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Money And Risk Management In Forex Trading

All successful and professional traders have a solid plan to manage their money and risk in trades. Although with a few simple rules this money and risk management is possible but many amateur traders ignore it and in the end they will fail in their trades. Using SL, TP and risk/reward ratio is the best practical way to lower the risks of Forex trading to minimum.

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Money And Risk Management In Forex Trading

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  1. Figure20.4Highperformancetradingopportunity 21.MoneyandRiskManagement Besidesfollowingasolidstrategy,managementofmoney and risk in Forex is the most important factor that determines the outcome of your trade. Management of moneyisabouttheportionofyourequity(orbalance)you riskonyouropentrades.Inanycase(exceptforoptimal trading),youarenotallowedtoexposemorethan3%of yourequitytothemarket.BecauseofhighriskofForex trading(evenwithprovenstrategies),puttingmorethan1/30 ofyourequity(orbalance)intheopentradesincreasethe chanceoffastdrawdownofyourequityandlosingallyour money. Risk management in Forex is about taking measures to prevent big unaffordable losses. The simplest but most effectivetooltocontrol(orlimit)yourriskinatradeis 73

  2. settingaStopLoss(SL).Ontheotherside,settingaTake Profit(TP)targetforyourtradeishighlyrecommendedto guarantee your expected profit. Don’t underestimate the powerofthesesimpletoolsinyourtrading.Infact,before enteringanytradeyouarerequiredtodetermineandset yourstoplossandtakeprofittargets.Assoonasyoudothis youactuallydefinearisk/rewardratioforyourtrade.For exampleifyousetyourstoploss30pipsawayfromthe entrypriceandsetyourtakeprofittarget90pipsawayfrom theentryprice,yourrisk/rewardratiowillbe1:3orsimply3. Thesafethresholdofrisk/rewardratiotoenteratradeis2. Ifyourratioisbetterorequalto2youareallowedtoentera trade.Ifnot,Irecommendyoutoavoidthattrade.So,your laststepafteranalyzingandconfirmingatradeopportunity istocalculateitsrisk/rewardratio.Inspiteofsimplicityof derivingyourrisk/rewardratiofromknownstoplossand takeprofitprices,settingstoplossandtakeprofitisabit challenging.Itdemandssomeexperiencetorealizethebest placestoputthesetwokeyriskmanagementlimits. Asageneralrule,trytosetyourstoplossmaximum10-15 pipsawayfromlocalminimaormaximaandallinallnot morethan25-35pipsawayfromtheentryprice.Tobemore exact,accordingtomyexperienceandautomatedtrading simulationstheoptimalstoplossforAUD/USD,NZD/USD andEUR/GBPis15-20pips,EUR/USD,USD/JPY,USD/CHFand USD/CADis20-25pips,GBP/USDis25-30pipsandforEUR/ AUD,GBP/AUDandGBP/JPYis30-35pipsawayfromtrade entry price. However, if you faced with a situation that neededtoputyourstoplossfartherthan35pipsawayfrom 74

  3. thetradeentryprice,itisagoodsignthattheoptimaltime toenterthattradehaspassedanditisbettertoignorethat trade. Settingtakeprofittargetcanalsobechallenging.Justlike settingstoploss,thisskillwillbeacquiredbytimebutasa goodtechnique,estimatingthemomentumofthepriceis very helpful to find the best take profit level. The chart pattern,thelengthofpinsinpinbarsandthedistanceof currentpricefrommovingaveragecanhelpyoutopredict themomentumofprice.Thentogetassuredthatyourprofit targetwillbehit,setitattwo/thirdwayofthetradeentry pricefromthefirstnearestsupportorresistancelevel(if youhaveconcludedthatthemomentumwillbesmall)or two/third way of the trade entry price from the second nearestsupportorresistancelevel(ifyouhaveconcluded thatthemomentumwillbelarge). Figure21.1HowtopredictTPtargetusingmomentum signals 75

  4. ThefollowingpicturesshowyouhowsetyourbestSLandTP targetsandhowcalculateyourrisk/rewardratio. Figure21.2HowtomanageyourriskinForex Figure21.3HowtomanageyourriskinForex 76

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