Risk noun - exposure to the chance of injury or loss; a hazard or dangerous chance.
Much has been said about risk in trading. Suffice to say that risk is something that must be taken in order to create the possibility of a return. However, a traders' management of risk is a vital component of their trading plan. Without proper risk management, a trader won't have a lasting career in the Forex market.
As legendary trader Doug Zalesky says "You always want to come back and play tomorrow. Never put yourself in the precarious position of losing more money than you can afford. The worst feeling in the world is wanting to trade and not being able to because the equity in your account is too low"
Too many novice Forex traders focus on reward. They keenly anticipate how much they can make on each trade, on what percentage return their system should make them per week or per month.
In order to succeed they should rather be focusing on risk. Working out how they are going to ensure that they don't wipe their accounts out. By focussing on minimising your losing trades, maintaining your capital and following your trading rules with discipline and consistency you will succeed. The return will take care of itself if you take care of the risk.
The most effective ways of efficiently dealing with risk is to automate your risk management processes. When it comes to risk, auto trading programs have an edge over manual or discretionary traders. By building risk management into your automated trading you reduce the chances of your risk management failing.
Making intra-day trading decisions in the heat of the moment can be extremely stressful. By not having to make risk management decisions when placing trades, you will not be faced with making tough calls that could easily expose your account to unnecessary risk. Decisions like how much size to put onto a trade, or where to set your initial stop loss can be outsourced to your automated trading system of Forex robot to ensure error free, stress free trading.
Build the following risk aspects into your auto trading system to improve the odds of successful trading:
Initial stop loss: Pre-define the maximum total loss you are prepared to take per trade based on either a fixed dollar amount or volatility to ensure you never lose more than your account can manage.
Trailing stop loss: Trailing stop losses ensure that your winning trades never turn into losing trades, whilst also ensuring that you do not close your winners too early.
Targets: I believe that programming your target price into your auto trading system is important. It's done so that if the market makes a sudden big move in your favour, you lock it in. Sometimes these big moves retrace so quickly you are unable to manually take advantage.
Position sizing: This vital component of risk management can so easily get out of control. Often traders put on huge trades after a losing streak to try to win losses back. This invariably ends in a massive loss. Or put on a tiny trade due to fear, only to see it turn into a great trade and wish they had traded it with the correct size. Manage this risk by building a position sizing component into your Forex system.
Black swan events such as the flash crash of 2010 or credit crisis in 2008 can wipe an individual trader out of the markets for good. Protect your account from these incidents through automated processes rather than relying on your ability to react swiftly and correctly in the face of such a crisis. You may not even be at your screens when it happens.
There are many other risks faced by traders on a daily basis that literally take money out of their accounts. Computers crashing, power outages, family emergencies, strange market phenomenon's, and internet connection failures all make it tough for individual traders to survive. However if you build a solid, automated, risk-management program into your Forex, Stock or Futures trading system you will improve your chances of success dramatically.
Learn to create your own hands free trading system at Automated Trading Academy. You can also view a free introduction to Automated Trading Systems for individual traders.
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