Money and Risk Management Before you start trading, you have to understand that money and risk management is the most important step to take as a trader. The number one reason for traders losing their all money is the lack of a proper money and risk management strategy. As a general rule, you should not take risk more than 5% of the capital you invest on a single position. Some traders are comfortable to risk as much as 10%, but you should never exceed this amount. Below is a useful guide that shows the maximum volume (lot) to open on a single position, according to how much money you have invested and according to your stop-loss (examples of 10-pip and 15-pip stop loss are given. It is highly recommended to choose a green and maybe a yellow area, but to avoid red. Low Risk (1-5% of Capital) Medium Risk (6-10% of Capital) High Risk (More than 10% of Capital) 10-PIP STOP LOSS CAPITAL / LOT SIZE $100 $200 $500 $750 $1,000 0.01 Lot LOW LOW LOW LOW LOW 0.05 Lot LOW LOW LOW LOW LOW 0.1 Lot MEDIUM LOW LOW LOW LOW 0.2 Lot HIGH MEDIUM LOW LOW LOW 0.5 Lot HIGH HIGH MEDIUM LOW LOW 1 Lot HIGH HIGH HIGH HIGH LOW 15-PIP STOP LOSS CAPITAL / LOT SIZE $100 $200 $500 $750 $1,000 0.01 Lot LOW LOW LOW LOW LOW 0.05 Lot MEDIUM LOW LOW LOW LOW 0.1 Lot HIGH MEDIUM LOW LOW LOW 0.2 Lot HIGH HIGH LOW LOW LOW 0.5 Lot HIGH HIGH HIGH MEDIUM LOW 1 Lot HIGH HIGH HIGH HIGH HIGH Gold is more risky to trade due to high volatility, however more profit (or loss) can be made in relation to the margin needed in comparison to currency pairs. Below is a recommended risk strategy fo trading gold. 200-PIP STOP LOSS CAPITAL / LOT SIZE $100 $200 $500 $750 $1,000 1 Lot LOW LOW LOW LOW LOW 5 Lot MEDIUM LOW LOW LOW LOW 10 Lot HIGH MEDIUM LOW LOW LOW 20 Lot HIGH HIGH MEDIUM LOW LOW 50 Lot HIGH HIGH HIGH HIGH MEDIUM 100 Lot HIGH HIGH HIGH HIGH HIGH Risk - Reward Ratio Another integral part of your money management is the risk-reward ratio. After choosing the amount of risk you are willing to take for each trade, you should then choose the appropriate reward to justify this risk. For example, with a 10-pip risk on a 0.1 lot trade, your risk is $10 (10x$1). Some of the possible risk-reward ratios are the following: Take Profit at 10 pips, risk-reward is 1:1 ($10 risk, $10 reward) Take profit at 20 pips, risk reward is 1:2 ($10 risk, $20 reward) Take profit at 30 pips, risk reward is 1:3 ($10 risk, $30 reward) The higher the risk reward ratio, the less successful trades you need in order to be profitable. For example: For 1:3 ratio, you need to win 1 out of 4 trades to break even For 1:2 ratio, you need to win 1 out of 3 trades to break even For 1:1 ratio, you need to win half of your trades to break even However, the higher the risk-reward ratio the more difficult is to win a trade since you need more pips in order to close the position. The risk-reward ratio to choose depends on your trading style. Scalpers usually prefer lower ratios, while day traders prefer Top seven Forex trading rules 1. Always put a Stop-Loss to your order Trading without stop-loss is one of the most common and expensive mistakes of beginning traders. Always set a stop-loss to the amount you are willing to loose for every trade, otherwise you will see your account getting wiped out in a short period of time. 2. Always put a Take-Profit to your order Not entering a take-profit can be just as dangerous as not entering a stop-loss. If you don’t enter profit targets and you just wait until it “feels” right to close the trade, then it can easily reverse and turn into a losing trade. 3. Don’t put too tight or too wide Stop-Loss Depending on your trading style as well as your time of trading, you should always adjust the width of your SL accordingly. In general, during news trading your stop loss should be wide enough to absorb the market volatility and any spread widening that might occur. Trading news with stop loss of 10 pips is almost always a losing trade. During normal market conditions, you should use wider stop losses for longer timeframes and tighter for smaller timeframes. 4. Don’t risk too much of your capital at once Another common mistake for new traders is risking too much capital on a single trade. In general, you shouldn’t risk more than 5% of your capital on a single trade. This way, you would have to have 20 consecutive losses your account to be wiped out. 5. Having a proper risk-reward ratio Choosing a risk-reward ratio depends on your trading style, but it should never fall below 1:1. A 1:1 ratio means your stop-loss and take-profit is of the same width (for example 20 pips SL and 20 pips TP). In this case, you would need at least half of your trades to be successful in order to break even. A 1:2 ratio means your take profit is twice of stop loss (for example SL 20 pips and TP 40 pips). In this case you would need only one third of your trades to be successful. 6. Focus you attention on selective currency pairs Don’t try to trade on a large amount of currency pairs. If you stick to a few pairs then you will better understand their characteristics by studying their history and you are more likely to predict their movement. 7. Trade with logic and analysis, not with emotion and hunches. Being a successful trader simply means increasing your probability to win than to lose. Trading without some basic technical analysis or a trading system is not much different than gambling. There are many ways to increase the probability for a trade to be successful. Knowing even the most basic tools of technical analysis and being able to spot buying and selling signals can greatly enhance your trading experience as well as your profits.
Posted on: Thu, 07 Nov 2013 16:17:54 +0000
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