8 Sep 2014

THE HOLY GRAIL IN TRADING



As I have said it before - the key to successful trading performance is risk management. It is the holy grail of trading. Whatever system or strategy you have, with bad risk management you will still lose money. In this article I would like to tell you how I manage risk.

The first thing you have to decide is - how much are you willing to lose on each trade. For me it's never more than 2% of my account equity.

As a conservative trader I most often set my first price target for the same amount of pips I have risked and when the price reaches this target, I close a part of my whole position to book some profit and set my stop at break even point for the rest of my position. 
I continue to trail my stop this way whenever price reaches my next target. 

Example.

You enter EUR/USD short position at 1.3900 
You set your stop at 1.4000
Your first target is 1.3800 - 100 pips lower as you are risking 100 pips
Your second target is at 1.3700
Your third target is at 1.3600

When price drops to 1.3800, you close part of your position and set the stop for the remaining positions at the entry point at 1.3900. Now - regardless of how the trade is going to play out from this point - you have already made some money from your partial close, and if the price reverses and hits your stop, not only you haven't lost any money, but you have even earned some.
If the price continues to fall and reaches 1.3700 - you again close a part of your position and set your stop at 1.3800

We all have heard the old forex saying - ''let the profits run''. So even when the price have gone all the way to your last target, think for a bit before closing your full position. Maybe there are some signs of trend continuation. If you decide to keep some part of your position opened, just trail your stop after price have moved every hundred of pips.


Managing risk in different timeframes

Although in theory trading price action is the same regardless of the timeframe used, larger timeframes WILL give you more reliable signals. So here is what I do:

If I am trading timeframe 4H< I will enter with risk of 1% - 2% depending on how sure I feel about this trade (An indicator confirming my bias will get 2% risk)
If I am trading lower timeframes I will enter with no more than 0.25% of my account equity.


Managing risk when trading breakouts

Usually when I see a breakout, I enter on the close of the breakout candle with a quarter of my intended position ( so if I've planned to risk 1% on the particular trade, I enter 0.25% on the breakout). Then I wait for a pullback to the breakout level, and if I see a polarity change (old support becoming resistance or vica versa), I enter with the rest 0.75% of my intended risk for the trade.

Trading breakouts this way I am making sure I won't lose so much money in case of a fakeout. Also if the breakout continues with any retracement I will still be in for some profit.


What is your holy grail?


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