Forex Trading Strategies : What makes a trading system “good”?
Risk Management : I need to continue the consultation on a way to find the right trading strategy for Forex trading. Formerly , I shared that for any Forex trading technique to be considered, it has got to be a total methodology ( insert link to prior article ) .
Today, I would like to add to that by talking about risk management. This is perhaps the area where 95% of Forex traders mess up and lose money. Handling risk is about reducing your losses AND about safeguarding trade capital by employing precise strategies to do each of these simultaneously.
What do I mean by that and why is it important?
First, most Forex traders make easy trading mistakes : they take too huge of a position and reveal themselves to major and steep losses if the markets move against them. 2nd , they fail to guard their Complete account by permitting ONE trade to put their full account balance at risk.
Here’s a fast and maybe extraordinary example:
Suppose a forex trader has a ,000 account balance. The forex trader takes a 5 standard lot forex trade on the EUR/USD pair. The forex trader now has at least ,000 ‘margin’ at risk (or 50% or more of the forex trader’s account balance).
For every 1 point that this forex trade moves against the forex trader, the trader loses 1/2% of the total account balance. For additional info see read my Forex Income Engine 2 Review. At first peek, that might not seem to be a steep loss. However, should the Forex trade move a total of 50 pips against the Forex trader, and the trader subsequently exits the position, the forex trader’s total loss would be an INCREDIBLE ,500! (25% of the trader’s account balance). This is poor risk management and it often leads to finish wipeouts of Forex trading accounts.
How did we figure out that loss? One pip for the EUR/USD pair is the same as ( on the standard lot trade ). A 50 pip loss equals a monetary loss of 0; and remember our example forex trader had traded 5 standard lots — for a whopping loss of ,500!
Instead, any trading method should teach you very specific guidelines for incorporating money management and risk management into every forex trade you take. For additional read my Forex Income Engine Report.
Money Management should involve the distribution of a forex account among the various trades a forex trader takes. For instance, foreign exchange traders should never trade their complete account on a single trade, and should seldom have more than some open positions. By using multiple positions, the foreign exchange trader distributes the chance among every one of the foreign exchange trades they have taken.
Risk management should involve the maximum risk in any SINGLE Forex trade, and should limit the impact of a losing Forex trade on the trader ’s account balance.
Here are 2 fast examples:
Money Management : A unproven foreign exchange trader takes four separate one lot trades on 4 separate pairs. Presuming here that every one of the pairs have a pip cost of on the standard lot, then the whole amount of the account being margined across all 4 trades is about 40% ( it could be higher relying on the pairs traded. With correct stop loss management, however, with risk management, it is Improbable that the currency exchange trader would encounter a complete 40% loss.
Carrying forward to chance management : In each one of the unproven foreign exchange trades above, the currency exchange trader hazards not more than 2% of the trader ’s total account balance on each currency exchange trade. That suggests a maximum loss of 0 per foreign exchange pair traded if ALL FOUR trades are stopped out. Total loss in this case would be 0 — a much more recoverable scenario than the 00 in the first forex trade example.
Furthermore, Risk Management has the capacity to make loss recovery easier. As an example, in the 1st case, where the Forex trader lost 00, the trader would need a virtually 250% gain on their next trade to recover the lost value on the 1st trade.
In the 2nd example the foreign exchange trader would need only an 8% gain.
A 2nd part of Risk Management not generally debated in poor trading strategies is defending gains. Though this begins as a discussion on Exit Strategy rules, it is also an element of risk management. Once a forex trade turns profitable, it is imperative that the forex trader manage the gains with smart stop loss management. The worst thing a foreign exchange trader can do is permit a lucrative position to reverse and become a losing position. So , handling risk reaches to the protection of gains on a foreign exchange trade, just as it does defending against deep losses on a currency exchange trade.
Therefore, in considering any trading technique to be used in your Forex trading, you should make sure that risk management is not just debated, but obviously explained with the use of the trading technique. If risk management isn’t present, misleading, or not express to the trading methodology, you’ve got to avoid using that trading method. For additional see my Forex Income Engine 2.0 Report.
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