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How to Manage Risk while Forex Trading

Discussion in 'Forex Basics Boot Camp - Fx Articles by Pharaoh' started by Pharaoh, May 12, 2008.

  1. christoify

    christoify Recruit

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    A very good lesson indeed.

    I have learnt a very good lesson from this. when I started using my strategy little did I know that I could sustain series of losses one after the other but having seen that I'm not the only person that is or that passed through the same. but can any one over there suggest to me the best risk ratio or percentage for a mini account of 1000 dollar?
     
  2. Pharaoh

    Pharaoh 1st Lieutenant

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    Leverage controls how much of a position you can open. If you open as much as leverage permits, you will fail. Doing a few simple calculations can save you from risking more than a few percent of your account no matter what the leverage is. The only ridiculous part is that many brokerages don't allow traders to set lower leverage as an added safety measure against moments of "irrational exuberance."

    Think of risk management like observing the speed limit in your forex account. Some accounts can go 100 mph, others 200, 300, or even 400 mph. The problem is that you are driving through hairpin turns on a mountain. If you push it to the edge, you will crash and burn. If you follow your self-set, reasonable speed limit, you will scrape the edges now and then and maybe knock off your mirrors, but your car will get a lot farther while you learn to drive it.

    If you really feel you can't control your urge to push the accelerator to the floor, then you probably should try to find a broker that will let you set a very low leverage. If you can control yourself and do some simple math, then it shouldn't matter how high the maximum leverage is.

    I had my risk management rules worked out before I really started looking for a broker, so the leverage offered wasn't even a factor that I considered.
     
  3. guapo

    guapo Recruit

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    Hi,
    useful article of course. My compliments for that.
    But what lot of traders face is the fact not being able to say goodbye to a losing trade.
    They start a trade not levering to much, probably just a minilot.
    Trade goes against them and...oops let's get a second lot.
    It goes further against them, probably also facing a good opportunity in another pair....and before they know, and could have imagined, MARGIN CALL...
    My opinion, only use more leverage if the initial trade is with you.
    Never ,ever try to catch the falling knife by doubling,tripling your loosing position.
    There's no guarantee at all there will be a reverse after entering your second, third or even fourth lot.
    Think of this, would you risk half your money playing a one-bet game at a roulette table in a casino ??
    That's exactly what you're doing if you lever too much because of doubling or tripling your position while trying to average your initial entry.
    Besides, there's no free lunch.
    Therefor, do your exercises and practice to get your odds.

    Good trading and may the profits be with you.

    Regards Guapo.
     
  4. Pharaoh

    Pharaoh 1st Lieutenant

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    Guapo,

    That's a very good point. Believe me, I've faced to temptation to add to a loosing position because I could get in at a "discount" price. I think my success record at trying to do that was about 1 in 5, so I gave up the practice.

    I've also experienced the thought of "it's going to go 20 pips past my stoploss before reversing, so I'll move my stop 25 pips farther out." After throwing away my money a few times on this, I have a firm rule. I only move stoplosses in my favor, never against. The only time I violate this rule is if I temporarily bring in stoplosses before a news event, I think it's ok to return them to their previous position afterwards.
     
  5. Justin Jay

    Justin Jay Recruit

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    What kind of an idiot would risk 50% of his account on ONE trade??
     
  6. Pharaoh

    Pharaoh 1st Lieutenant

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    I can think of several kinds of people who could lose 50% or more of an account on a single trade.

    1. Someone who doesn't understand their broker platform and enters too large of a trade.

    2. The same kind of person who bets his monthly mortgage on a hunch. Compulsive gamblers should not trade forex.

    3. Someone who trades with no stoploss (not even an emergency stoploss). "Hey, the market never moves over 100 pips in 2 minutes when there's no news release scheduled, right?"

    4. The new trader who has no clue about risk management and can only think about how much profit the trade will make, especially if he's just bought some over-hyped "no lose" system.

    I'm sure there are more.
     
  7. Millionaire

    Millionaire Recruit

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    You know what Pharoah, today I closed my evaluation for the month of Oct and here what I found,
    60% of my trades were WIN, 40% LOSSES. and my account dropped 20% down, how is that happend ! because of poor reward to risk ration.
    I'll start up in Nov with a very restrict plan for 2% - 3% maximum loss per each trade, that's will quranty to me to live longer trading live until I become more experience.

    Regards,
     
  8. murpheytrader

    murpheytrader Private

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    restrict plans

    hi guys. I’m no sure if a very restrict plan as you say, 2 or 3% maximum loss per trade gives you the time to win on this market. Usually, the spread is a parameter to choose your order for stop losing or winning. What if the trade at that moment lows just 2.5%, suddenly it starts going up? You may be losing the spread friend. You should take some more strategies or check the scripts given by your metatrade4 platform if is that which you are using, you know it?
     
  9. Pharaoh

    Pharaoh 1st Lieutenant

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    Murphy, you need to look at a couple of factors.

    If you get stopped out all the time on trade that would have gone well with a larger stoploss, try reducing your trade size and increase the stoploss. This will keep your risk the same.

    Another alternative is to see if there's a way to improve your entry point. If your trade system almost always seems to have you entering a good trade just before a price pullback, then don't enter with a market order. Instead, place a limit order so that you get a better entry price. Yes, you will miss some entries on good trades this way, but you'll be saving pips on the trades where your limit is hit.
     
  10. murpheytrader

    murpheytrader Private

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    Usually, I decide my entry point using some indicators, stop loose I’m used to avoid but I stop the order by myself before leaving the market. I don’t leave orders long. What you mean is to use some scripts that I find in my platform to choose instantly the moment to enter and maybe to close? It means I should use the system to works by itself? Murphey
     

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