RM

Risk Management

Greetings, today we’ll be discussing risk management. Last lesson we learned what you do to make money. This lesson, we’ll learn how to keep it in your pocket, as opposed to losing it, aka Risk Management.

I’ve seen far too many times, how people painstakingly grow their account, and then manager to lose months, if not year of progress in a few bad deals. That’s why I put together the four golden rules of money management:

1)      Risk/trade should be no bigger than 2% of your deposit. Accordingly, if your deposit is 1k, your stoploss shouldn’t be more than 20 bucks.

2)      If you lose 10% of your deposit, stop, take a step back, and figure out your mistake. Sometimes a few los deals result is trading that’s more akin to gambling, which is a terrible idea.

3)      A maximum of 2 trades at a time. If you’re a beginner, you won’t manage, say, 10 trades at a time, so keep it simple – no more than two.

4)      The safe rule.

Now, all of those are pretty self-explanatory, apart from the last one, let’s explain what this safe rule is.

Let me show you an example:

We open a position here, with a stop loss of 100 pips. After the price goes our way for a 100 pips, we close half of the deal, say, one of 2 orders.

Safe-Rule
Safe Rule

The next take profit would be the closes level or zone.

The logic here is that the price sometimes goes your way, then suddenly spikes up to your stop loss, and then keeps going your direction, except you already stopped out. To prevent this from being entirely tragic, you put a takeprofit at the same distance from the order as your stop loss, and, chances are, the price will hit your first TP before, say, spiking and stopping you out, but that puts you at 0, as opposed to -100.

Now, some more examples.

First thing’s first, impulsive zones.

impulse
An Impulse

Now we wait for confirmation, after that, we mark the zone as a level.

Level
Level

Then we wait for the price to come back to this zone. Comes back, forms a fractal, now, the most important part – we measure our stop loss, which should be our nearest preceding high point (Ctrl+f should help), and in this case that’s 310 pips.

Entry
Entry

Let’s remember our first rules – risk should be no higher than 2 % of your deposit, in our case, we have 10 000 dollars, which means the risk mustn’t be higher than 200 dollars, lets increase the Sl to 400 pips. That means that we can go in with a maximum of 0.5 lot size, which would be 200 usd. For the safe rule, we open two positions, the sum volume being 0.5, so 0.25 volume apiece. So both our SL is 400 pips, the first TP is also 400, and the second is the nearest zone. The price meanders down to our first tp, so if the price bounces to our stop, we’ll break even.

hit-tp
hit our tp

I think it’s very simple, in addition to being a very good technique for trading in general.

Look, people make mistakes, especially on forex, and this really helps shield newbies, and if I’m honest, professionals from screwing up and killing their deposit in just a couple of bad trades.

Here’s another prime example from last lesson

example
example

We measure our stop loss at 300 pips, making our sum lot size 0,6, so two at 0.3. Again, first tp is the same as sl, and the second is at the nearest zone

Sadly, the price spiked straight away and stopped us out. Upsetting, to be sure, but imagine if we went in with a bigger volume, like 20% of our deposit – that would be 2000 dollars lost in one fell swoop, and I assure you, the upset would be far graver. Just to reiterate, if the price spikes, stops you out, and then goes back, just reopen your position, but don’t forget to re-measure your stop loss. Here it’s 700 pips, that puts us at a lot size of 0.2, So we open two orders, 0.1 lot each, and follow the same drill.

success
Success

That was rather simple, don’t you find? To sum up – risk is a bad idea when it comes to money, and this little rule saves you a lot of heartache by giving you strict rules to follow, making it quite tricky to crew up.

Good luck on your homework, Thanks for reading, and have a good day.