Risk Management basics - how to mitigate serious damage to your account,
We all know trading has its fair share of risks. I dare say some of you have blown an account already and that's why you're here; you're looking for an edge in the markets and want to profit and grow your account over time.
Luckily, you have come to the right place, since sentiment analysis is an incredibly powerful tool, but while we might have a good system (using TA and sentiment together), a good knowledge of Risk Management can never be ignored, especially if you want to be successful in the long term.
This August will mark my 10th year in trading FX. So hopefully I can share my experiences with you, for an awesome tool which I only discovered a few years ago.
Before I link the website URL, it's vital to understand your risk parameters for every trade.
Remember FX is not a "Get rich quick" scheme, that's how people blow their accounts; they bet too large, in the sheer hope of making money... and worst of all is betting too large to recoup recent loss. That's a huge mistake.
Over-leveraging is not only damaging to your account but has emotional and psychological complications also. For instance, if you've ever woken up in the middle of the night, worrying, checking your phone (when you should be getting restful sleep for the day ahead). You are very likely over-leveraged.
You want to trade as I do. I maintain a sense of peace and relaxed attitude to accompany my system, knowing my account is fully protected from collateral damage.
How can I be so relaxed and so zen-like? Because I know whatever happens I'm only ever risking a tiny portion of my account.
2. Your Risk / Ratio must never be greater than 5%. Ever.
3. The Stop-Loss is at your discretion. The smaller the stop, the greater your Risk/Reward.
4. The currency pair matters. Since GBP/AUD has twice the volatility of EUR/USD. So this is a required field.
And then therefore, we have the correct lot size for your trade. We see if we use a 2% R/R (to your account size of 10,000 USD) for EURUSD trade, we can use no more than 0.80 lot size, in gross total.
So that means you can only have one EURUSD trade at 0.80 lot, at any given time.
Naturally, your local currency affects this calculation of lot size. A trader in India would not use 0.80 lot sizes due to the USD/INR rate.
But regardless of this, the key to safe guarding your capital is understanding you have to set the Risk / Reward before you enter by setting lot size with respect to the size of your account. Do not ever ignore the R/R rules when it comes to your capital. Your job is to preserve funds the most efficient way possible.
Lastly, if you are struggling to come to terms with the small losses, you need to evaluate whether trading is for you. The most important thing to remember is that small losses (15, 20 pips) are perfectly "okay". You may have to train your brain to get this idea fully integrated in your consciousness. Small losses are ok.
You only ever want three outcomes to any trade:
1. Big win
2. Small win
3. Small loss
You do not ever want (4) Big loss... and this is what this article will hopefully make you understand how to avoid.