May 06 2009
Risk and Your Forex Trading Style
The most critical part of any type of investing, is knowing what your risk tolerance is. Without a good understanding of this, you will not only tend to over extend yourself but also jeopardize your capital base. There are many different types of trades you can make on the Forex, each possesses its own risk parameters and these tie in directly with your risk tolerance. Then there is your trading approach, conservative, moderate, and aggressive.
Initially you may decide to trade a day chart. The trading movement over a day can be 100’s of pips, so when you protect your position you have to assess what your drawdown limits are. If your money management dictates a 3% funds exposure, you will find problems on day charts unless your account is substantial.
The 5M or 30M charts maybe more appropriate since the pip movement tends to be less, so your stop placements can fall within your management criteria.
Yes, we all want good returns from our trades, but exposing ones account to wide stop positions and large drawdowns is going to wipe out your account and trading career very quickly.
A common risk level is 3% or $300 on a $10,000 account. Convert 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 countback or support and resistance or any other, dictates a 100 pip stop position then you are not risking 3% but 30%. Three adverse trades and your account has gone!
An aggressive trader is willing to take riskier trades that a conservative trader. They expose larger amounts of money in these high risk trades with the hope of achieving larger returns – often over longer trading time frames, but they may still use the similar strategies for shorter times as well. Very much the ‘crash and burn’ trader.
So where do you place yourself? Are you a disciplined trader with good money management and risk rates, or a trader that will take high risks for big pips? If you are the latter, you will not be trading for long, that’s a guarantee.
If any of this leaves you a bit bewildered, you need to learn more, so start your Forex training with Top Dog Trading, you will learn an enormous amount and it will teach you to trade to win pips, not risk everything.
Never trade without having all of the facts!
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