FX RISK MANAGEMENT
Te trade setup that we’re drooling over is the formation of a double bottom around 0.84 on the daily chart. The furthest below this level that price has successfully tested is 0.832, so our stop-loss needs to be at least below that level. Let’s call it quits at 0.829, which will give us some breathing room below the support we do cume n t e d (.0832), will also place a nice physio lo g ic a l barrier between the price and our stop at 0.83, but this level also allows us to keep our stop close enough to the imaginary double bottom so that we’re still trading based off of our analysis.
I always like to either stagger my profit points, or use the same levels to add to a profitable position if the levels get broken. For the sake of this example, which is strictly a lesson in risk management, we’ll say that there isn’t a strong resistance until 0.875. So that we don’t require the price to break the support in order to exit this trade, we’ll set our target at 0.872. This price gets us close to our documented strong resistance, without requiring that the price actually test this resistance prior to taking our money and running. If we enter at 0.842 after the bounce off
58 FX TRADER MAGAZINE October - December 2017
of 0.84 at the double bottom, then we know our stop loss is placed 130 pips away, but we could potentially make 300 pips if our research pays off.
Now, it’s time to figure out what size the trade needs to be in order to
suggested only risking 2%.
Te benefit of proper risk management, such as the 2% risk used in the above example, is that you have to lose 50 trades in a row to bankrupt the account, not accounting for slippage and spread. If you’ll use a strategy that has a reasonable success rate (>50%, which is literally chance), only allows trades with a positive risk:reward ratio, and minimizes exposure (i.e. 2% per trade), then you will see tremendous improvements to the
profitability
and consistency of your trading. Once you have developed a
keep our risk under the 2% that our risk management strategy requires. Since 1 pip equals $1.2869 and our stop loss is placed 130 pips away, then a single 100k lot only risks $1672.90 (assuming our broker is successful at exiting us at our stop without slippage). $1672.90 is only 1.67% of our account, so we’re just under our allowed risk of 2%. If we wanted to push it even further, we could adjust our trade size to something like 1.2 lots and then our max risk would be $2006.90. I wouldn’t suggest this, but I also know that there’s amateur traders who laughed at the fact that I
consistently profitable strategy, then you can begin to use analytics sites that break down the details of your strategy, such as Risk of Ruin, Sharp ratio, etc, in order to really squeeze out every last pip from your trading.
Hopefully this helped someone, somewhere out there. If you’ll work on developing your risk management skills,
then the rest will fall into
place. Until next time, happy trading!
Andrew Marshall Chief Compliance Officer Fx Investment Management LLC
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70
