Risk MANAGEMENT

 

One of the biggest parts of being successful in trading is being successful with risk management. Without proper risk management, it is possible for the best trader on earth to take bigger losses than they should and possibly blow up an account. When deciding your risk management, you need first to know what % of your account you're comfortable risking on each trade. Typically traders risk 1-2% of the account equity, but there are also people who risk up to 5% on a trade. After you have figured out what you're comfortable with you need to understand what your goals for the day, week, month and year regarding profit are. We find the best way to create a proper goal setting plan is to reverse engineer and start with the amount you want to make, but we will leave goal setting for the next lesson. Regarding risk management you should never be risking more than you're making which means in the worst case your risk to reward (R:R) should be at least even. That being said this means if you're placing a 20 pip stop loss you should not have a 15 pip take profit because you will be risking more than you're making on the trade. Now I know what you're asking, what are take profits and stop losses?

Take profit - A take-profit (TP) is used by currency trader's specifying the exact rate or number of pips from the entry price point where to close our their position for a profit.

Stop loss - A stop loss (SL) is the opposite of a take profit. It is left to ensure that the trade does not exceed the intended max loss.

Trailing stop - A stop loss that can be set at a defined percentage away from a trades current price. A trailing stop for a long position (buy) would be set below the trades current price; for a short position (sell), it would be set above the current price. A trailing stop is designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in the right direction, but closing the trade if the price changes direction by a specified percentage. A trailing stop can also specify a dollar amount instead of a percentage.

 

Although trailing stops are very useful a lot of people do not and can not use them because of the platform they use. The next best way to ensure you protect yourself from a loss is to move your stop loss to break even (the entry price), or in profit when there is a comfortable cushion between the current price and entry price. Doing this on every trade will guarantee that you will never take a loss but most importantly bring you closer step by step to your end goal. I'm sure you have heard the saying "don't put all of your eggs in one basket" well in trading this couldn't be any more correct. Below you will find a video with more in-depth examples on everything from this lesson.

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