Managing Forex Trading Risk like a Professional
May 7, 2020 (Investorideas.com Newswire) Only a small percentage of forex traders achieve consistency and that doesn't have to do with a secret trading methodology, but with a series of professional trading practices. Risk management is one of the main areas where traders fail to focus, leading to big losses each time a losing period happens. At the same time, most of the educational material online reduces risk management to "risk 2% per trade", when in reality, there are a few additional variables that must be taken into account.
A 3D risk management approach
The exposure for each trade, in percentage terms, is not enough to keep risk under control. It is just one of the factors that have an influence over one's trading performance. What traders should do is keep track of:
- Risk per trade;
- Risk/reward ratio.
Accuracy refers to the percentage of winning trades over a given period of time (week, month, year, etc.) or for a particular trading instrument. To calculate the risk/reward, one should divide the take profit (in pips term) by the stop loss.
If the risk is being analyzed based on a combination of the above-mentioned factors, a lot of misconceptions about trading become false. For example, some experts claim that a trader can't be profitable without an accuracy above 50%. That may not be the case since even with lower accuracy, profitability can be achieved if the risk/reward ratio is higher. At the same time, the combination of risk per trade, accuracy, and risk/reward allows traders to calculate their risk of ruin.
Additional risk management tools
Reducing the impact of losing trades is key in keeping a steady upward trading performance. Aside from a proper risk management model, traders can use plenty of features developed by brokers around the world. For example, dealCancellation is a unique tool from easyMarkets to undo losing trades within 1, 3 or 6 hours exchange for a small fee. Other brokers are adjusting leverage levels or provide volatility protection measures, helping traders to keep their market exposure balanced.
Having a well-established risk management strategy as well as using all the useful risk features will be an important factor in 2020, given the wild market volatility and the great level of short-term uncertainty.
Monitoring your risk of ruin
The risk of ruin is a statistical model which helps traders understand their chances of losing all their account based on the three variables previously mentioned. Luckily, there no need to make calculations on a constant basis, given that now we have risk of ruin calculators available for free.
One of the key points here is that only a small percentage of trade monitor their risk of ruin. They do that due to a lack of education most of the time and the result is always predictable: they make money for some time, only to encounter a losing streak which ends with them giving away the gains. The solution is to adjust the the risk management to keep the risk of ruin as close to zero as possible.
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