn that money back. Both of these wants can lead to disaster as it can cause you to increase the amount of risk that you are putting on your account. You need to remember that you are trading with a plan, stick to it or things will only go downhill.
Too Much Guessing
Never guess which way the markets will go, what makes you think that you know what is going to happen but the person next to you doesn’t. The markets can be very unpredictable. In fact, there have been times where all fundamental and technical analysis would indicate that something should go down, but it continues to rise, these things can actually be quite common, so if proper analysis cannot fully predict the movements, there is no reason why you should be able to instead. Stick to a tried and true strategy instead of going on what you think.
Overconfidence
When you go on a winning run, it can build up your confidence, and confidence is great until it grows a little too large. Once you have grown in confidence and get into the overconfident stage, things can quickly start to turn south. What do you often do when you have a little too much confidence? You often start to increase your trade sizes or start taking guesses at the movement of the markets, you have been right before so you can definitely be right again. Stop and think about it, you were right because of your strategy and not your own guess. As soon as you step away from that strategy you will only begin to make some unwanted losses.
Using Sub-Par Signals or Trading Systems
Sometimes you just don’t want the hassle of working out a strategy or spending the time to learn yet another aspect of trading, so instead, you decide to purchase an EA or trading signal. Bad idea, not only do you have no control over this signal, there are so many scam ones out there which are only after your money. When a trade comes through, why is that trade there? You have no idea as you do not understand the reasons behind out of how the strategy is working. Not having that knowledge means you have no idea if it is a good or bad trade. It is much better to learn and trade yourself than to rely on others, especially people who you do not know and that have no interest in knowing you.
Those are just some of the ways that you can lose when trading and common reasons why so many do. It is important to learn and to create a trading plan that you can tick to, as soon as you deviate from it disaster will only be one trade away.
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.
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.
Moving averages are an important piece in analyzing the charts. Some traders simply use to determine the direction of the market, while others have solid trading strategies. The Bladerunner strategy is a powerful trading strategy based on the 20-period Exponential Moving Average (EMA). The best part about the strategy is that it can be applied to any time frame and currency pair. This strategy is given the term “Bladerunner” because the 20-period EMA cuts the price action like a blade.
What is the Bladerunner Forex Trading Strategy?
A market trading above the 20-period EMA indicates a bullish bias, while a bearish bias if it is trading below the 20-period EMA. If the price retests the EMA, traders look to long or short.
If the price is trading above the EMA, one can prepare to buy the currency pair once the drops and tests the EMA line and bounces back up. That said, if the market breaks below the 20-EMA, it can be comprehended as the market has switched directions – uptrend to a downtrend. Thus, traders can look for shorting opportunities.
On the flip side, if the price action is evidently below the EMA, traders may consider short selling the pair after the price retraces up to the EMA. However, if the market manages to break through the 20-EMA, it signifies that the buyers have taken charge of the market, and a potential reversal could happen. Thus, traders can catch the new trend after a proper test to the EMA line.
Criteria to trade the Bladerunner Strategy
Before taking an entry using the Bladerunner strategy, two criteria must be satisfied:
Before entering based on the strategy, the price must breakout from a range or should already be in a strong trend.
After the first criterion is satisfied, the price must successfully retest the 20-EMA. If the market is trading above the EMA, the test should be such that the price drops to the EMA, touches it, and reverses in the predominant trend. Finally, if the candle closes above the EMA, it is an indication that the uptrend is still active and intact. A similar concept applies to a downtrend as well.
These two points are vital to consider before attempting to trigger the order. Besides, traders who require more confirmation may trade those setups where the price bouncing off from the EMA is also a strong Support and Resistance level or a pivot point.
Trading the Bladerunner Forex Trading Strategy
The Bladerunner strategy can be traded in several ways, given the concept applied remains the same. Novice traders enter solely based on the EMA, while more professional traders combine this idea with their analysis and then execute their trade. Here are a couple of Bladerunner strategies designed for traders of all suites.
Buy Example
Below is the price chart of GBP/NZD on the Daily time frame with the 20-period EMA applied to it.
Reading the chart from left-most, it is observed that the market has been moving sideways in a range. During mid-May, the market finally broke above the top of the range. Also, the breakout happened such that the price was well above the 20-period EMA.
At the beginning of June, the market pulled back down to the EMA and left two tails at the bottom. This is an indication that the market is preparing to go north. Thus, a trader can go long as the holds for a couple of candles above the EMA.
Placements
Stop loss
The stop-loss must be placed few pips below the top of the range such that it is below the EMA as well.
Take Profit
There is no fixed take profit point for this strategy. However, the trade can be closed when the price drops below the 20-period EMA.
Sell Example
Below is the price chart of EUR/USD on the 4H time frame. Initially, the market was ranging, but later it was pushed down by the sellers. After the breakout, the price retraced and tested the EMA as well as the S&R. When the sellers pushed the market down yet again, it is an indication that the downtrend is going to continue. Thus, one can prepare to go short at these levels.
Placements
Stop loss
The stop loss can be placed safely above the Support and Resistance and the bottom of the range.
Take Profit
Since there is no reference to the left, there is no fixed take profit. However, traders must liquidate their positions once the market crosses above the 20-period EMA.
Bonus Example
Consider the below price chart of AUD/USD on the Daily timeframe. We see that the overall trend of the market is down. The level 0.68745 represents the most recent Support and Resistance area.
To trade this market, we wait for the price to retrace up to the S&R level (grey ray) before entering the trade. Below is the same chart of AUD/USD on the 4H time frame. The pullback for the massive downtrend began in September. Observe that the price action of the retracement is above the 20-period EMA.
Once the price approaches the Daily S&R, it begins to consolidate, yet above the EMA. Later, as the market slows down, the price aggressively drops below the 20-period EMA. The price then retests the EMA, tries to go above it, but gets drawn down by a bearish candle. Thus, when another bearish candle appears, one can short sell the pair.
Placements
Stop loss
Since the market took a turnaround at the S&R level, the stop loss can be placed right above this level. Besides, one should ensure that the stop loss is above the EMA.
Take Profit
This strategy is basically a trend pullback trade that incorporates the Bladerunner strategy. Thus, the take profit can be placed at the recent lows.
The Bladerunner is a great strategy and helpful to several traders because it blends with any other strategy. Do try this strategy by combining it with your primary strategy and level up your trading skill. Cheers!
The Pennant is both a bullish and bearish continuation pattern that is used by technical analysts across the globe. This pattern can easily be identified on the price chart and is typically used for trading the upcoming price movements. In an ongoing trend, when the instrument experiences a significant upward or downward movement, followed by a brief consolidation, the Pennant pattern is formed.
Pennant Pattern’s Key Characteristics
A Flagpole – The Pennant pattern always begins with a flagpole, and that is the initial strong move.
Breakout Level –Two breakouts should occur in this pattern. The first one will be at the end of the flagpole, and the second one should be after the consolidation period.
The Pennant Itself – A triangular pattern is formed when the market consolidates between the flagpole and the breakout, and we call that a Pennant.
How To Trade The Pennant Pattern?
The Pennant is a relatively simple and easy-to-spot pattern on the price charts. We will find this pattern on all the timeframes, and the strategies that we are going to discuss will work on any timeframe you trade. In the below examples, we have used 15 minutes, Daily, and Weekly charts to prove the same. All you need to do is to train your eyes well to spot the pattern. Once we master this pattern, we can easily increase the probability of our winning trades.
Trading The Bullish Pennant Pattern
Example 1
In the below EUR/GBP chart, we have identified the formation of a Bullish Pennant Pattern.
We must always look to take long or short positions depending on the breakout in the Pennant chart pattern. If we find a bullish Pennant pattern, we must wait for the price action to break out in the north direction to take a buy trade.
In the below chart, you can see that when have placed a buy order after the price action broke the Pennant’s upper trend line. The take-profit should be placed at the higher timeframe’s resistance area, whereas the stop-loss order should be below the lower trend line. The best part about trading this pattern is that it offers a good risk to reward ratio, and most of the trades hit the targets within a few hours.
Example 2
In the below AUD/NZD chart, we have found another Bullish Pennant pattern.
Here, we can see the market has started a new downtrend, and we have placed a buy order right after the price broke the upper trend line. We can see our trade hitting the TP within a few hours. If we find this pattern in active trading hours, or when any trading session is about to begin, it is advisable to take bigger trades because opening trading hour breakouts have higher chances of succeeding.
Trading The Bearish Pennant Pattern
In the image below, you can see that we have identified a Bearish Pennant pattern on the GBP/NZD pair.
In the below chart, we can see that a brand new downtrend has just begun. The first leg of the pattern (flagpole) was quite strong. When the price action broke below the lower trend line, it is an indication for us to go short in this pair. The take-profit is as placed as same as the size of the flagpole, and stop-loss was just above the pattern formation.
That’s about Bullish and Bearish Pennant pattern and how to trade them along with appropriate risk management. Following money management principles is as crucial as entering the market at the right time. If you have any questions, let us know in the comments below. Cheers!
Until now, we have paired the Fibonacci levels with various technical tools to find appropriate trading opportunities. Some of them include support/resistance, trendlines, and even candlestick patterns. In the previous lesson, we also saw how to place appropriate ‘take-profit’ orders to maximize our profits. The uses of the Fibonacci levels do not end here. There is another incredible application of these levels, and that is to find the appropriate ‘stop-loss’ levels. ‘
As a trader, one should always use the ‘Stop-Loss’ orde as they are critical to avoid the risk of bearing huge losses. In some adverse situations, if this order is not used, it would result in a complete drain of trading capital where we can have the risk of losing everything in a single trade. Placing an appropriate stop-loss ensures that we do not expose ourselves to the unbearable risk.
However, placing the stop-loss order randomly might expose us to the risk of getting stopped out very early. So the proper placement of this order is crucial, and it can be hard for traders who aren’t experienced enough. So the Fibonacci tool can be a great help for us in determining accurate stop-loss levels.
Using Fibonacci Levels To Place Appropriate Stop-Loss Orders
In the below chart, we see a big initial move to the upside on which the Fibonacci levels are plotted using the Swing low and Swing high. Using the ‘Fibonacci strategy,’ we can notice a retracement that has reacted fairly well from the 61.8% Fib level, and now if the next candle is green, this could be a confirmation for us to go ‘long.’
We notice in the below chart that the next candle appears to be Green, and now with that confirmation, we can place our ‘buy’ trades with appropriate ‘stop-loss’ and ‘take profit.’ The traditional way of using a stop-loss order is to place it 50 pips away from the point of entry. Most of the novice traders use this method even today. This is said to be a layman’s approach with no suitable reasoning. When we use such methods, there is a high chance of we getting stopped out before the trade moves in our favor.
The below chart shows that how placing a 50 pip stop-loss can prove to be dangerous. We can see the stop-loss getting triggered by the immediate next candle after the entry was made.
Now let’s see how to place the stop-loss order using Fibonacci levels. The strategy is to place the stop-loss at the Fib level, which is below the Fib level from where the retracement reacts and gives a confirmation candle. Taking the above example, since the retracement touched the 61.8% Fib ratio and gave a confirmation candle, the stop-loss will be placed at the 78.6% Fib ratio. This seems to be very simple, yet most traders are not aware of this.
In the above chart, we can see how the price just misses our stop-loss placed at the 78.6 Fib level and later directly went to our take-profit. This shows the precision of stop-loss placement, which was established using the Fibonacci levels.
Conclusion
We must understand that stop-loss determination is a crucial step and has to be calculated mathematically using any reliable technical indicators. Indicators like Fibonacci have a mathematical approach in determining these levels. Make sure to use these levels before going to place your stop-loss levels next and let us know how they have worked for you. Cheers!
We have discussed the many applications of the Fibonacci levels in our previous course lessons. Now its time to explore the scope of these levels in the most integral part of trading, which is money management. We are all familiar with the ‘take-profit’ order and also know how crucial it is to determine the same before entering a trade.
There are numerous ways to determine the ‘take-profit‘ levels to maximize our profits, but the Fibonacci levels are said to be extremely accurate. In this article, we will validate the accuracy of the Fibonacci indicator in determining the ‘take-profit’ levels.
Placing Accurate Take-Profit Order Using Fib Levels
To find a trade, we need first to establish a significant trend. The primary trend could either be a continuation of a previous trend or beginning of a new trend after a market reversal. In the below chart, we can observe the market reversal to the upside. We must wait for its retracement; if the retracement follows all the rules of our Fibonacci strategy (discussed in the Fibonacci article), we can proceed to take the trade.
In the below image, we can notice a pullback coming in from the swing high. We will be evaluating this swing high using the Fibonacci levels. The Fibonacci levels used in this particular strategy for determining the accurate ‘take-profit’ placement are different from the usual Fibonacci levels we used in all the previous articles.
We are going to use ‘Fibonacci Extensions’ instead of retracements here. These extensions can be plotted on to the charts by using an indicator that can be found in most of the trading platforms. We use the Tradingview platform for our charting purpose, and this indicator can be found on the drawing panel of TradingView. It is available in the sub-menu of the Fibonacci tool folder and named as ‘Trend-Based Fib Extension.
To plot Fibonacci extension on the chart, first, click on a significant low, then drag the cursor and click on the recent high. Finally, drag the cursor back to the swing low. We can also highlight the Fib ratios by clicking on the retracement levels. Don’t forget to include the Fib ratios on the chart that are above 100%, as our take-profit methodology is based on those ratios.
The below chart shows how the Fibonacci Extensions are plotted on the chart using the swing low and swing high. We also see from the chart that the retracement is exactly reacting from the 50% Fib levels, which could a sign of trend continuation. But to be sure, it is prominent to have a confirmation candle at this place.
We get a bullish confirmation candle in the direction of the dominant trend, after which a potential trade entry can be made to the ‘buy’ side.
Right after entry, it is essential to determine our take-profit and stop-loss areas. Here is the part where we will be using our Fibonacci Extensions. The strategy is to take some profits at 127%, and then at 141% and remaining profits at 161%.
The take-profit points are clearly shown in the below chart. One can see that the market falls exactly after touching the respective Fib extension levels. By following this method, one can maximize their gains by taking profits at every subsequent point. The risk to reward ratio in this trade is also outstanding.
The below chart shows that the market continues to take support at the 50% fib level and eventually breaks out above our final take-profit order. The trend has completely reversed from a downtrend to an uptrend.
Conclusion
The Fibonacci tool can be used to find potential exit points in a trade with a great degree of accuracy. Hence, rather than taking a simple approach to determining the target points of the trade, we must make use of Fibonacci Extention levels to maximize our grains. Please remember that these extensions are not guaranteed levels too. So it is important not to depend upon them completely. Cheers!
Introduction
In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which
Introduction
In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which
Introduction
In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which are very important. In this article, let’s determine how one can position themselves in the forex market based on three different models. Each of these has its own merits that impose some sort of position sizing discipline in traders.
The three core position sizing techniques in terms of risk are:
Fixed lot per amount
Percentage margin
Degree of volatility
These models can be applied to all the asset classes and are time frame independent.
We suggest you stick to one model to estimate the position size or at most two position sizing techniques. Following every given method will increase complexity, and that is not good for a trader.
Fixed Lot Per Amount
This is a fairly simple model. It requires a trader to simply state how many lots he is willing to trade for a given amount of capital. For example, let us assume a trader is having $2000 in his trading account, and he trades only the major currency pairs like EUR/USD, GBP/USD, GBP/JPY, USD/JPY, etc.
The trader simply needs to make a thumb rule that he/she will not trade more than one standard lot of futures (of major currency pairs) per $2000 at any given point.
The lot size can also be determined based on their risk appetite and money management principles. This technique of ‘fixed risk’ is based more on the discipline than strategy.
Percentage Margin
This position sizing technique is more structured than the ‘Fixed lot per amount’ technique, especially for intraday traders. It requires a trader to position themself based on the margin. Here, a trader essentially fixes an ‘X’ percentage of their capital as margin amount to any particular trade. Let’s see how this works with the help of an example.
Assume a trader named Tim has a trading capital of $5000; with this, he decides not to expose more than 20% as margin amount on a particular trade. This translates to a capital of $1000 per trade.
Now, if Tim gets an opportunity in another currency pair, he would be forced to let go of this margin as it would double to 40% (20% + 20%). This new opportunity will be out of his trading universe until and unless he increases his trading capital. Hence, one should not randomly increase the margin to accommodate opportunities.
The percentage margin ensures a trader pays roughly the same margin to all positions irrespective of the forex pair and volatility. Otherwise, they would end up in risky bets and therefore altering the entire risk profile of their account.
Degree Of Volatility
The degree of volatility accounts for the volatility of the underlying asset. To measure volatility, we make use of the ATR indicator, as suggested by Van Tharp. This position sizing technique defines the maximum amount of volatility exposure one can assume for the given trading capital.
Below we have plotted the ATR indicator on to the USD/JPY forex chart.
The 14-day ATR has a peak and then a decline, which shows a decrease in volatility. As you know that high volatility conditions are the best times to trade (less slippage, high liquidity, etc.), you can risk up to 5% of your trading capital on the trade while one should not risk more than 1% when the ATR is at the lowest point. Do not forget the risks involved while trading highly volatile markets. Only use this position sizing technique when you completely trust your trading strategy.
Conclusion
A trader should not risk too much on any trade, especially if their trading capital is small. Remember, your odds of making a profit are high when you manage your position size and risk the right amount on each of the trade you take.
Beginners should trade thin to get experience with open positions, so they can assess the stress of a loss and gradually increase the position size as he is comfortable with the strategy results and performance. As a matter of fact, this is also the right way to proceed when trading live a new strategy, be it a beginner or an experienced trader.
Introduction
Calculating risk is one of the most important parts of Money Mangement. Many novice traders or traders with limited experience won’t be aware of the amount of risk they
Introduction
Calculating risk is one of the most important parts of Money Mangement. Many novice traders or traders with limited experience won’t be aware of the amount of risk they
Introduction
Calculating risk is one of the most important parts of Money Mangement. Many novice traders or traders with limited experience won’t be aware of the amount of risk they can tolerate. In this article, we shall focus on determining the appropriate risk % that fits your trading style. The goal of risk management is to gain control over three things:
Emotions
Leverage
Sustenance
Furthermore, by limiting the loss per trade, a trader can ensure that his/her trading capital is not wiped out in one single trade. Having this discipline systematically reduces the loss per trade and provides an opportunity for the trader to re-look at the situation.
Calculating the risk
One can determine the risk based on the following factors:
Win rate
Win rate refers to how often a trader takes profitable trades relative to the trades that result in a loss. Win rate is determined by using the risk-to-reward ratio (RRR) and is calculated by the following formula.
Win rate = 1/(1+RRR)
The above-given formula is also referred to as the Minimum win rate. If any trader is trading with an RRR of 1, then his/her minimum win rate will be 50%. So out of 100 trades, we require a minimum of 50 trades to end as winners to compensate for the losing trades.
This will help a trader in deciding their maximum risk based on the win rate. This formula can also determine if a trade can be taken or not. For example, if someone has a win rate of 25%, he/she will not be able to take trades that have a risk-to-reward ratio of less than 3.
Nature of the market
Depending on the market situation, the risk can vary substantially. In a trending market, like the one in the below chart, risk should be reduced as much as possible by using a stop-loss order. We are recommending this idea as you would most probably be trend trading, and there is no point in risking more than the usual (can be lesser).
Trending Market
In a market that is trapped in a range (below image), the risk is always higher. This means anyone who trades the consolidation market is essentially increasing their risk. This would mean increasing the stop-loss, thereby reducing the risk-to-reward ratio (RRR) of the trade.
Maintaining a risk of 1% constantly, regardless of the market conditions, will help the traders to sustain the loses and stay in the game even after a series of losing trades. This is a conservative method that reaps fewer rewards, but the risk is certain.
Conclusion
The aim is to achieve some level of consistency in trading by allowing yourself and your trading strategy to fight the evil forces of the market. We would say in all circumstances, a max risk of 1% appears to be the winner if you are a conservative trader. When the risk increases, it is said to impact not only the capital of the trading account but also the psychology of a trader. Hence it is better to keep risk at a bare minimum in times of uncertainty.
Introduction
The Risk to Reward Ratio is one of the most critical aspects of risk management in Forex trading. Traders with a clear understanding of what RRR is can improve
Introduction
The Risk to Reward Ratio is one of the most critical aspects of risk management in Forex trading. Traders with a clear understanding of what RRR is can improve
Introduction
The Risk to Reward Ratio is one of the most critical aspects of risk management in Forex trading. Traders with a clear understanding of what RRR is can improve his/her chances of making more profits. In this article, let’s discuss the fundamentals of Risk to Reward ratio with examples and also the ways through which it can be increased while taking your trades.
What is the Risk to Reward Ratio?
Before getting right into the topic, let’s define the meaning of ‘Risk’ here. Risk is the amount of money that a trader is willing to lose in a trade. If you have read our previous money management articles, we mentioned that a trader should not be risking more than 2-3% of their trading capital in each trade. It means when they find a trade setup, they should choose their position size in such a way that if the market hits their stop-loss, they lose a maximum of 2-3% of their trading capital.
Now, the Risk to Reward Ratio is simply the ratio between the size of your stop-loss to the size of your target profit. Let’s say your stop-loss is five pips away from your entry price and your target profit is ten pips away from the entry. In this case, your risk to reward ratio is 1:2 (5 Pips/ 10 Pips).
The larger the profit against the stop loss, the smaller the risk to reward ratio. Which means your risk is a lot smaller than your reward.
What is the recommended risk to reward ratio in the forex market?
Typically, a minimum of 1:1 or 1:2 RRR is recommended for novice traders. There are super conservative traders where they look for a minimum RRR of 1:5.
The risk to reward in every trade cannot be fixed as it varies depending on the market condition. For example, 1:3 or 1:5 RR ratio is achievable when the market is trending, and you enter the market at the right time. Whereas when the market is not very volatile, we should be happy with a risk to reward ratio of 1:1.
How to increase the risk to reward (RR) ratio?
🏳️ Raising target and putting stop-loss to breakeven
A trader can think of raising the target if the market moves to the initial take-profit quickly. This is because when the market moves so fast, it has the potential to move further, thereby increasing the profits.
🏳️ Finding trade setups from the larger time frame
Another way to increase the risk to reward (RR) ratio is by taking the strong trade setups from the higher time frames like daily, weekly, and monthly. We need to wait for such strong trade setups to form. Once formed, the price will move for hundreds of pips, and so we can have wide targets.
Final words
Higher the RRR, the better it is, and of course, higher RRRs are more challenging to achieve. So, do not forget to keep the expectations real and the risks appropriate. You do not have to avoid perfect trades just because the RRR is not as high as 1:5. Make sure to do proper risk management before placing a trade. Never trade with a risk to reward ratio that is too less and try to maximize it as much as possible. Cheers!
What is Leverage?
Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk
What is Leverage?
Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk
What is Leverage?
Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk while expecting for additional rewards. This is done by the traders only when they think the odds are in their favor. Leverages is basically represented as a ratio or with an ‘X’ next to the times of leverage. For instance, to take a trade what is double the size of the amount you want to risk, you are essentially taking leverage of 2:1 or 2x.
The main leveraged products available today for Forex traders are spread betting and contract for difference (CFDs). Other products include options, futures, and some exchange-traded funds (ETFs). Before using leverage, a trader needs to understand the risk associated with it. Controlling risk means having money management principles that can be used on a daily basis. Since leverage trading can be risky, as losses can exceed your initial investment, there are appropriate money management tools that can be used to reduce your potential losses. Now let’s look at a few of these tools.
Money management rules
Using stops
Putting a stop-loss to your position can restrict your losses if the price moves against you. As mentioned in previous articles, markets move quickly, and certain conditions may result in your stop-loss not being triggered at the price you’ve set. Do not forget to trail your stop-loss after you get in a profitable position. By trailing your stop-loss, you will be able to lock in the profits you have made on your trade. There is no need to monitor your position nor the need to adjust your stop-loss manually.
The risk to reward ratio can be calculated by taking the total potential profit and then dividing it by the potential loss. You need to calculate risk based on your trading capital (risking not more than 2% of trading capital) and the leverage that you use to trade, as the leverage can alter your stop-loss.
Choosing the right leverage level
It is hard to determine the right margin level for a trader as it depends on trading strategy and the overall market volatility. But from a risk perspective, there is a maximum level of margin that one should use in order not to overexpose themselves to the market. It is seen that scalpers and breakout traders use high leverage when compared to positional traders, who often trade with low leverage. Irrespective of the type of trader you are, you should choose the level of leverage that makes you most comfortable. Since forex brokers provide a maximum leverage of 1:500, newcomers find it attractive and start trading with that amount of leverage, which is very dangerous.
If you are a novice trader, the optimal leverage to use in Forex should be below 10X. But if you are an experienced trader and are extremely sure about the trade you are about to take, the maximum you can go up to is 50X. But as discussed, Forex brokers offer a maximum leverage of 500X and some time more too. But it is advisable not to go that far until and unless you have the appetite to take that risk. By using less leverage, you can still trade even after having a series of losses in the market as you are taking a calculated risk.
Bottom line
A simple rule to keep in mind is that you shouldn’t be risking more than you can afford in the market. You can open a special type of account with a forex broker known as limited-risk accounts, which ensures that all your positions have a guaranteed stop. They decide your account type and leverage based on the information you give them while opening an account. Hence, leverage can be used successfully and profitably with proper money management techniques.
What is liquidity?
When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest
What is liquidity?
When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest
What is liquidity?
When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest figures suggest that the daily trading volume of forex is close to $5.1 trillion.
Liquidity is the ability to trade a currency pair on demand. In simple terms, it is the measure of how easily a currency can be exchanged. When you are trading major currency pairs, you have an exceedingly high amount of liquidity. This liquidity is provided by financial institutions, big businesses, and retail traders as well. However, not all the currency pairs are liquid; liquidity depends on whether a currency pair is major, minor, or exotic. Major pairs typically have high liquidity compared to the other currency pairs. In the next section, we will look at some of the money management principles in trading with respect to liquidity.
Liquidity and Risk
A market with low liquidity has chaotic moves and gaps because of the absence of buyers and sellers at any given point of time. These gaps occur when news announcements are made over the weekend or if an event happens at the same time. The chart below depicts such a gap after a news release.
According to money management principles, when you know that there will be a change in liquidity levels between Friday to Monday, it is not advised to carry huge positions on Friday. The risk drastically increases, if the price opens above your stop loss on Monday, it will become a market order, and this loss will be much higher than the predefined loss (determined using stop-loss). A conservative trader especially should not take any positions during times of news releases.
Retail forex traders need to manage liquidity risk by lowering their leverage and putting stop losses based on higher time frames. In this way, you would be safe from any kind of gaps that happen at the beginning of the week.
Volatility
Volatility refers to the currency fluctuations in the global exchange market. Price movements can vary from hour to hour, minute to minute, and second to second, depending on many factors. A lot of forex traders enjoy volatility, but it comes with a risk. Therefore it is important to manage volatility and do plenty of research before placing a trade.
Eliminating the risk of volatility
In order to make the most out of volatility, follow the below-mentioned techniques:
Volatility strategies
Money management, in relation to volatility, essentially suggests traders invest in strategies that can perform in different market conditions. Some of the strategies that can be used to turn the volatility in your favor include widening your targets, placing tight stop-losses, and analyzing the higher timeframes.
Stay diversified
Don’t rely too much on any asset class or forex pair. If one investment performs poorly, other investments may perform better over that same period and thereby reducing your overall losses. This happens due to the difference in volatility across various asset classes. A balanced portfolio protects from losses and provides a high return on investment.
Money management should always be a top priority for every trader, as these principles guide us while taking trading decisions. A lot more concepts related to money management will be discussed in the upcoming articles.
Double Top/Double Bottom is one of the most robust patterns that price action traders wait to take entries. When the price is rejected twice at a resistance level, it forms
Double Top/Double Bottom is one of the most robust patterns that price action traders wait to take entries. When the price is rejected twice at a resistance level, it forms
Double Top/Double Bottom is one of the most robust patterns that price action traders wait to take entries. When the price is rejected twice at a resistance level, it forms a Double Top. As far as the candlestick pattern is concerned, an engulfing candle is the most reliable reversal candle that traders usually love to take an entry from a value area.
A combination of Double Top and a bearish engulfing candle attracts sellers to go short. Since it is an outstanding price action combination, it does not usually go wrong. However, in today’s lesson, we are going to demonstrate that even a great flourishing price action combination can go wrong, as well.
The price consolidates at the marked resistance and heads towards the downside. It then goes back towards the resistance. The sellers are to get ready to get a bearish reversal candle. The red-marked level is the resistance level, where we don’t consider the upper shadows. Since the price has several rejections at the marked level, and it is a valuable area for the sellers, the price most probably may respect the area and produce the bearish reversal candle.
The price does not respect the red-marked level, but it does not make an upside breakout either. Instead, it closes within the upper shadows. Traders are to adjust here. Let us see how it looks now.
The level where the last candle closes has some significance. One of the bullish candles closes within the marked level. This level may work as a resistance level and ends up producing a bearish reversal candle.
Here it comes. The Double Top’s resistance level produces a bearish engulfing candle. We have found the resistance level at last. So all the equations to go short from here seem to match as far as price action trading is concerned.
The price produces a Double Top.
The price produces a bearish engulfing candle right at the resistance of the Double Top.
The swing low is far enough, which offers good Risk-Reward as well. All seems to be okay to trigger a short entry.
After triggering the entry, the next candle comes out as a bearish Doji candle. Things still look good. The sellers are going to grab some green pips!
No! The next candle comes out as a bullish Marubozu candle, which breaches the resistance of the Double Top. It wipes off the Sellers Stop Loss. The buyers may take control once the breakout is confirmed.
The Lesson
It does not matter how good a trade setup looks: it may fail. Thus, there is no reason to be too optimistic about any entry. We must calculate our Risk-Reward and have immaculate risk management with every single entry that we take in the market.
Mastering risk management
What is risk management in Retail Forex?
It doesn’t really matter how well you set up your trade, the bottom line is that you
https://youtu.be/f4yP_rvZIP8
Mastering risk management
What is risk management in Retail Forex?
It doesn’t really matter how well you set up your trade, the bottom line is that you
Mastering risk management
What is risk management in Retail Forex?
It doesn’t really matter how well you set up your trade, the bottom line is that you wont know the amount of volume that is trading against you in any particular situation. And so if you have a particular trade set up, which is producing returns on a consistent basis, that’s great news, however, there will always be times when trades will go against you, and this is when you must have a good risk management strategy (RM) in place. Also, if you are trying new trade set ups you especially need to be mindful of your potential losses if your trade does not go to plan. Again, this can only be done by implementing RM.
One of the biggest friend that you will ever have in RM is strong understanding the currency pair that you are trading, or thinking about trading. When you consider taking on a trade you should know whether or not there is a great risk of extreme volatility just about to commence in a particular pair as soon as you have pulled the trigger. Therefore, before you execute a designated Spot (on the spot) or Limit order trade you should be extremely cautious of looming fundamental reasons why the trade might very quickly go against you. For example, it could be that major fundamental, economic, news is just about to be released and where you had no knowledge because you had not researched this properly. Or, it could be that a finance minister pertaining to one of the currencies is just about to give a statement, or press conference regarding monetary policy. This could dramatically move the market against you. There is also a timing issue to factor in to your trade,for example; let’s say that you have a trade set up in mind, but the market is just about to move from one time zone into another (e.g New York to the Asian session). Traders in the new time zone might have a completely different view about the exchange rate on your chosen pair and then decide to move it in a different direction: against you!
But let’s say you have taken all the above, necessary, precautions and you are ready to pull the trigger on your trade. You should have a profit target in mind to exit your trade. But, what you should also have an exit threshold in the event that the trade goes against you and you want to cut your you’re losses. The most simple and effective way to mitigate against this is to use a stop loss order on your trade: a market order to close out your position, or a part of it, at predetermined exchange rate, in the event that the trade moves against you.
To be a successful Forex Trader it is a simple matter of mathematics: you need to win more trades than you lose and those losses should be less than your wins. Therefore you should aim for a minimum of 2 to 1 as a ratio. Example: you should be aiming to win $200 for every $100 loss. This is considered to be a positive risk to reward ratio and will be a minimum requirement for you coupled with more winning trades than losers.
Another area where new traders regularly have shortcomings is that they often take their profit too quickly and let their loosing trades run on too long. this is very often coupled with chasing losses: where traders take extra risks to try and win back losses. This will often come about by ‘doubling up’ and taking on riskier trades without validating set ups. This type of destructive trading can be mitigated against by adopting a trading style which is successful and with the above risk to reward strategy and then trading consistently without deviation.
One other problem which can burst a new trader’s bubble is a lack of understanding when it comes to leverage. By over leveraging your position you will be in danger of getting close outs due to margin calls (more to follow on both). By trading with over extended leverage you run the risk of blowing your account. In fact, over 70% of new Retail Forex trdaers will blow their accounts in the first 6 months of opening. And so learning to gauge how to trade with a reasonable amount of leverage relating to your account balance will allow you to develop a
consistently winning trading style. This is when to consider ramping up your leverage: when you are winning, not when you are losing!
And therefore, the most effective way to adapt a successful RM strategy is to remember that winning consistently at Forex will only ever happen with self discipline and by adopting the above methodology. This, in tandem with an uninterrupted work space, a cool head in stressful situations and some degree of self evaluation with regard to psychological suitability (trading isn’t for everyone) is a must if you are serious about trading successfully in the Forex market.
Hello, and welcome to this latest edition of courses on demand brought to you by forex taught academy. So, in this course, we will be
[embed]https://youtu.be/uqNBiv7AGA4[/embed]
Hello, and welcome to this latest edition of courses on demand brought to you by forex taught academy. So, in this course, we will be
Hello, and welcome to this latest edition of courses on demand brought to you by forex taught academy. So, in this course, we will be discussing the approach in, and around mastering risk management however, before we begin, and there is, of course, inherent risks in terms of trade in the financial markets. So, please do take a brief moment to familiarise yourself with our disclaimer, if you do need to stop this particular recording, and please feel free to do.
So, and we shall, as a result, we shall continue with explaining what you can expect over the course of this webinar. Okay, so, we’re going to begin with just a fairly brief introduction to risk management we will then look at the principle of conviction trading, and, how that impacts a person’s approach to broadly speaking let’s say to risk management then we’ll have a look at specifically risk-reward ratios, and obviously, how that, and those principles can impact your approach to risk then we will be looking at notional travel size which is one aspect to trade the financial markets which most new, and inexperienced traders have very little understanding of. So, we try to explain that to you at this very introductory level will then look at trading exposure levels we look at risk tolerance, and the importance of accuracy when you’re trading especially with regards to risk is actually something that should be quite important for every trader’s toolkit, and finally we’ll finish with just looking at the psychology behind risk okay. So, let’s start straight away then with a brief introduction to risk management, and let’s start by giving you a basic definition, and risk management is the forecasting of evaluation of financial risks together with the identification of procedures to avoid or minimise the down side-impact. So, this is particularly important. So, risk management as far as a trader is concerned should I say is their ability to do one of three things, and it’s just expanding in a little bit more detail firstly it’s all about a traders ability to firstly assess, and quantify the potential for loss. So, how much of their capital are they putting on the line in order to perhaps get involved in that potential investment or trade. So, that’s the first thing that’s quite important. The second thing is to then actively manage the potential for losses on an ongoing basis. So, it’s not just that from the outset it’s as things evolve, and as things change will there be decisions that will need to be made to regarding to protect your capital, and once you happen to be in that particular form of investment, and then the third thing in terms of what risk management is all about it’s about a trainers ability to mitigate that potential loss. So, if you can get an opportunity where you can take you any potential loss off the table, then obviously from a psychological perspective as well, that’s a very good position to be in. So, those are the three major elements, which is what risk management is all about. It’s about a trader’s ability to assess to manage and to mitigate potential losses. So, consistently in it is a point worth making, and hopefully you’ll take this on board but consistently profitable traders owe their ongoing success to their understanding appreciation, and implementation of a risk management strategy however certainly in our educational experience as well if nothing else it doesn’t particularly figure that highly in the list priorities for all other traders, ie those that are not necessarily consistently profitable. So, there is a common denominator with those that are able to generate consistent returns, and that is because they’ve they’re acutely aware of the importance of risk management either from a protecting their own capital perspective and but also in their ability to generate those consistent returns on an ongoing basis. Now, a stop-loss I’m sure you’re all very aware of what a stop-loss is, but it is effectively a traders metaphorical line in the sand which states for example if a trade pulls back to a certain price then I as a trader no longer want to be in that particular trade. Now, this is a very powerful, and strong risk management approach in something worth taking notice of ok.
So, that was just a brief introduction to risk management. So, what works hand-in-hand is something which it’s very important first a certain number of traders out there, and it’s really the conviction they have for a particular trade. So, talking about conviction trading, and let’s start with a definition, it’s simply a strongly held belief or opinion to achieve the desired outcome. So, conviction trading is built on the principle that each, and every trade has different characteristics, therefore, should not make set should it not make sense to apply a one-size-fits-all approach to each, and every trade. So, that doesn’t necessarily seem to make much sense. So, what you need to do is to find a way to rate the potential for each, and every trade, and almost cherry-pick the trades which you have a strong held belief that you will see, and achieve a certain positive outcome from, and it’s really that’s what conviction trading is all about. So, the key is to look for higher conviction trade setups. Now, an easy way to categorise whether a trade is a higher conviction trade setups is for looking for the specific reasons to get into that trade. The more reasons you can identify to take a particular trade as a result normally, the stronger your conviction will be for that particular trade. So, one important skill to develop when it comes to your approach with regards to conviction without a doubt is actually patience. So, you might be identifying a particular set up it might not be fully formed you may need to be patient, and wait for that setup to realise itself because a lot could happen in between, and try not to preempt you know often trade in financial markets for a lot of technical traders as using a variety of indicators to trade what they see, and often when you get those setups [Music] it’s then about an issue of timing actually, and on occasion you are required to be somewhat patient, and wait for that final confirmation. So, hopefully, that makes a little bit of sense that’s a little bit about conviction trading. Now, moving on to risk-reward ratios. So, there’s two major types of risk-reward ratios, and the first one is a positive risk-reward ratio. So, this is when a trader makes consistently more money on a trade when they win than when they lose. So, let me give you a little example of this. So, if we have a trader who’s making a hundred euro every time they win however, when they take a loss, they realise a fifty euro loss each time they take that loss. Now, this is a trader that’s adopting a positive risk-reward approach. So, the wins are greater than the losses, and this just happens to be a positive two-to-one risk-reward in this particular case. So, this particular trader can lose two trades, and if the third traders of winner he will effectively break even on his on his capital. So, that’s positive risk reward. So, the opposite of positive risk reward is adopting a trading strategy, and approach which is referred to as a negative risk reward ratio. So, this is when you consistently make less on a trade when you win then when you lose. So, let me give you this example once more. So, let’s just say a trader makes 50 euro every time they win on this occasion however when they take a losing trade they actually lose 100 euro every time they lose, and on this situation it’s a it’s a trading approach, and I’m sure there is a lot of traders which adopt this kind of approach but what they’re effectively doing is operating a two-to-one negative risk reward approach. So, that’s worth taking on board. Now, there is a lot of traders that do trade both types of approaches however with a negative risk reward ratio the impact can be, and significantly psychologically quite damaging if that is the type of trading approach you happen to be adopting. So, you can imagine if you take let’s say five back-to-back losing trades which can happen every trader will experience a losing streak. Now, that might become a considerable uphill challenge them to realise the 500 euro loss in this situation, and realise that they will need to get ten back-to-back trades in order to even break winning trades that is in order to even break even on their capital, and that can put quite an onerous psychological negativity I guess to an approach it can it can change perhaps your the way that you’re interacting with the markets you might take on a little bit more risk.
Now, to try and chase those five losing trades, and you’ve only had five losing trades you know that’s not beyond the realms of possibility, and all of a sudden you’ll start changing your approach you’ll start taking on more risk, and that’s when an approach like this you know can become a little bit more dangerous. Now, it is possible to make money from both approaches however please do be careful all high-percentage win rate strategies normally operate a negative risk reward ratio. So, they might suggest, and suggest that you know this particular approach is at 80 or 90, and 95% win rate that’s absolutely fine but as far as risk reward ratios are concerned that very well may be the case but the likelihood is with an approach like that their risk exposure to the downside might be considerably greater than the number of trades that they enter, and the fact that they take out profits a lot more often than not. So, you can make obviously money adopting both approaches, and you just need to be very aware of the pros, and of each type of risk reward ratio if you do. So, okay. So, moving on then to notional trade size or n TS for short, and let me start by giving you a brief definition. So, notion of trade size is the overall position size value of a leveraged trade where in a small amount of invested money can control a much larger position in the markets accurately calculating trade size is an important component of a solid risk management strategy. So, to break this down in a little bit more detail for you, and putting this into fairly simple terms the notional trade size of a trade is is the actual value of size of that trade if you are trading without leverage. So, it’s it’s very common for most retail traders to trade with leverage it allows traders to access markets which they would not ordinarily be able to access. So, leverage can have its benefits but therein lies some of the potential issues as well with access that what we often what some traders experience is because of a lack of education, and understanding about what they’re doing in these markets leverage can become kind of a double-edged sword for some. Now, whatever actual trade size you happen to be trading on a leveraged product you will also be trading a notional trade size as well. So, if you happen to take a 10 min trade in the euro dollar for example then that will also have a notional trade size, and the problem is most traders do not necessarily have a particular understanding about notional trade size they focus on the trade size which they see in front of them, and which they identify with relatively quickly however it is a very useful thing to know just because what you can do when you’re trading you can get you can make sort of errors especially when you start out trading these markets but if you have an understanding of notional trade size, and then you can often identify the perhaps that the side the notional trade size of the trade doesn’t look right it doesn’t it doesn’t fit with your kind of your normal notional trade sizes, and it’s just a very useful aspect for I trader to have a little bit of understanding about. So, it’s very useful to know. So, just to explain it in a little bit more detail, and we just got three markets up on the screen. So, the first one is the example of market is a Forex pair. So, just take for example at the Euro Dollar, and the notion of trade size for a 1 lakh trade or a 1.00 volume on a Metatrader 4 platform is actually a hundred thousand of the base currency, and what this means is when we trade foreign exchange the first three letters the EU are refers to the base currency, and the second three refer to the quote currency. So, when traders actually trade the foreign exchange markets they’re trading one currency against the other, and the base currency is the trade size that they’re looking to trade often the price well it’s it’s for a fact the price that you will be trading euros in is the quoted price on the metatrader4 charts for example. So, you have the base currency, and then you have the currency that the value is quoted in, and that’s referred to as the quote currency.
So, in this example one standard lot size of foreign exchange if you’re trading a euro dollar is a hundred thousand euros. Now, of course that is the notional trade size. Now, because of leverage you’ll be trading a much a small proportion of that capital but that is again the benefit of leverage enabling you to access a trade of that size with much less capital to be able to do. So, hopefully this makes sense, and to just slide it across as you can see you can also trade, and different portions are of 1:1 standard luck, and on a Metatrader 4 platform in this occasion you could also trade 1/10 of a standard luck which is zero point one zero, and what that transpires from a notional trade perspective is this time instead of 100,000, and a base currency. Now, you’re effectively trading 10,000 euros worth of US dollars, and this is also referred to as mini lots as well. So, you have a standard lot you have mini lots, and you also have micro lots. So, without going into too much detail as far as that’s concerned because we’re just focusing on notional trade size right. Now, if you happen to trade a 0.01 locked raid on a Metatrader 4 platform, and you’re trading a euro dollar what you’re effective from a notional train size is accessing a notional trade size of 1,000 euros worth of base currency. So, if you trade a 0.01 lot of the euro dollar you will effectively be trading 1,000 euros worth of US dollar at whatever particular price you happen to take at that time. So, that’s just a broad overview, and in terms of notion of trade size, and, how that can change depending on the size of the trade in which your you’re trading. So, applying that to different markets for example the footsie, and it does vary for market to market. So, this is this is something that you will learn with experience no doubt but let’s take a foot see trade for example this time. So, this is a global indicee. So, again if we’re trading one standard luck, and will effectively be trading one pound in terms of a notional trade size. So, this is a without the desire to confuse you too much let’s just say for one standard lot size you’ll be trading effectively one pound if you’re trading as zero point one zero valium on a Metatrader 4 platform you’ll effectively be trading 10 pence, and finally if you happen to be trading a 0.01 lot on the footsie market you’ll actually be trading at a notional trade size of 0.01 which is a 1 pence trade. So, taking that across to different markets you can see, how these markets vary quite drastically depending on what market it is you happen to be trading a 1 lakh trade in the gold market, and would transpire as a 1.00 volume on a Metatrader 4 platform the notion of trade size is effectively 100 ounces of gold in this particular example moving along the zero point zero sorry zero point one zero volume on a Metatrader 4 platform would give you a notional trade size of 10 ounces of gold, and finally one micro lot or 0.01 volume on a Metatrader 4 platform if you’re trading gold would mean that you are effectively trading one ounce of gold. So, hopefully that makes sense that just gives you a sample of a different market in a few different asset classes. So, I hope that does make some sense ok. So, just um just to reiterate just having an understanding of notion of trade size is just a very useful tool from a knowledge, and understanding perspective when a trade is trading these markets ok. So, moving on then to trading exposure levels, and these are very important for traders because an individual exposure level is the amount of capital you are risking in each individual trade. So, for example if we happen to be trading a 2% trade of a 10,000 US dollar trading account what you are effectively doing is exposing approximately $200 of your trading account. So, it’s quite a straightforward calculation. Now, where things become a little bit more difficult is with regards to overall exposure levels so. Now, this is the total amount of capital you are risking in all open trades combined at any one time.
So, let me give you a good example let’s say we happen to be trading six open trades, and we happen to be risking approximately 3% per trade. So, what that means, and if all of those six trades are open at the same time, and you’re still exposed to that amount of risk what it means is you’re you’re effectively risking eighteen hundred US dollars of your 10,000 account balance is the amount of your capital which is exposed not taken into account any any particular issues with regards to to slippage or anything of that nature which means that your exposure could actually be potentially more than the one thousand eight hundred US dollar, and currently on screen but what it does is it gives you a bit of a better understanding that for all intents, and purposes if all those trades move against you you’re actually exposing about 20 percent of your trading account. Now, the problem is this is not really what retail traders pay that much attention to or they certainly don’t pay enough attention to this. So, then they think of each individual trade individually but in actual fact if you are exposing capital in all of those trades then the overall exposure is something that should be a consideration. So, this is what retail traders do not pay enough attention to they stay disciplined on the individual trade size often ignoring what their overall exposure to the market is if all trades go against them, and it’s that ignorance are perhaps ignoring the overall exposure is why a lot of traders can really come unstuck. So, it definitely worth giving some thought to. So, moving on then to risk tolerance. So,, how much should a trader risk per trade is often a question especially for those that are starting out, and trading the financial markets, and unfortunately the answer is that it depends on the traders risk profile. So, what we mean by this is let’s just take a little chart just in the middle of your screen there where what we’ll have going down the y-axis is a traders approach to risk, and perhaps along the x-axis along the bottom we might have a traders approach to return, and of course with each aspect whether it’s risk will have those traders that am within their personality in there their genetics they’ll have a higher profile to risk or perhaps be a little bit more risk-averse the same with regards to return there is all types of traders out there some have a very low expectation when it comes to return, and some have a very high expectation when it comes to return, and this is why this question is a very difficult one to answer because it depends on the traders risk profile, and of course that is a very individual decision to make but what you can see currently from what’s up on screen is that you will experience a significant move whether you are someone that wants okay. So, moving on to risk tolerance. Now, and a question that is very common is, how much should a trader risk per trade the answer unfortunately is that it depends on the traders risk profile. So, let me share this graph with you. So, let’s start with the y axis on the left hand side there which is the traders approach to risk, and along the x axis let’s look at a traders approach to return, and the problem you have with each, and each individual traders they’ll have a very different risk profile from a low sort of more risk-averse approach to taking risks with their capital to those people that are quite happy to take higher risks when they trade, and the same as with regards to return. So, they’ll have some people will have a lower expectation of return, and some people of course will have a much higher expectation return, and the problem is that will change over time depending on your approach to risk, and, how much return you want in exchange for that risk, and what you generally find is those that are quite happy to risk less are quite in general happy to see a lower return whereas those that will take higher risk when they trade to financial markets are therefore looking, and interested in seeing, and achieving a much higher return for their time, and their effort, and a capital that they’re putting on the line. So, just as a brief sort of bit of information for you for those of you that are new, and inexperienced traders it’s always advisable to start with a low risk low return approach to gain the experience necessary before taking on more risk. So, hopefully that’s a common-sense approach. So, do bear that in mind, and really the reason why this question is. So, difficult to answer is because it depends on a traders risk profile depends where you place yourself with regards to your approach from risk to return. So, wherever on that scale you might be placed is really the answer to that question, how much should a trader risk per trade it’s a very individual decision to make depending on your on your risk to reward profile okay. So, moving on then to just to accuracy risk management strategies should be based on accuracy in our opinion knowing exact entry, and exit prices, and the size of the trade you wish to take, and, how many pips are capital you happen to be exposing in a trade is all very important. Now, a common problem for retail traders there’s a couple of them lack of it, and to give you a practical example trading a higher risk percentage per trade, and then intended is it is an issue that a certain cohort of traders will experience because they decide to ignore the principles of accuracy. So, for example they happen to be trading a 1000 euro account in this example they intended to risk just 20 euro at a 2% of their capital but in reality, and they’ll realise this when they when they look at their journal order P&L; in reality they were effectively risking 30 euro per trade actually at a much higher percentage, and it’s because they were perhaps very lacks or very careless about the size of the trade in which they were taking, and perhaps they didn’t consider the stop-loss placement to well whatever the case may be because they weren’t particularly accurate in their approach they decided to take a series of decisions, and then ultimately realise that they’ve actually been overtraining they’ve been trading at higher sizes than they actually intended on.
So, again it’s a very common problem for retail traders, and another common problem is trading on this occasion a lower percentage per trade than intended. So, for example this time we’ve still got the trader with a thousand-euro account, and they intended to risk 20 euro per trade which again is the 2% of their trading account but in actual fact they were under trading in this example, and they were actually seeing losses of approximately 10 euro let’s say, and in reality they were actually trading at 1% when they actually intended to trade a higher percentage than that. So, it can it can work both ways. So, it is important to try to maintain a certain degree of accuracy when your trade always trade at a predetermined risk percentage perhaps when you trade, and try to be accurate, and disciplined it in everything you do, and that is just a generic overview and. So, just to finish off then with the psychology of risk. So, it’s fairly common there’s three key reasons why new traders do have difficulties, and this is very much anecdotal but they it’s quite important at the same time, and the first one is they don’t have a trading strategy, and I mean that I mean that in the kindest possible sense because the trading strategies should help you be able to determine what trays you should select where you should enter those markets weigh should exit those markets, and of course give you some assistance with regards to timing how, and why you should get into those trades at those particular moments, and if a trader can’t answer all of those questions, and then what they’re actually doing is guess thing with every decision they make, and there are lies some of the difficulties that trader coming can encounter the second one. Now, is that they don’t really have firstly an understanding of risk management but they definitely don’t have a strategy which they’re looking to implement to any great extent, and of course that’s what this whole particular webinar is all about. So, no risk management strategy is a major issue, and something that new traders have significant difficulties with, and then the third, and final point is that are not mentally prepared to trade volatile markets maybe they don’t understand, how volatile some of these major global liquid markets are, and but they get into the markets they may be trade at much smaller timeframes, and they’re finding those markets very volatile you know big swings very difficult to understand what’s happening, and, how to navigate those markets, and what all of these things will elicit in traders from a psychological perspective is a whole range of emotions for example fear, and greed will also have guilt in there perhaps you’ve you’ve taken a much bigger trade sighs than perhaps you anticipated maybe because you have elements of greed as well, and you thought this is a, and no a no brainer trade for example when you thought you can clean up on this particular trade, and maybe didn’t go quite well for you, and then you’re suffering with that level of guilt which might impact some future decisions that you’d be looking to make, and same with elation those that go through a winnings free can be absolutely delight with themselves they might let whatever got them that success they might let that drop ego starts to play a particularly important role especially with a certain core of trader, and that can have its own concerns confidence of course your confidence can be affected positively, and obviously negatively anxiety you know lynx works hand-in-hand with fear, and anxiety, and just your general mood whether it’s sad or happy. So, these are all the impacts that these particular three reasons why traders have difficulties, and and this all of these aspects linked to the psychology of risk. So, it’s just important that you try to I guess I guess embrace the major reasons why new traders do have difficulties, and look to start to address them as best you possibly can. So, just to finish then there are a number of things that a trader can absolutely do to reduce the impact that negative psychology can have on you when you happen to be trading these markets, and the first thing is try to remain objective. So, and what we mean by that is subjectivity can be a little bit on the dangerous side. So, if you have a method to remain as objective as you can that will definitely benefit you take into account market conditions, and your conviction of the trade setup. So, if you have an understanding of whether the market is range-bound whether we are bouncing from highs to lows whether the price action is quite choppy at this moment in time then that should begin to prepare yourself for a potentially continuation of that, and prepare yourself mentally as well for those types of conditions, and of course the conviction of the trade setup itself is quite important.
So, if you are able to stack a lot of reasons why you should be getting into that trade in favour of that trade you’ll feel a little bit more positive about it if you are getting into a trade with very little conviction or a low conviction status for that trade then you know your psychology won’t necessarily be that great because you shouldn’t really have major expectations of a successful outcome in those in that situation try to be accurate as we’ve discussed, and be precise with things like your entry levels, and your stop-loss placements, and things like that because again that is something that a lot of successful traders have in common they know exactly what their approach is regarding their ability to enter those markets but also their ability to protect their capital as well. So, do have an understanding as well of as we’ve discussed individual, and overall trade exposure levels that will assist you with having the more control you have over your exposure the more comfortable you’ll feel about the decisions you’re making, and it’s all about knowledge, and understanding about what you’re doing, and, how you’re conducting yourself. Now, losses are inevitable with every trading strategy is important to know that. Now, it’s it can be fairly a bit of a no-brainer to just try to control them if you possibly can try, and mitigate them wherever possible obviously that’s not always possible, and but in terms of an approach to losses you know if you can accept that they’re an inevitable part of everyone’s trading approach then that should make it a little bit psychologically easier for you strategically wait for the markets to come to you if you possibly can, and never force trades you know never have live with that anxiety, and stress, and fear of needing to get into that trade just in case you miss it because that that’s not really a good position to be in certainly from a psychological perspective whereas if you have a nice calm, and considered approach where whatever you do you wait for the markets to come to you before you make that decision, and then you put yourself psychologically in it in a much better position, and finally try to work within a risk/reward framework. So, that’s whether your approach is a low risk low return or it might be a medium risk medium return approach whatever the case may be have a basic understanding about what you’re looking to achieve, and if you can achieve, and what you set out then you’re doing very well in this environment, and that’ll really be worthwhile continuing to practice that okay. So, that’s just touching upon the psychology of risk. So, what we’ve covered in this webinar is an introduction to risk management we’ve looked at conviction training risk reward ratios notion of trade size trading exposure levels risk tolerance accuracy psychology also of risk. So, all that’s left me to do is to thank you very much for joining us on this latest instalment of course on-demand which have been brought to you by Forex Academy we hope you benefit from it, and we look forward to seeing you soon bye for now.
You need to have a good understanding of what your own limits are, this is more in regards to the money that you have available to trade. You often see horror stories of people borrowing money in order to trade, this is never a good idea and is something that you should never do. You need to be able to trade within your own means. In order to work out how much you can trade, think about losing the money that you are wanting to trade with, if it would have a negative effect on your life, such as not being able to do things you would normally do then this is too much, you need to reduce it down to an amount that if you lost, you could still continue to live the way you currently are.
Understanding your strategy, the advantages of it, and the weaknesses of it is vital, but it is also just as vital that you trade a strategy that suits your own style of trading. If you are a relatively impatient person and like to take smaller and quicker trades (known as scalping) then there is no point in trying to use a swing trade strategy, it just won’t gel with your personality and you will begin to make some mistakes.
Starting with a balance that is too long can make it hard to implement some proper risk management into your trading plans. It is great that some brokers are now letting you start trading with low amounts, even $10 with some brokers, but what are you going to do with this? Even a currency trade at 0.01 lots can easily decrease to -$10 which would then blow the account. You are not able to apply risk or money management to such small amounts. It knows you want to learn and start earning, but you will need to invest a slightly more amount if you want to be successful at it.
Overconfidence
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.
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.
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.
