Advance knowledge of risk management to save your trading capital

Trading the Forex market is a very complex task. But every single day the number of retail traders are increasing at an exponential rate due to the lucrative profit potential of this industry. Though this market is an excellent place for making profit consistently only, a few traders can make a profit on a regular basis. In fact, 95% of the currency traders are losing money in the online trading world. To make profit consistently you must learn the perfect art of money management, and only then you will be able to lead your life based on trading. Most of the new traders tend to consider risk management as a small subject, but in the eyes of the trained professional, this is one of the most diversified section in the Forex market. Today we will discuss some of the advanced technique, to manage your risk while trading the financial instrument.

But before we begin you need to ask yourself whether you are a long term trader or day trader. If you are looking to trade the market in the higher time frame, then you are on the safe side of this investment sector. But if you are seeking to trade the lower time frame with bigger lots than this advance knowledge of risk management factor will save an enormous amount of money.

Almost all the new currency traders often trade the market with the universal 2 % rule of money management. They simply risk only 2% of their account capital in every single trade but still at the end of the month most of them lose their entire trading capital. So is it perfect for us to use the 2% risk factor in professional currency trading? To be honest its good but we need to understand how this system works. Let’s give a practical example to make it more clear. Imagine that you have $1000 in your trading account and in a day you have executed 20 trades. If you lose every single trade, then you will be losing: 20 deals x $20 = $400.So within three days of your trading career, you will blow up your entire trading account. Being a currency trader, you must know that this 2% rule is applicable for only quality trade execution. Being a new trader, you might not differentiate between high and poor quality setup. In that case, you should never risk more than 2% of your account capital on any trade, in a single day.

Trailing stop loss features

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Money is management is not all about your losing trades. If you want to become a profitable trader, then you need to use the trailing stop loss feature as a part of your risk management plan. Many traders often complain that their trades are very profitable at the early stage, but after few hours it hit their potential stop loss price. It is where the trailing stop loss features come very handy. But to use the trailing stop loss feature actually, you must have an apparent knowledge about the minor and major levels of the currency market. Let’s give you an example to make it crystal clear to you. Let’s say that you identified that the EURUSD pair is in a strong bullish trend. So you will have to find the key support levels of this market to execute your long order in favor of the prevailing trend. Once you have executed your orders, you need to switch back to the lower time frame to find the minor resistance levels of the market. Once the market breaches a minor resistance level, it will become the new support for EURUSD pair. So you can trail your stop loss price just below the newly formed support level to book a particular portion of your profit.

Some traders often use the EAs and bots to set their trailing stop loss price. But in real life trading, no mechanical system can help you. You need to manually set your trailing stop loss to maximize your potential gain in the market. But make sure that you are not using the minor support level of 1 minute or 5-minute time frame. If you place your trade based on daily chart trading signal, then you should find your secondary levels on the 4-hour time frame. Just lower down your time frame one step to find the key levels to trail your stop loss.

Precise entry and exit point

Finding the perfect entry point plays a great role in your risk factor. For instance, if your trade the market with price action confirmation signal then you can quickly set a predefined tight stop loss. Even if you look for a longer term trading signal, then you can do the multiple time frame analysis to find the best spot to execute your order. But those who trade the market with indicator based trading system is forced to use a wide stop loss. And most importantly their stop loss sometimes become dynamic which means they have to adjust their stop loss based on the different readings of their indicator. So make sure that you are not trading the market with any indicator based trading system.

When you look for potential trade setup, you must keep in your mind that no matter what happens you can’t afford to risk more than 2% of account capital. But in advance money management, this 2% rule is not applicable. Not even a single broker can give you the guarantee about exact stop loss price execution. You might have some slippage due to high market volatility. For instance, if you have traded the GBPUSD pair during the Brexit news than chances that you will obviously have some massive slippage during the dramatic market volatility. But if you risk less than 1.5% then even after having massive slippage in your stop order execution you will be fine.

We all know the importance of 2% risk factor in the Forex market. But this is not suitable for every trader. You need to trade the market based on your risk tolerance level. In fact, the professional traders always assess their risked amount regarding dollar rather than a percentage. So if you are trading with $1000 trading account than by risking 2%, you might lose $20.So ask yourself whether you are comfortable with that losing amount. If the answer is no, then reduce your risk percentage in live trading. Finding the perfect balance between your trading system and money management is very important. In fact, your trading system should define you’re your money management policy. For example, being long time frame trader, you can’t afford to risk like the scalpers. Similarly, being a scalper, it will be unprofessional to use lot size as the long term trader. You need to know the lot size calculation to adapt to the changes in this market.

Lot size calculation

Let’s begin with an example. For your $1000 trading account, you know that you should never risk more than 2% of your account capital. The scalpers in the Forex market have 10 -20 pips for each trade whereas the long term deals often have more than 100 pips stops. So how do the professional traders bring the variation with their lot size? Here is the calculation

Assume that we are trading with standard lot size trading account

For 20 pips stop loss, we will use 0.1 lot size. So if the trade goes 20 pips against us, it will be closed with a 20$ loss.

Similarly, for 40 pips stop loss we will use 0.05 lot size. So if the trade goes 40 pips against us, it will be closed with a loss of $20

You need to know your pip value and stop loss price level before you can determine your lot size. Some traders often ignore this rule in the Forex market, and at the end of the day, they remain on the losing side. Lot size calculation is not all complicated rather its simple arithmetic. You don’t have to learn rocket science to find the perfect lot size your trade. Just know your account type and stop loss price level and rest is just simple math.

Risk in news trading

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There are two types of traders in the Forex. One type of trader always loves to trade the technical trading signal, on the other hand, the second category is the news trading. News trading is something very different and risky in the financial world. During the event of a major fundamental news release, the Forex market becomes extremely volatile. Most of the new traders think that they can trade the news data very quickly, but when it comes to real life trading, they become the ultimate loser of this industry. However, if you still want to trade the news, then you need to consider three things very strictly.

  1. Severity of the news
  2. Trend of currency pair or financial instrument
  3. Technical levels of the market

Not all news creates an extreme level of volatility in the Forex market. For instance, if you trade the U.S average hourly income data release then you won’t experience more than 20-40 pips movement. On the contrary, if you trade the U.S Non-Farm Payroll data release than you can easily experience more than 80 pips movement within a short period. The expert traders use the volatility to make a quick profit in their portfolio. So if you don’t know the potential outcome of an individual news release, then you can’t make a profit and assess your risk factor since you will not have clear price level to close your trade. For instance, if you see that you have 20+ pips profit after trading the U.S average hourly income data release than its better for you to close the trade. And before you place your trade you should never risk more than 10 -20 pips in that trade since you know that you will close the deal with 20 +pips profit. On the contrary, if you trade during the NFP data release then you should use stop loss by using the price action confirmation signal on the lower time frame. Since you know that average price movement of EURUSD pair during NFP is 80 + pips, so your potential target will be minimum 50 pips.

Getting into the market by maintaining proper money management policy during news trading is very hard. In fact, most of the novice traders often blow their entire trading account during the early part of their news trading career. To be precise news trading is only for the experienced professional. However, if you still want to trade the news than adapt yourself with high volatile market movement by using a demo account. Practice hard unless you feel comfortable with your demo trading result. Placing money on trade without having proper knowledge of volatile market condition is one easiest way to lose money. As a currency trader, you must be more concern about your investment rather than profit.

Some traders often think that they can trade the news based on fundamental data. But things are not all simple. You need to have a solid technical knowledge of this market to trade the high impact news. Before the press release draw all the key levels of this market so that you don’t have to place your trade at minor support levels. Learn the art of multiple time frame analysis since it is one of the best ways to filter the best possible trading signal. Being a news trader, you should only risk 1% of your trading capital since high slippage is widespread phenomena during extreme market volatility. But make sure that you are not trading the political speech or press conference data since most of the time the false spike washes way the retail trader’s open position before making the financial movement.

Withdraw your profit and focus on organic investment

Everyone trades to make their life much better. But most of the retail traders rarely withdraw the profit from the market. But as a full-time trader, you must learn how to with draw your profit without hampering your account growth. Money management is not about managing your losing trades. Every single transaction that you made in the Forex market should be a part of your risk management plan. At your initial stage always try to withdraw a portion of your profit at the end of the most. And consider the reaming portion of your profit as your reinvestment. This process is often known as an organic investment in the professional trader’s community.

If you trade all day long and pile your profit, then this market will become boring to you. Withdraw some money from your profit and do some nice things. Consider your withdrawal amount as your losing trades in the market. So try to tactfully recover your withdrawal amount by placing high-quality trades in favor of the market trend. You need to find a balance between your regular withdrawal and growth your trading account. If it is imbalanced, then it will be tough for you to live your life by Forex trading.

Advance knowledge of risk management is nothing but the perfect use of trading skills. Every single trading parameter is interrelated with each other. So, if you think that you will only work with your entry point, then you will have face unexpected huge loss. However, if you plan for your exit and entry point, then you won’t have to deal with big amount of loss. You need to learn to book your profit by using the trailing stop loss feature. You need to have a rock-solid foundation if you want to get the real essence of advance money management.

Living your life by trading is extremely hard since it requires perfect execution of your trading plan. You need to learn the advanced art of money management so that you can reduce your risk in every possible way. When you trade the market always remember the famous proverb “Trend is your friend.” By only trading in favor of the long term prevailing trend, you can reduce your risk exposure to a great extent. Since the market is always changing you, need to develop an intense reading habit to keep pace with dynamics of this market. Never trade the market with other people trading system. You need to work hard and develop your trading system based on your personality. You might even buy a million-dollar trading system from the professional trader, but this won’t help you to become a successful trader. Every single person in this world is different and has different risk tolerance level. Based on financial condition and depth of trading knowledge you should define your risk level in each trade. Always remember that this market is all about probability and you can’t win 100% of the time. So make sure your winners are bigger than your losers to survive in this industry.

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