RISK MANAGEMENT

RISK MANGEMENTAs always:∙20/10 position sizing rules.∙Maximum trade risk is 2% of trading equity.∙Daily stop-loss is 6% of trading equity.∙Monthly stop-loss is 10% of trading equity.∙Intraday trade limit—3:o After 2 wins or 2 losses, go do something else (stop trading!).o After 1 win and 1 loss, take a 3rd trade only if the direction is supported by the hourly price action.20/10 position sizing rules:∙Before I can trade a new strategy in a real-money account, I must trade that new strategy in a demo account (1-lot position) until my last 20-trade block shows acumulative profit and more winning than losing trades; and my last 10 trades in that block also show a cumulative profit with more winning than losing trades.∙Repeat the above step trading the new strategy in a real-money mini account.∙For each block of 20 trades that shows a cumulative profit with more winning than losing trades, I may add 1 lot to a trade position; but if the last 10 trades in a newblock of trades fail to show a cumulative profit or have more losing trades thanwinning ones, I must immediately reduce my trade position size by 1 lot.My trading equity is the total value of cash, cash equivalents, and open positions in my trading account(s).1.Calculate 2% of my trading equity after each closed trade. This is the maximum Imay risk on a new trade opportunity. I may risk less!2.Calculate 6% of my trading equity as of the close of trading each day. This is mydaily stop-loss for the next trade day—hit this level of net dollar loss during thecurrent day’s trading and I must immediately close all open positions, and shut off my trading screens until the next trading day.3.Calculate 10% of my trading equity as of the close of trading on the last day of eachmonth. This is my monthly stop-loss—hit this level of net dollar loss during thecurrent month’s trading and I must immediately close all open positions, and refrain from trading in a real-money account until the first trading day of the next month.Continuing to trade in a demo account is encouraged.There is still little or no regulation of Forex brokers. This is a serious risk, and I manage it by having multiple brokers and having only one trading account per broker; and by deposit or withdrawal, starting each new month with a maximum $10,000 balance in each account.Money ManagementMoney management is a critical point that shows difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don't understand how important it is.It's important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.There are different money management strategies. They all aim at preserving your balance from high risk exposure.First of all, you should understand the following term Core equityCore equity = Starting balance - Amount in open positions.If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade,your core equity will be 8,000$It's important to understand what's meant by core equity since your money management will depend on this equity.We will explain here one model of money management that has proved high anual return and limited risk. The standard account that we will be discussing is 100,000$ account with 20:1 leverage . Anyway,you can adapt this strategy to fit smaller or bigger trading accounts.Money management strategyYour risk per a trade should never exceed 3% per trade. It's better to adjust your risk to 1% or 2%We prefer a risk of 1% but if you are confident in your trading system then you can lever your risk up to 3% 1% risk of a 100,000$ account = 1,000$You should adjust your stop loss so that you never lose more than 1,000$ per a single trade.If you are a short term trader and you place your stop loss 50 pips below/above your entry point .50 pips = 1,000$1 pips = 20$The size of your trade should be adjusted so that you risk 20$/pip. With 20:1 leverage,your trade size will be 200,000$If the trade is stopped, you will lose 1,000$ which is 1% of your balance.This trade will require 10,000$ = 10% of your balance.If you are a long term trader and you place your stop loss 200 pips below/above your entry point.200 pips = 1,000$1 pip = 5$The size of your trade should be adjusted so that you risk 5$/pip. With 20:1 leverage, your trade size will be 50,000$If the trade is stopped, you will lose 1,000$ which is 1% of your balance.This trade will require 2,500$ = 2.5% of your balance.This's just an example. Your trading balance and leverage provided by your broker may differ from this formula. The most important is to stick to the 1% risk rule. Never risk too much in one trade. It's a fatal mistake when a trader lose 2 or 3 trades in a row, then he will be confident that his next trade will be winning and he may add more money to this trade. This's how you can blow up your account in a short time! A disciplined trader should never let his emotions and greed control his decisions.DiversificationTrading one currnecy pair will generate few entry signals. It would be better to diversify your trades between several currencies. If you have 100,000$ balance and you have open position with 10,000$ then your core equity is 90,000$. If you want to enter a second position then you should calculate 1% risk of your coreequity not of your starting balance!. Itmeans that the second trade risk should never be more than 900$. If you want to enter a 3rd position and your core equity is 80,000$ then the risk per 3rd trade should not exceed 800$It's important that you diversify your prders between currencies that have low correlation.For example, If you have long EUR/USD then you shouldn't long GBP/USD since they have high correlation. If you have long EUR/USD and GBP/USD positions and risking 3% per trade then your risk is 6% since the trades will tend to end in same direction.If you want to trade both EUR/USD and GBP/USD and your standard position size from your money management is 10,000$ (1% risk rule) then you can trade 5,000$ EUR/USD and 5,000$ GBP/USD. In this way,you will be risking 0.5% on each position.The Martingale and anti-martingale strategyIt's very important to understand these 2 strategies.-Martingale rule = increasing your risk when losing !This's a startegy adopted by gamblers which claims that you should increase the size of you trades when losing. It's applied in gambling in the following way Bet 10$,if you lose bet 20$,if you lose bet 40$,if you lose bet 80$,if you lose bet 160$..etcThis strategy assumes that after 4 or 5 losing trades,your chance to win is bigger so you should add more money to recover your loss! The truth is that the odds are same in spite of your previous loss! If you have 5 losses in a row ,still your odds for 6th bet 50:50! The same fatal mistake can be made by some novice traders. For example,if a trader started with a abalance of 10,000$ and after 4 losing trades (each is 1,000$) his balance is 6000$. The trader will think that he has higher chances of winning the 5th trade then he will increase ths size of his position 4 times to recover his loss. If he lose,his balance will be 2,000$!! He will never recover from 2,000$ to his startiing balance 10,000$. A disciplined trader should never use such gambling method unless he wants to lose his money in a short time.-Anti-martingale rule = increase your risk when winning& decrease your risk when losingIt means that the trader should adjust the size of his positions according to his new gains or losses. Example: Trader A starts with a balance of 10,000$. His standard trade size is 1,000$After 6 months,his balance is 15,000$. He should adjust his trade size to 1,500$Trader B starts with 10,000$.His standard trade size is 1,000$After 6 months his balance is 8,000$. He should adjust his trade size to 800$High return strategyThis strategy is for traders looking for higher return and still preserving their starting balance.According to your money management rules,you should be risking 1% of you balance. If you start with10,000$ and your trade size is 1,000$ (Risk 1%) After 1 year,your balance is 15,000$. Now you have your initial balance + 5,000$ profit. You can increase your potential profit by risking more from this profit while restricting your initial balance risk to 1%. For example,you can calcualte your trade in the following pattern:1% risk 10,000$ (initial balance)+ 5% of 5,000$ (profit)In this way,you will have more potential for higher returns and on the same time you are still risking 1% of your initial deposit.3 keys to successful trading are:1. StrategyYou must have a proven set of rules to tell you when to enter, when to exit and when to stay out of the market. 2. Money ManagementYou must practice proper money management by controlling your risk. Great traders do not risk more than 3% of their capital per trade.3. State of MindYou must be disciplined and not let emotions rule you when it comes to trading. In order to do so, one of the most effective ways that I know is to have a trading plan and follow it diligently.Looks simple but not everyone is discipline to accomplish that.You can drive fear and greed completely only when you1) Realize that trading is a business and 2) Good money management skills.The simple rules for high profitsYour brain is your trading engine. Your engine can make you either a loser or a winner.Drop the emotions; your power is your intelligence.Stay 200% FOCUSED.Do not be greedy. Trade as long as you have planned.The luck won’t help you.Invest in yourself. Spend much time reading and studying the techniques of the successful traders, then practice with a demo account.If you fail, call it a day and do something else then will distract you. You can do yoga, sports, meet a friend. You have to stop thinking about trading.Auslanco - GBP/JPY and GBP/USD (newstrade)Dear traders....I decided to start my own thread because there are some other great traders who can provide very valuable analysis of GBP/JPY on the other thread , and I feel that my trade calls are overshadowing those good analysis contributed by other experienced traders.This thread is mainly focused for new traders who want to learn my trading methods.Money Management & Trading habits:Maximum 2% risk per pair. What that means is when you calculate your stop losses your stop loss amount has to be within 2% of your account .If the trade goes against you, the maximum you will loose is 2% of your account. This way it also prevents you from getting panic attacks when the trade retrace against you resulting you close the trade pre matur ely. If your desired stop losses do not come within 2% of your account don’t take that trade. As I always say, you may miss one trade but there are millions more to come.You always have to calculate your risk every time before you enter your trades.Your risk to profit ratio has to be minimum 1:1. That means if you are taking a 2% risk on a trade make sure your profit target would be at least 2%.Always have realistic targets. My aim is 300 % capital growth per year. The lesser your target is lesser the risk of losing your own money. Even if you have 50% capital growth per year you are doing better than 90% of the worlds biggest hedge funds.More trades you take the more you expose your account for losses. No trader in this world can profit from every single market move.Patience plays a big part in trading. Take the trades only if you are at least 90% sure of profiting from it. If you are not sure stay away from the trade. Staying on the sideline is as good as winning.Never trade against the trend. Specially with a high volatile pair like GBP/JPY. It may give you couple of winning trades. But it’s going to get you in the long run.Always have a trading strategy ... make a habit to stick to it doesn’t matter how desperate you are. Always trust your strategy but not bloomberg or some statement from citibank. Don’t go with your gut feeling because 95% of the time your gut feeling is wrong.Your charts are your forex bible. Everything what you need to know about forex is on your charts. You will learn something new everyday from you charts.Specialize in one or two pairs. Every single pair has it’s own characteristics. No two pairs are the same. Don’t trade all the pairs your broker can offer. If you specialize in one or two pairs very soon you will be able to read the pair like a road map .Stay away from the ranging markets. There will be enough of trend break outs on this pair than you ever want. Why take any extra risks trying to chase 20 pips on a ranging markets when you can grab 200 pips on a break out.As Monarc mentioned traders are a greedy bunch. Less greedy once are the most successful once.Don’t try to chase every single pip or market movement. Have a realistic weekly or monthly target as a percentage of your account . Not the number of pips. If you have already achieved that target stay away from the market. As I mentioned before.. the more you trade there is more risk of losing your money.The losses are part of the game. Do not try to cover all your previous losses from your next trade. First your trading plan has to include at least 50% of losing trades. Then you can cut down on the number of losing trades while you gain experience and confidence.When you start you must demo trade at least for the first 3 months to build a trading strategy. Then for the next 3 months trade on a demo account or a micro account and test your strategy coupled with a good money management strategy. When you are fully confident then trade with your real account.Use minimum account leverage. Don’t abuse it. My recommendation for new traders is maximum one mini lot for every $2500 or one full lot for every $25000.At last ... remember there is no easy way to become a good consistently profitable trader. No one can become a profitable trader overnight. As everything else in life it takes time, patience lots of sacrifices and learning. Don’t be afraid of mistakes.It took me 8 months to make my first consistent $100 per week. Since then making money is like a walk in the park.Basic Forex Money Management PlanToday's article is based on money management for trading forex successfully. If you are a new trader or experienced trader,it will help you for both.Now, it is time to ask what is money management or what does it mean by money management?For understanding easily, I'll explain four questions related it.Q1: How much risk per trade will you take on your capital when market go against you?Suppose, you have $10,000 balance in your account. What is the portion of balance you agree to lose per trade if market suddenly moves against your desired direction. Is it 1%, 2%, 3%, 4%, 5% or up to 100% of your capital?Q2: How much profit will you take when market go towards you?It means what is your profit target level, when price hit your target, you come out from market. Every trader has his own profit target level according to calculation.Q3: What is the ratio of risk-reward?How much you are willing to risk for the chance of a good profit. It may be worth risking 50 points to make 100 points, but it may not be worth risking 50 points to make 30 points.Q4: what is the win-loss ratio?A ratio of the total number of winning trades to the number of losing trades. It does not take into account how much was won or lost simply if they were winners or losers.If you made 30 trades and of them 12 were winners 18 were losers, your win/loss ratio would be 2:3. Your probability of success would be 40%.Definition: Money management is used in Investment management and deals with the question of how much risk a decision maker should take in situations where uncertainty is present. More precisely what percentage or what part of the decision maker's wealth should be put into risk in order to maximize the decision maker's utility function.Why should we follow the money management?The main reason is that we can survive in trading for long time! We should remember that survival is the first task, after that we can make money.Some basic rules of good money management:1. Risk only 2-3% of total balanceMost of the time new traders think that big volume means high return of money, you should know that big volume also helps to vanish your capital rapidly. I think 2-3% of your capital is more enough to earn a well money for long run.On the other hand who took 10% risk per trade under worst situations lost 60% of his capital. By this simple calculation, you got the main reason to maintain proper money management.4. A practical example of applying money management rulesRisking no more than 2-3% of the total account per trade... How does it work in practice? Let's use an example to understand it. We have opened a trading account of $1000 USD with a broker and got 20:1 leverage. So, now we haveleveraged ourselves to $20 000 USD to begin trading with.More money means a higher trading power. Correct. But, the higher the trading power, the higher the risks; and when we talk about risks we talk about a real account value which will decrease with every loss sustained during trading.So, when we say risking no more than 2-3% of a total account value we mean the real account value-which is $1000 USD in our case.Now, let's start trading and do the math.Let's say, we have decided to risk 2% of the account in each trade.$1000 x 2% = $20 USD.This means that when the price goes against us, we will need to be out of the trade once we are $20 dollars down.Ok, time to trade. Our trading power measures $20 000 USD(thanks to our leverage).What will happen if we try to trade them all at once: for one $20 000 dollar trading lot order our Forex broker gives us a pip value of $2 dollars. This means that with each pip gained we will have +$2 USD in our pocket. Butthis also means that with each pip lost our real account will shrink by $2 dollars.Since we can afford to lose only $20 dollars in one trade, we'll exiting a trade once the market makes... -10 pips! Yes, only 10 pips is required this time to reach our 2% limit.10 pips * $2 USD per 1 pip = $20 dollars, which is our 2% account limit according with the money managementrule we've chosen to follow.Now, let's try to trade a $10 000 dollar position. Thepip value for this position size will be $1 USD.The math goes as follows: we can stay in trade until market makes -20 pips against us. Yes, this time we can sustain a bigger market shift. If we decrease our trading lot to $5000 USD, our sustainability will raise to -40 pips against our trade.(The pip value for $5000 dollar lot will be $0.50 cents).And so on.As you can see, with the money management rule in place our real account is under control. And even ifleverage allows trading larger positions, the risks should be always under control.If you want to learn trading Forex, you can participate in my forex trading course in Bangladesh.Trading is a delicate balance of Strategy , Money management and Psychology.Let us focus on major Trading Psychologies-1) Personal Psychology2) Psychology of Money management3) Trading method psychologyTrader’s Personal PsychologyThis umbrella includes all the qualities of your mind- Greed , Fear, Ignorance, Arrogance, Humbleness, Peace etc. Before we continue any further let us know the fact that Greed and fear are same. The only difference is in your perception.Greed and FearWhenever you feel greedy , there is an indirect message into your subconscious that you are also fearful.Thus being greedy will invite fear automatically. Let’s remember the early days wh en you started trading and hoped that it turned out to be hundreds of thousand dollars winner! You positioned yourself in the market on greed using the depths of leverage you can. Thus you were greedy, but at the same moment you invited fear of losing not only what you have but also gaining in debts. Your this fearful behavior within did put you under immense pressure and finally you landed up in the worst situation. Thus driving the greed automatically drives the fear within you. Greed is the Action and fear is the Reaction. Treat trading as a BUSINESS. Why you want to double your account every month. Keeping a realist approach of 5 to 10% a month is decent enough to trade for living. The problem with many small players is 5 or 10% a month is BS and thus they want to gear for doubling or tripling the account in a month. But you then invite greed and fear factor. Be realistic about trading. This is not gambling (unless you make it), it’s about surviving. You can only survive here if you treat this as busines s. You can drive fear and greed completely only when you1) Realize that trading is a business and 2) Good money management skills. We will deal it more later on.More on Personal terCheersWinstonIgnoranceIt is the lack to know what you must know! As traders we must constantly realize that markets change. The only unchangeable truth in markets is that it changes all the time on all time frames. You must set aside a day in a week for your own updation of knowledge. You can surf the net, join trading fourms and do everything all you can. When you are aware of the latest developments, Ignorance is automatically dissolved. Thus Trading methods, Broker discussions and other major Fundamental news are really very important. They act like Sugar in Tea. Trading methods are essentially Sugar in Tea. Without it the whole Tea would be bitter. Only a drop of tea in lump of sugar would kill the taste of tea.ArroganceIt is the overconfidence or The BIG ego coming your way. Many a times you will win in the market consecutively and that is the moment you are on top of the world. It happened with me, others and will also happen to you. But let me assure you that it will take no time for the markets to break your arrogance. Thus, you win or lose just have fun. No feeling of sadness or no arrogance when winning. This is the key to winning trading psychology.The King of Beast – ATTACHED EXPECTATIONThis attitude alone is sufficient to melt you down in almost all the aspects of life. There is noting mystic reason about not having this psychology. The simple and logical reason is FOCUS. Almost all the religious scriptures have stressed the importance of this attitude tons of times. When you start focusing on outcome, it implies that you want the external things behave according to your thought out plan. This means you are controlling the markets if you are attached with the outcome. You want the life to go on according to you. But you hardly realize that life was before you and still be there after you. How could you control the outcome? If you can’t control the outcome how could you have Attached Expectation? They say mind is an Amplifier. It can amplify one thing at a time. When you amplify Results, how can you perform very well? You hardly channel your energy in real performing activity. This is the keyreason that you should not have attached expectation. However why would you want to do a thing without any goal. Even I can’t do it? Who can do it purely? Having a Balanced Expectation is the Key to success in any forms of life. In the background I know I want to make money. But when I am trading I just have fun and focus all my energy on the process. Again this could be compared with the Tea –Sugar analogy. Your Sweet Tea is the goal. But if your Tea is full of Sugar, could it taste nice?I hope that by now, you must have released most of your mental blocks which were restricting you from being a profitable trader. You have now just realized that the animal within you is lovely Pet. But now you have to get friendly with it.Trader’s Psychology of Money managementHere, we have focused our attention only on management of a trade. Firstly I would recommend you to start a small live account. This will take you on a journey-like experience without much to lose. With small live accounts you can still feel the Liveliness of your friend /enemy within. It does not matter even if you blow couple of live accounts. In fact if you are not blowing your small live accounts in the beginning of your trading career, I would smell it fishy. You must get used to live trading so much that it then becomes a part of your Right Brain. At this stage you start doing things automatically without efforts. Tell me did you try sleeping? What was the result? Remember the last time you had a sound sleep? I bet you can’t remember because you did it effortlessly and without knowing. Same thing applies in trading. The time when things will be automatic in trading, you are on that path of your trading career that hardly anyone gets it!Some people risk 1%, some 2, 3, 4, 5…10…20….. And some all they have. You still practice the Money Management style unknowingly. Whenever you start risking more than 3 or 5% of your equity, you are automatically inviting the Beast like Greed and Fear within you and I bet they will kill most of you at some point of your trading career. Most Successful traders do not risk more than 1% of their account on single trade. What is important is you should not risk your COMFORT ZONE. (Thanks to Bill M. Williams)The moment you risk anything more than your Comfort Zone, all the enemies within you wait to kill you at some point. What is a Comfort zone? It is really subjective. Suppose you have 1000$ to start with, 1% risk means 10$ , 2% is 20$ and 10% is 100$ .Some of you may be Comfortable with even 100$ risk. Now , you have One Million$ Live account. 0.5 % risk means 5000$, 1% is 10,000$, 2% is 20,000$ and 10% is 100,000$. I bet many people will go for as less as 0.1% i.e. 1000$ risk if were to handle a one million $ account.Thus it is not a hard and fast rule that you should risk only x% on your Live Account. Thus your risk should be COMFORT ZONE + TECHNICALLY ALLOWED RISK. Technically allowed risk is not 10% or 5%. It ranges any where from 0.1% to 2%. This is because Trading is a game of Probabilities. Every New hand is independent of the previous hand. You can have and will have at some point of time in your trading career 10 or more consecutive losses.IF YOU ARE NOT PREPARED FOR THIS DISASTER OF HAVING SUCH CONSECUTIVE LOSES, YOU ARE DESTINED TO BE THROWN OUT OF TRADING. Thus Your Risk is defined as COMFORT ZONE + TECHNICALLY ALLOWED RISK. This is the best gift from money management psychology you can ever present to yourself. Trading with the edge is all what you need. You don’t need to focus on single trade outcome.When you take 100 trades irrespective of outcomeswith Comfort Zone risk and a trading method with the edge, winning is sure! Yes you read it right. Give the edge the chance to prove its power. This can be only done when you trade uninterrupted at least for nearly 100 trades!note- there are many other complex MM strategies, however i have presented the most basic , simple , effective and consistently successful MM styleAll the BestWinstonMost of you are well tuned with this type of psychology. You must have searched for high % winning methods, even spent days and nights for Holy Grail. However there is a very big difference between an Expert trader and an amateur. Experts build not an extremely high percent winning strategy. They know that over a period of time, their odds will help them to survive. On the contract, Amateur will definitely have a very high percent winning method initially and still is a loser. The most fundamental reason for this phenomenon is amateurs and most traders try to curve fit their trading methods. The real problem is not with the method, rather within you. You carry a notion that all of your trades should be winning. You constantly optimize it whenever it fails to give the outcome you desired. The irony is you then start to look in the past for filters and come out with yet another modification of your trading method. Now you go for a live account and still suffer loses inspite of your strategy being optimized and curvedfit. This is because the market conditions in “NOW” are different from what you made your filters. This process repeats indefinitely until you are frustrated and end up giving your Trading Career. The root for failure is this type of attitude which wants to avoid the dark side of trading method. I assure you there’s no method without dark side. This dark side gives loses. The only thing under your control is limiting your risk on the basis of this dark side. From now onwards, you should stop curve fitting your trading method. Stop optimizations every time you have streak of losses. Again there should be a balance between optimizing and re-optimizing.Losses can’t be avoided. They will be there to any trading method. Those who promise you 100% winning methods are Snake oil vendors. Do not waste your time with them. The only thing you will gain with them (snake oil vendors) is 1000 things you should never do.Trading methods are needed to be developed according to one’s own personality. If you are D ay trader what a long term investing method do to you? Could it support you? However there are certain methods which only need a change in time frame and give you very good chances of winning in every market. Try to see reality of market without any biases. Your methods should be based on Market structure or market facts. When your methods are robust and successful on most of the markets and across many timeframes, they are backed with market facts and will continue to survive for the longterm with very rare optimizations.I hope you had a great time here! I wish you the true success for taming the untamed within you. This is the only real difference between consistent profitable traders and many losers. Read and re read the Trading Psychology until it sinks into your subconscious. Have a great Trading careerThank you all contributors and others........keep on coming to enrich others..I request all the posters stay away from negative statements and if you feel something is wrong ,please do。