3 Tips to Better Risk Management
- Always identify where to exit the market and use a stop order
- Consider risking 1% or less of your account per trade
- Money management tools can help in controlling risk
While the question of money management may seem fairly straightforward, it remains the most critical component of any trading plan. Before placing a trade, traders should examine exactly what the risks associated with that trade. This includes asking some tough questions about stop placements, risk totals, as well as risk reward levels. To help answer some of these concerns today we will tackle some tips for better risk management. Let’s get started!
Plan Your Exit
More often than not, traders have an idea of where to exit the market when a trade is moving in their favor. While a profit target is always good to have, every trader should have a contingency for when a trade moves against them. Stop losses can be set in a variety of manners, but more often than not these levels are coupled with an existing value of support and resistance.
Remember, a stop order is a point on the graph where your trade idea is considered no longer valid. If you have buy orders in place, and a key level of support is broken with price making a lower low it may be time to consider exiting the trade. As well, the opposite is true in a downtrend. If a trader is selling while prices are making higher highs it may be time to look for a new trading idea!
The 1% Rule
After you have planned a point of exit, traders need to decide how much to risk per trade. Since it is inevitable that at one point a trade will close at a loss, it is important to know exactly how much you intend to lose prior to that occurring. One way to determine this is the 1% rule. Simply put, this means traders should risk no more than 1% of their TOTAL balance on any one trade idea. For instance if you have a $10,000 balance at no point would you want to risk more than $100 on any 1 trading idea.
The 1% rule can also be coupled with a favorable risk reward ratio. Using a 1:2 setting, this means if we risk 1% in the event of a loss, at minimum we should look to close our trades out for a 2% profit. This would translate into a $200 profit on a $10,000 account balance. Now that you are familiar with the 1% rule, let’s look at our next risk management tip.
FXCM Money Management App
To help traders control and manage their risk, programmers at FXCM have created a simple indicator to help decipher 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.
---Written by Walker England, Trading Instructor
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