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Risk Management – Protect Your Money

Let’s face it, when you trade Forex you are planning to make money.

Forex is interesting and exciting. You can get a real buzz out of trading. But what is underlying that buzz. It’s the fact that you are making money doing something that you enjoy. Another part of the buzz comes from the risk that you could lose. And many people do lose, particularly in the early days of trading.

This is why you must manage your money. There are a number of factors to consider:

• deciding who much will be in your trading funds

• deciding how much you will risk on a trade

• deciding how to protect yourself during a trade

Your Trading Fund

Your fund is your money. I’ll bet you worked hard for it. When you start trading you have the greatest risk of losing. The tips below will help you limit your losses. But until you know what you are doing and train yourself to be disciplined the chances are you will make initial losses. I’ll take it that you have tried trading with a Demo account. If you haven’t do it now. Even if you are good on a Demo account trading for real money is very different. At the start you watch the charts and your mood will change with every up. You will make poor decisions. You may stay in a trade too long or not long enough.

Please decide carefully how much to put in your trading stash. Do not use money that you can’t afford to lose. No one likes to lose any money. But you need to be able to ride through the worst loss. Don’t put your rent/mortgage/food money on Forex. It’s not worth the risk. Your trading fund is the tool that you trade with. If you were a carpenter and someone stole your drill or power saw you would be really annoyed but it wouldn’t be the end of the world.

How Much to Use in a Trade? – Risk Management 

The next thing is to decide how much of your stash you should put on any one trade. Many experienced traders say that you should not put more than 5% of your fund on any one trade. Obviously you can have a number of trades running at once. To be honest it depends on your strategy. If you are snipping or scalping (moving in any out of positions very quickly to grab a few pips here and there) you probably can’t look at more than one or two trades at a time. If were then using only 5-10% of your fund there would not be much point in having the other 90% as it isn’t working for you. You may want to use more of your fund per trade. At the most never use more than 20% on any one trade. Only get near that level if you are closely monitoring things.

Protecting Yourself in Case the Trade goes wrong – Risk Management 

Every broker will offer a service which includes “stop losses”. A stop loss is a level at which the trade is automatically closed if you start to use more than you are prepared to do. For example, if you Bought Euro on the EUR/USD pair you would be betting that it goes up. If you buy at 1.35175 you may set a stop loss at 1.34175. If the market suddenly crashes when you are making coffee, playing with the kids or fast asleep the trade will close at the stop loss. It isn’t great but, it’s not the end of the world. If you have no stop loss you will keep losing money until your fund has disappeared.

Another word of caution; most brokers will close all your positions if you fund falls to zero. No all do. In theory if the market keeps going against you you are liable to pay all the losses and not just the amount in your account. Make sure your broker will do this.

Protecting Yourself if the trade goes right – Risk Management

This seems a little odd. But you can use “take Profit” points. This is the flip side of stop losses. If the market goes with you it will automatically close the trade and lock in your profit at the level you have chosen. This is important. First it is a good discipline to think in advance how much you want to make. Second there is nothing worse than coming back to your desk and seeing that the market has hardly moved with you at all or gone against you. It is much worse when you see that at one point the market had actually reached a point where you would have taken a profit.

Again if you are at your desk (or have a mobile platform) you will be able to adjust your take profit point upwards if the market is really moving strongly in your direction in the hope of getting an even greater profit. Please only do this if the market is moving unusually strongly, perhaps after a major announcement. Otherwise just bank you profit and move on to the next trade.

“Trailing Stop Losses” are another way of protecting yourself and something that you need to know. You can set it to remain at say 100 points below your start. Take the example above again. You have bought at 1.35175. You set a trailing stop loss at 1.34157. But this time the market moves up and you are in profit If it moves u to 37.175 the trailing stop loss will trail 100 points behind the highest price. This means that your (trailing) stop loss will have moved up to 1.36175. This means that 100 points profit are locked in should the market reverse. Trailing stop losses are a great way to protect yourself while hoping to lock in some profit.

Don’t forget that even if you have set a stop loss or take profit point you can still close the trail manually. Sometimes you just want to forget about the markets. Sometimes you don’t want to be trying to relax when part of your brain is wondering what is happening with your positions. This is a great plan. You need to stop thinking about the markets. They will still be there later or on the next trading day.

Binary Options are another way some people prefer to go. The attraction is binaries is that you know what you will gain and what you will lose at the start of the trade. Generally speaking you can set the position and leave your desk. But the “all or nothing” style if not for all. Try out different ways of trading and different strategies. Pick whatever feels right for you. Don’t do it because someone, or some website, says it’s the way to go.

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