|
 |
| The M.R.S Trader – The Essentials of Successful Trading |
|
(R)isk Management
|
Now that we got mindset out of our way, let’s talk about risk management. Some call it money management, others call it trade management. I choose to call it risk management because I see managing risk in trading as something very core and very essential.
First things first, traders have to decide how much risk or drawdown as a percentage of the entire equity they are willing to take in a given period (be it a day, a week or a month). As a guideline, it can range from 2% right up to 10% and more. I personally use 5% as my line in the sand.
Breaking it down further, you have to decide how much risk you are willing to take per trade (this relates back to max drawdown in a month and the typical number of trades taken in that time). Also, risk tolerance is dependant on the style of your trading. You have to discern if you are a positional trader or an intraday one. Positional traders will allow for a bigger move against his entry by trading a smaller size. Conversely, intraday traders can only afford a relatively smaller move against his position if the trade taken is a bigger one as compared to the one taken by the positional trader.
Another factor to take into account is the trader’s typical setup. If his setup requires only a small stop, he can choose to put on a bigger trade as compared to another setup that requires twice the stop of the former setup.
So what can a proper and well thought out risk management plan achieve for the trader and his account?
For starters, the trader has a plan that he knows that if he breaks it, he will have a much harder time growing equity. Suppose a trader loses 50% of his account in a given month. Mathematically, he needs to make 100% on his remaining equity just to get back to where he started off in the month where he wiped 50% from his account. Does this make sense?
With proper risk management, an account can grow very quickly if the trader trades profitably. On the other hand, the balance on the account will dwindle more slowly if the trader experiences bad spells or streaks. This is true only and only if the trader trades in the size proportionate to the total equity or balance.
As a final point in risk management (and most would miss out on this I reckon), you should also think about the possibility that your internet connection might go down at any point in time while trading. And as such, I use 2 precautionary measures.
The first one would be to put in my profit target and stop loss per individual trade. And last but not least, to write down your broker’s telephone number somewhere next to your trading desk so that you can call in to change your orders.
|
|
Next->
|
|
|
 FXAddict Newsletter
|
Forex Brokers
|
|
|
New York: 
