These are the hard-working, non-glamorous nuts and bolts of trade management and trading.
How to manage your risk
It doesn't matter how well-planned your strategy might be, it will eventually fail. You might be thinking, "Not mine". It is possible to believe that you have a perfect system. It is possible that you have backtested it until the cows come home, and even traded demo accounts for months. It works. It works. It works. It works, it works!
You can now start living with your hard-earned money. It all seems great at first, but then it turns out to be a sad day. All goes wrong, and the last trade was enough for you to lose all of your gains.
You can win 9 of 10 trades if you don't have your trade money management in order, but you will lose the 10th trade more than the 9 winning trades. It happens all too often. These are the three main things to think about. We will soon be covering them all.
What happens if my strategy is not working?
A stop order is a simple and effective way to ensure you don't overexpose yourself to the market. Although we will never enter a trade expecting it to go against us, there will always be times when it does. Our advice is to always remember to place your stop loss order. They will save you so much time, protect your capital, and give you some peace of mind. It's important to remember that stop orders must be placed at the time you place your trades.
You might be interested in three types of stop orders.
1. The normal stop2. The guaranteed stop
3. The trailing stop
Each of the three have their plus points. Depending on how you view things, which one is right for you will vary. Let's look at the differences.
The usual stop:
The stop is the point on your chart at which you intend to close the trade. If the market moves against you, your trade will be stopped. This allows you to take more control over your losses than just letting the trade go. This sounds sensible, right? It is amazing how many traders think they can trade without stopping. They tend not to trade for long periods of time as their accounts burn quickly.
The guaranteed stopping point:
The difference between the normal and your offer price is very small. It will also cost you a little more. It is usually in the form a little more spread, a few points on either side the bid/offer prices but some may argue it's worthwhile. As you can see, the above example shows how a trade should be stopped. If the market moves against you, your stop-loss order will be hit at the level you specified and your trade is shut down. However, the market does not have to behave this way. It doesn't have to move in an ordered fashion. For example, if there are unexpected developments, the market might "gap in any direction, especially after the weekend has ended. Although it is less common in forex than with the stock markets, there are still some instances when you could be caught. To protect yourself, you can use a guaranteed stop that would close your trade at the exact point you choose, even if market gaps exceed this.
The trailing stop is
It does exactly what it claims. The stop order can be set to where you want it to be. If the market moves against your position, it will cancel the trade. If the market is in your favor and your trade turns into a profit, then the trailing stop will move with it locking in some profit. This is a good way to protect some profits.
Do not be misled into believing that the market will know where your order has been placed and may move to block you from trade. This is not how it works. You should not place orders too tight. The market must have room to move so you don't get lost in the noise. Although it might take some time to determine the best order distance for any currency pair or time period, this will be something you get better at with practice. This is why we recommend a trading journal.
2. Is it worth the risk?
Any sensible money management strategy should include a way to calculate the risk-reward ratio for all trades.
Forex fixed trading can be very risky. You can lose a lot of money if you trade too much. You might have small winning trades but then you lose a lot of money.
Every trade involves risk. Before you press the buy button, it is important for traders to determine what they stand to gain and what they will lose.
A trader must know before entering a trade whether you are willing or able to lose any of your capital.
It is easy to understand so let's take a look at some examples.
If your ratio is 1:2, then you can expect a return of at least two units for every unit that you lose. If you set your stop loss order at 20 points/pips from the opening order, you should expect a gain of 40 points/pips.
If the ratio is 1:1, then you should expect a return of at least three units for every potential loss. If you set your stop loss order at 20 points/pips from your opening order, you can expect a gain of at most 60 points/pips.
The best leased property to look for is one that has parameters of 1:2. This would mean that you can be profitable if 40% of your trades are successful, which is unlikely. "Wow, that's less that half of my trades and yet I can still make a profit" That kinder does reduce the pressure. Here is where we return to our psychology, patience and self control. It's amazing to hear someone tell you that you don’t have to be right every time.
"Let your profits run and cut your losses quickly"
"Which risk/reward ratio should i use?" "
It is up to you whether you seek a return of 2, 3, 4, 4 or 5 times your potential loss. However, we found that 1:2 is a good starting place for beginners. As you gain experience, you'll find trades that offer a return of three to four times your risk. But always keep the goal at two. You will just be gambling away your hard earned cash if you don't. If the trade isn't worth it, then wait for another one.
3. What percentage of my total account should I trade for?
The percentage of your account that you are willing to take on one trade is what position sizing refers to.
Many traders make huge mistakes at the beginning by risking too much of their accounts in one trade. Overconfidence is a hallmark of traders who believe their new knowledge will make them more successful than average beginners. They also believe that they can dominate the global financial markets in a matter of months. After a few trades, their trading career ends abruptly and global dominance is gone.
If we want to do this right, it is crucial that we all understand the importance of position sizing.
"So, how much should I trade?" "
We believe that only 2/3% should ever be put at risk on any trade. You might be thinking "it will take me years to purchase that boat I've been eyeing". Yours may not be a boat, but you get my point. And the truth is that we all experience a losing streak at one point or another. How you react to this will affect your chances of staying in market. Or, will you use a sensible strategy for sizing your positions and then after your loss you will still be in the market to make the profit. This is how we can achieve our long-term goals.
If your maximum risk is 2%, then you must lose 25 times per day to wipe out 50% of your account. How unrealistic is that? This approach to position sizing is a great way to reduce stress.
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