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Risk Management Rules for Scalpers

By , Forex Trading Instructor
02 April 2014 19:00 GMT

Talking Points:

  • Risk should be considered on every position
  • Set Stops using a swing high or low
  • Risk 1% or less per position

Many Forex scalpers forget their stop loss positioning until it is too late! This can be devastating to traders that hold on to bad positions as the market continually moves against them. The good news is this issue can be avoided in a few easy steps! Today to combat this, we will review stop positioning for scalpers.

Setting a Stop

The first step is to plan stop placement. While there are a variety of ways to do this, one easy method is to determine a high or a low on the graph. This can be done by selecting a number of bars and then determining where the peaks and valleys are for that point.

Below is an example of a sample breakout on the AUD/NZD currency pair. In a sample breakout from this morning, stops can be placed at a 15 bar low. Traders will count back 15 candles from their entry and set their stop below the low. The 15 bar low is a great default on a 30 min chart as it incorporates slightly over half a days’ worth of data. This can be adjusted however, more conservative traders can use more periods when selecting a stop, whereas more aggressive traders can use fewer.

Learn Forex: AUDNZD 15 Bar Stop

Risk-Management-Rules-for-Scalpers_body_Picture_3.png, Risk Management Rules for Scalpers

Risk By the Percentages

Once a value on the graph is selected for stop placement it is important to decide how much of your account to risk per trade. One easy way to do this is to consider the 1% rule. This means that traders should never risk more than 1% of their account balance on any one trading idea. That means using the math above, if you are trading a $10,000 account you should never risk more than $100 on any one position.

As well, traders should consider risking no more than 5% of their trading account across all open positions. This means in the worst possible scenario, if all trades are closed out at a loss, you will only lose 5% of your account balance. As seen in the equation below, on a $10,000 balance this would be a loss of $500. While no one wants to lose $500, that will still leave $9500 remaining in your balance to continue trading.

Risk-Management-Rules-for-Scalpers_body_Risk_Management.png, Risk Management Rules for Scalpers

FXCM Risk Management

Lastly, to help traders control and manage their risk and decipher the percentages mentioned above, programmers at FXCM have created a simple indicator to help determine how much risk is being assumed on any one particular trade. Once added to Marketscope 2.0, the FXCM Risk Calculator, as depicted above, has the ability to help a trader calculate risk based off of trade size and stop levels.

We walk through the application, as well as how to manage risk in several videos embedded into the brainshark medium. After clicking on the link below, you’ll be asked to input information into the ‘Guestbook,’ after which you’ll be met with a series of risk management videos along with download instructions for the application.

Risk Management AppDownloadand Review via Brainshark

Learn Forex: Risk Management App

Risk-Management-Rules-for-Scalpers_body_Picture_1.png, Risk Management Rules for Scalpers

(Created using FXCM’s Marketscope charts)

---Written by Walker England, Trading Instructor

To contact Walker, email wengland@fxcm.com. Follow me on Twitter at @WEnglandFX.

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02 April 2014 19:00 GMT