Two weeks ago we looked at the varying aspects of how to handle risk like a professional in our Forex trading. This week I would like to continue the theme of risk management further by looking into some of the less talked about aspects of controlling our risk in market speculation. Of course, maintaining a consistent reward to risk ration of at least 3:1 provides us with a solid foundation to work from, but there are other factors which must be taken into account when looking for low risk, high probability trading as well.
Rule number one in any kind of trading should ensure that your risk per trade is always less than your targeted reward. However, where many struggling traders falter is in actually finding these ideal setups. This is often due to the fact that many simply don’t know what they are looking for in an ideal trading opportunity. Even if you do know what an ideal setup looks like, you still need to be disciplined enough to actually wait for the opportunity to present itself and that requires patience. Here at Online Trading Academy, we teach our students to effectively utilize our rules-based core strategy, allowing them to think and trade with the mindset of a bank or major institution by understanding what a true picture of supply or demand looks like on a price chart.
When the concept of supply and demand is fully implemented, then it is down to the trader to follow the rules and allow the market to do its thing. However, finding and trading your levels is just one part of it. As I stated at the start of this article, risk management must always come first, above all else that must be taken into account before placing you trade:
Duration of your trades means how long you are in a position. Now don’t get me wrong, I would never suggest closing a trade early because I don’t like the way it is going or because I got nervous that I would not hit my profit target. However, there are certain times when it does not make sense to hold a position longer than a specified period. Take Sunday Gaps for example. In the shot below, we can see a decent buy at demand on the EURUSD:
The level matches our requirements for buying the pair and, so, we could take the trade with a stop loss order just below the zone around 1.1100 to protect us if the trade fails to work. I would always leave my trade alone from this point to either hit target or stop out. However, there is one exception to the rule of “set it and forget it” and that applies when we are going into the weekend. If the trade has not hit target or stop loss by the time the end of trading week comes around on a Friday, I will close my trade out at whatever price it is. The reason is simple; I don’t want to get caught on the wrong side of a Gap when the market re-opens on the coming Sunday. This could happen after all:
On the Sunday open, the EURUSD gapped down lower, opening around 150 lower than where it closed on the Friday. If I had left this trade open over the weekend with my original stop loss order around 1.1100, I would have actually taken a loss on the open. I would not have been filled at 1.1100 however. I would have actually been filled at 1.1000, enduring more than 100 pips of extra unplanned loss on the trade!
While gaps create great opportunity for trade profits, they can also create huge opportunities for trading losses as well. Our task as traders is to be fully aware of all potential outcomes when we are exposed to the market and, while duration of our FX trades is rarely something that we have to worry about, this does not mean that we simply ignore it either. Even the very best levels of Supply and Demand need to have the weekend gaps factored in to be safe and make sure that if our stop loss orders are hit, they are hit at the price we originally intend for them. In two weeks, join me for the third and final piece of this article where we will explore trading frequency and screening.
Written by Sam Evans, Online Trading Academy Instructor
After leaving University in 1999, Sam thrust himself into the media world, working as an executive producer and part-time presenter for London’s Capital FM. Roles in the record and film industry followed, where Sam conducted many promotional interviews and honed his presentation skills for nearly 7 years. With a strong desire to work for himself, Sam left the media industry behind and spent an intense 18 months studying to become a professional Life Coach, embarked on various property investments and gave in to his childhood fascination with the money markets by training to become a trader with Online Trading Academy. Since his graduation, he has been a full-time trader, specializing in Stock Index Futures and Forex.Under the guidance and mentorship of some of Online Trading Academy’s best instructors, Sam himself joined the teaching roster and forged his own unique style of trading. A devoted student of the Market, Sam’s focus is on strict risk management discipline, combined with a realistic approach to understanding the true nature of Price Action. Fuelled by a passion for the markets, Sam now teaches and presents for Online Trading Academy, welcoming and helping others into the rewarding world of trading.