Friday, December 11, 2009

Risk and Your Forex Trading Style

The most important part of any style of investing, is being aware of what level of risk you are comfortable with. Without a good knowledge of this, you will not only tend to over extend yourself but also jeopardize your capital base. Every Forex trading strategy carries its own risk parameters and these tie in directly with your risk tolerance. Then there is your style of trading, conservative, moderate, and aggressive.

Initially you may decide to trade a day chart. The trading movement over a day can be hundreds of pips, so when you protect your position you have to assess what your drawdown parameters are. If your money management stipulates a 3% funds exposure, you will find problems on day charts unless your account is substantial.

The 5M or 30M charts maybe more tradable since the pip variation tends to be less, so your stop strategies can fall within your management range.

Yes, we all want good returns from out trades, but jeopardising ones account to wide stop positions and large draw-downs is going to burn out your account and trading career in the blink of an eye.

A practical 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 placement, whether count-back or support and resistance or any other, indicates a 100 pip stop position, then you are not risking 3% but 30%! Three adverse trades and your account has vanished!

An aggressive trader is open to taking riskier trades that a conservative trader. They may be prepared to expose larger amounts of money in riskier 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 think you sit? 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 understand what you are about to do with your hard earned funds, so begin by getting your Forex training with Top Dog Trading, you will learn a considerable amount and it will help you trade with safety to win pips not risk everything.

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