Improve Your Risk Management
Risk management usually ranks very low on the priorities list of most traders. Many beginners and Professional traders are always searching for ways to improve. Typically the way of finding a better indicator, more accurate entry signals or worrying about stop hunting and improper algorithm-trading practices.
However, without proper knowledge about risk management, profitable trading is difficult. A trader needs to understand how to manage risk, size positions, create a positive outlook for performance, and set orders correctly if he wants to become a profitable and professional trader.
8 Ways to Improve Your Risk Management in Forex Trading Success
Here are 8 Ways to Improve Your Risk Management in Forex Trading Success and avoid the most common problems that cause traders to lose money.
1. Setting Orders and the Reward: Risk Ratio
When you spot an entry signal, think where you don’t place your stop loss and take profit order first. Once you have identified reasonable price levels for orders, measure the risk: reward ratio. If it doesn’t meet your requirements, skip the trade. Don’t try to open your take profit order or tighten your stop loss to achieve a higher reward: risk ratio.
The reward of a trade is always potential and uncertain. The risk is the only think you can control your trade.
Most novice traders do this the opposite way: they come up with a random reward: risk ratio and then manipulate their stop and profit orders to achieve their ratio.
Click on Below Video: Professional Traders Giving Amazing Advice
2. Avoid Break-Even Stops
Moving the stop loss to the point of entry and so creating a “no risk” trade is a very dangerous and often unprofitable plan. Whereas it’s right and advisable to protect the position, the break-even strategy often leads to a variety of problems.
Especially if you are trading based on simple technical analysis, your point of entry is usually very obvious, and many traders will have a very similar entry. Obviously, the pros know that, and you can often see that price retraces back and squeezes the amateurs at the very obvious price levels, just before price then turns back into the initial direction. A break-even stop will get out of potentially profitable trades if you move your stop too soon.
3. Never Even Use Fixed Stop Distances
Many trading strategies advise you to use a fixed amount of points/pips on stop loss and take profit orders across different instruments and even markets. Those “shortcuts” and generalizations neglect entirely how price moves naturally and how financial markets work.
Volatility is continually changing and therefore the much price moves in any given day and how much it fluctuates changes all the time. In times of higher volatility, you set your stop loss and take profit orders properly to avoid the premature stop runs and to maximize the profits when the price swings more. And in times of low volatility, you have to set the orders closer to entry and not be overly optimistic.
Next, trading with fixed distances doesn’t let you chose reasonable price levels, and it takes away all the flexibility you need to have as a trader. Always be aware of essential price levels and barriers such as round numbers, big averages, Fibonacci levels or only open support and resistance.
4. Compare Win Rate and Reward: Risk Together
Many traders claim that the figure of win rate is useless. But those traders miss a very important point. While observing the win rate only will provide you with no valuable insights, combining win rate and the risk-reward ratio can be seen as the Holy Grail in trading.
It’s important to understand that you neither need an insanely high winrate nor have to ride your trades for a very long time.
Trying to achieve a high astronomical win rate or believing that you have to ride trades for a long time often create wrong expectations and then leads to incorrect assumptions and, finally, to mistakes in how traders approach their trading.
5. Don’t use daily Performance Targets
Many Traders randomly set their daily or weekly performance targets. Such an approach is very dangerous. Setting you daily goals creates a lot of pressure, and it usually creates a need to trade.
Here are some ideas on how to set the trading goals in the right way.
Longer Term (Semiannually)
Analyze your trades, focusing on how well you executed your trades to get an understanding of the level of professionalism. Find weaknesses in your trading and adjust accordingly. This will lead to profitable trading inevitably.
Mid Term (Weekly and Monthly)
Follow a professional routine, plan your trades, obey your rules, journal your trades, review your trades and make sure that you learn the right lessons.
Short Term (Daily and Weekly)
Focus on the best possible trade execution and on how well you follow the rules/plan.
6. Position Sizing
When it comes to position sizing, traders pick a random number such as 1%, 2% or 3% and then apply to it all their trades without ever thinking about the position sizing again.
Trading is an activity of chance, such as professional betting or poker. It is common practice to vary the amount you wager, based on the likelihood of the outcome. If you hold a strong hand in poker, you had bet more than when you see almost no chances of winning, right?
The same holds true for trading. If you trade multiple setups or strategies, you will see that each setup and strategy has a different win rate and also that the reward: risk ratios on different strategies vary.
Thus, you should reduce your position size on setups with a lower win rate and increase the position size when your win rate is higher.
Following the approach of dynamic position sizing will help you reduce your account volatility and potentially help you to improve account growth.
Click on Below Video: Position Sizing
7. Take Spread Seriously
For the most liquid instruments, the spread is usually a few pips, and therefore the traders view them as they weren’t even existent.
Research shows that only about 1% of all day traders can profit net of fees.
The average day trader usually holds his trades for anywhere
Between 5 and 200 pips. If the spread on an instrument is 2 pips, it means that you pay a fee of 10% on trades with a profit of 20 pips. And even if you hold the trade for 50 pips, the spread amounts to almost 5%. Those costs can result in the significant drawbacks for trading system and even turn winning into a losing system. Therefore, start monitoring spread strictly and avoid instruments or times where spreads are high.
8. Correlations Increasing Risk Unknowingly
If you are a forex trader, you can often see a very strong correlation between the certain forex pairs.
When it comes to money and risk management, it means that trading instruments which are positively correlated lead to increased risk.
Let’s illustrate this with an example:
You bought the EUR/USD and the GBP/USD, and you are risked 1.5% on each trade; the correlation between those 2 instruments is highly positive. It means that if the EUR/USD goes up 1%, the GBP/USD goes up 0.90% as well. Having a long position in both EUR/USD and the GBP/USD is then equal to having 1 position open and risking 2.7% on it.
It is a very simple way of looking at correlations, but it gives you an idea of what to keep in mind when trading the correlated instruments.
These 8 Ways to Improve Your Risk Management in Forex Trading Success help you to avoid the most common problems that cause traders to lose money.