Risk and Your Forex Trading Style
June 20th, 2009
The most critical part of any type of investing, is understanding your personal risk tolerance. Without a good comprehension of this, it will be way too easy for you to loose all your capital. There are many different types of trades you can make on the Forex, each possesses its own risk parameters and these will closely relate to your risk tolerance. Then there is your trading approach, conservative, moderate, and aggressive.
When you first come to Forex trading you may decide to trade a day chart. The bar movement over a day can be hundreds of pips, so when you select your stop-loss position you have to assess what your drawdown parameters are. If your money management stipulates a 3% funds exposure, you will encounter problems on day charts unless your account is large.
The 5M or 30M charts maybe more appropriate since the pip movement tends to be less, so your stop positions can fall within your management range.
Yes, we all want to make money from out trades, but exposing ones account to significant stop positions and large draw-downs is going to clean out your account and trading career in the blink of an eye.
An avarage risk level is 3% or $300 on a $10,000 account. Change this to pips, 1 standard lot ($100,000) has a pip value of $10 so if you trade end of day and your stop loss establishment, whether count-back or support and resistance or any other, determines a 100 pip stop position, then you are not risking 3% but 30%! Three wrong trades and your account has vaporised!
An aggressive trader is prepared to take riskier trades that a conservative trader. Their tendency is to expose larger amounts of money in riskier trades with the hope of grabbing bigger profits – often over extended trading time frames but they may still use the similar strategies for shorter times as well. Very much the ’all risk’ trader.
So where do you place yourself? Are you a highly controlled trader with good money management and risk rates, or a trader that will take over the top risks with all or nothing gains? If you are the latter, you won’t be around for long, that’s a guarantee.
If any of this leaves you a bit bewildered, you need to gain some knowledge, so commence your Forex training with Top Dog Trading, you will learn an enormous amount and it will help you trade with safety to win pips not risk everything.
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