RISK MANAGEMENT.doc

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 limit3: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 a cumulative 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 new block of trades fail to show a cumulative profit or have more losing trades than winning 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 I may 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 my daily stop-loss for the next trade dayhit this level of net dollar loss during the current days 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 each month. This is my monthly stop-losshit this level of net dollar loss during the current months 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 $10,000 balance in each account.Money ManagementMoney management is a critical point that shows difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders dont understand how important it is.Its important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.There are different money management strategies. They all aim at preserving your balance from high risk exposure.First of all, you should understand the following term Core equityCore equity = Starting balance - Amount in open positions.If you have a balance of 10,000$ 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$Its important to understand whats meant by core equity since your money management will depend on this equity.We will explain here one model of money management that has proved high anual return and limited risk. The standard account that we will be discussing is 100,000$ 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. Its 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.Thiss 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. Its 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. Thiss 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$. If you want to enter a second position then you should calculate 1% risk of your core equity not of your starting balance!. Itmeans that the second trade risk should never be more than 900$. 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$Its important that you diversify your prders between currencies that have low correlation.For example, If you have long EUR/USD then you shouldnt long GBP/USD since they have high correlation. If you have long EUR/USD and GBP/USD positions and risking 3% per trade then your risk is 6% since the trades will tend to end in same direction.If you want to trade both EUR/USD and GBP/USD and your standard position size from your money management is 10,000$ (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 strategyIts very important to understand these 2 strategies.-Martingale rule = increasing your risk when losing !Thiss a startegy adopted by gamblers which claims that you should increase the size of you trades when losing. Its 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$High return strategyThis strategy is for traders looking for higher return and still preserving their starting balance.According to your money management rules,you should be risking 1% of you balance. If you start with 10,000$ 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 wont 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 maturely. If your desired stop losses do not come within 2% of your account dont 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 its going to get you in the long run.Always have a trading strategy . make a habit to stick to it doesnt matter how desperate you are. Always trust your strategy but not bloomberg or some statement from citibank. Dont 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 its own characteristics. No two pairs are the same. Dont trade all the pairs yourbrokercan 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.Dont 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. Dont 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. Dont 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 PlanTodays 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, Ill 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 targetlevel, 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 makers wealth should be put into risk in order to maximize the decision makers utility function.Why should we follow the money management?The main reason is that we can survive in trading for long time! Weshould remember that survival is the first task, after that we can makemoney.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 shouldknow that big volume also helps to vanish your capital rapidly. I think2-3% of your capital is more enough to earn a well money for longrun.We can view two simple examples below. One person invest 2% of hiscapital and another person invest 10% of his capital. After 10consecutivelosses how much amount remains in their balance.Compare between 2% and 10% risk in forex tradeIt is very much clear that there are huge difference between 2% and 10%of the account balance per trade. First person who made 10 trades with2% risking under the worst conditions would lose only 17% of his capital.On the other hand who took 10% risk per trade under worst situationslost 60% of his capital. By this simple calculation, you got the main reasonto maintain proper money manag