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Trade and Risk Management

Jun 11, 2018 12:30


Trade Management:

Forex trade management is arguably the most important aspect of success in the markets; it can literally make or break you. Once you learn a high probability Forex trading strategy like price action, you have to know how to manage your trades after they are live. Most traders simply ignore this essential piece of the Forex trading puzzle. By ignoring trade management or by simply not being aware of it, it is only a matter of time before you self-destruct in the market. A perfect price action trade setup can very easily turn into a losing one if you fail to manage it properly

Forex Trade Management Mistakes

Most trade management mistakes are a result of emotional decisions. How often have you found yourself entering a new position just because your current position is in profit? Or how about moving stop losses further from your entry because you are “certain” that price will turn around and move back in your favour? Have you ever moved your profit target further out as a trade moved into profit because you convinced yourself it would keep going because of XYZ reason? Maybe you take profits smaller than 2 times risk all the time or often get stopped out at breakeven only to see the market move on in your favour without you? These are all very common errors that traders make which result from poor or no planning and emotional decision making.

All of these errors seem pretty silly when you’re not in the market and thinking objectively but, once you enter a trade, if you are not following a Forex trading plan and keeping track of your trades in a Forex trading journal, you are very likely to experience extreme temptation to make one or more of the above mentioned trade management mistakes. While trade management is not a concrete science or a mechanical process, there are some general guidelines you can chose follow and questions you can ask yourself before and during each trade which can help you manage your trades much more effectively

Averaging In and Averaging Out

Let’s discuss adding to positions and having multiple or partial positions. First off, the decision of whether or not to add to your initial position in a trade should largely be made before you enter. You need to analyse current market conditions and decide the most logical exit strategy and whether or not adding to your initial position is logical given current market conditions. If you are entering into a strong trending market, you may decide beforehand that you will try a trailing stop and try to let the trade run and add to it at logical levels as it moves in your favour. The safest way to add to a position as it moves in your favour is to average in as the market moves in your favour. Here is an explanation of averaging in

  • Averaging in means that you use your open profit to “pay for” the next trade, it allows you to add to your position in a risk-free manner, but the sacrifice is that you increase your odds of getting stopped out at breakeven. It typically is only good to try this technique in a market that is in an obviously strong up or down trend. Forget about it in trading ranges or sluggish / slow-grinding markets. Ideally you want to wait for a price action setup to form at a key level after the market has pulled back a bit, a good example of this would be if your initial position moved in your favour and then pulled back to around 50% of the way back to your entry and then formed a pin bar at a key level, or some other price action setup at a key level; this would be a logical spot to add to a position by averaging in. You want to avoid adding to a position just because you are in profit, ideally you want a price action-based reason to add to an already winning position.
  • Here is an example of averaging in: you sell the EURUSD at 1.4500 with one mini-lot. The position quickly goes into profit by 100 pips and then forms a fakey setup in the direction of your initial position. Once your first position is up 100 pips and the market formed another price action setup giving you a reason to take on another position, you add a second mini-lot with a 50 pip stop loss, you then move down the stop loss on the first lot to lock in +50 pips. Now, if the second position turns around and hits your 50 pips stop loss, the first position will also stop you out for a 50 pips profit, stopping you at breakeven.
  • This is a risk-free way to add to a position that is moving strongly in your favour. However, always keep in mind it increases your odds of getting stopped out at breakeven and making no money at all, the payoff is that you could obviously make twice as much (or more) money. One important note of caution is to make sure you never add to your initial position and double up your risk by not adjusting your stop on the first position. Averaging in means that you move your average entry price closer to the market price, if you double up your position and don’t trail up your stop loss, you open yourself up to substantial losses
  • Averaging out, also known as “scaling out” is often talked about in the Forex trading community but it is almost always a bad idea. The main reason it is a bad is because of this; when you scale out of a position all you are doing is reducing position size as the trade moves into your favour. Sound illogical? It is. Think about it for a minute. Why would you purposely want to hold the smallest part of your position at the most profitable part of your trade? It is always better to either take full profit at a logical spot in the market, 2R multiple or greater, or trail your stop on the full position, than to try and take partial profit by scaling out. The bottom line on averaging out is that holding the least profitable part of your position at the most profitable part of the trade is not a financially wise or logical way to try and maximize your winners.

Trailing Stops (Only use them when the market is trending)

Trailing your stop as a trade moves in your favour can be a very good Forex trade management technique. However, trailing has limitations and you don’t want to just blindly trail your stop.

  • Stop trailing techniques can take many different forms. A few of the more common ones including the following: trailing your stop up as a trade moves 1 times risk in your favour, thereby reducing your risk to 0 as a trade moves 1 times risk in your favour and subsequently locking in each 1R multiple of profit.
  • The 50% trail technique is also popular, in this technique you trail your stop to 50% of the distance between your entry and the newest high / low as the market moves in your favour; thereby locking in profit as the market moves in your direction, this technique generally gives a trade more room to breathe but it can also give way a lot of open profit if a trade comes back beyond the 50% level and stops you out.
  • Yet another popular trailing stop technique is to trail your stop just beyond the daily 8 or 21-day EMA. The 21-day EMA typically allows your trade to run for longer since it is less likely to get hit in a strong trending market than the 8-day EMA. The 8-day EMA trail would only be used in very quickly moving / trending markets. These are by no means the ONLY ways to trail your stop, they are just examples. There really is no right or wrong way to trail your stop loss, but just keep in mind it’s not the best strategy for every market condition. You generally only want to trail in strong trending markets.
  • Breakeven stops are not always a great idea because the market can whipsaw around as everyone knows; stopping you out at breakeven only to move back in your favour. What you need to realize about trailing stops to breakeven is that it can cut down your long-term gains by limiting your potential profits. Yes, you will eliminate some potential losses by moving to breakeven, but you will also eliminate some even larger rewards.

As traders, we all need to accept the risk that is an inherent part of any trade, and if you are entering the market on a sound price action trading strategy, you want to give your edge time to play out, essentially you are interfering with this edge if you move to breakeven as soon as possible. viewing my trades as a win or lose proposition and being totally OK with the loss, is a better way to trade long term, because you will inevitably have some winners that more than make up for your losers, and you don’t want to cut back on these winners through breakeven trades. There are times when moving to breakeven is a good idea; in very volatile markets or if you have pre-planned to trail up your stop in a logical manner like discussed above.

Getting the Most Out of Each Trade

The goal of any successful Forex trader is to get the most out of every trade they enter. The way that you give yourself the best chance to get the most out of every trade is by behaving in a logical and consistent manner and pre-planning all aspects of your Forex trade management.

There is a fine line between being a trader who lives in hope and being a trader who accepts the reality of the market by taking what the market offers them. Before you get into a trade you need to ask the question, “how far do I realistically think this market can move before a substantial correction occurs?” Once you master price action trading and learn to read the levels and dynamics in the market, you will be able to make a pretty accurate estimation of the potential of any setup before you enter. And keep in mind you are always less emotional before you enter a trade than at any time during it so, you have to assume that long-term, you are going to get the most out of every trade by managing it as much as you can before you enter it, rather than trying to manage it “on the fly”.

Listen to the signal and the market conditions; if there’s a price action setup at a clean breakout level or an obvious trend with strong momentum, trailing your stop into a 1 to 4 winner may have its reward. However, in a more congested or range-bound “not-so-sure” market situation, it’s not a good idea to pray and hope, trying to milk every last dollar out of a trade so you see, there is a certain amount of discretion involved in trade management, it’s most important to read the market conditions before you enter a trade and decide how best to manage the trade at that time while leaving open the possibility of adjusting your exit strategy if any obvious reversal signals occur in the course of the trade or if the market conditions change drastically. That being said, it’s almost always better to plan everything beforehand and then set and forget your Forex trades. Trading in this way allows you to see how your trading edge plays out over the long-term with no “outside” interference, and it prevents you from trying to force your will on the uncontrollable market. To learn more about Forex trade management.

3 Quick Tips to Managing Your Trades:

Something that is absolutely crucial for success, but often not discussed or understood correctly by many traders is just how important taking full profits are for staying in business and ensuring that the overall account risk reward stays in a good position.

Often have a trader or member show us a list of their winning trades that are solid A+ trades, followed by just one or two trades that have wiped out a chunk of their winnings.

This will then be followed up by them telling me how they are going to change something and they want thoughts or ideas.

Often they are looking to change something huge like a major part of their whole trading methodology are looking through their whole trading edge for where they are went wrong.

The problem is often not in the trades being entered.

The problem is simply that the profits when winning do not cover the losses when losing and a major reason for this can be because a trader is not taking enough 100% winning trades.

When we have a losing trade, it is always a 100% losing trade. What it means by this is that if we risk 3% of our account each trade, then we are going to lose 3% if we lose.

Often, we can take multiple profits off the table. We can also use break-even.If used wisely this can increase profits and also protect from bigger losses.

However, what happens if we take 50% profit at the first main profit target, we move our stop higher to a break-even position and we are then stopped out at break-even having only taken 50% profit on the winning trade?

See below for the chart example of this:

As the chart above shows; the trader takes 50% profit and moves their stop to break-even after price moves higher from the Bullish Engulfing Bar and then they are stopped out.

Now many, many times this management will stop the trader from taking on a full loss.

What we need to be careful and super mindful of is that we cannot pick individual situations out of a chart or trade an edge from one trade.

In the chart example above the trader ends up taking 50% profit at target 1 and then having the rest of their position (50%) stopped at break-even.

If the profit target 1 was 1/1 RR (Risk Reward), the total profit overall was 0.5 RR.

So, whatever was risked, if for example 3% was risked at the start, then 0.5 is the reward. That would look like 3% x 0.5 = 1.5%.

Over one trade this is not so bad and a trader can get away with it, after all adding 1.5% to your account looks okay.

However, if you turn right around the very next trade and make a loss, you will lose 3% and now be losing money.

This is where it hurts and that is why full profit trades are important for your overall account risk reward situation and they become more important the longer you trade.

Quick Example of Small Changes

Look at a small sample size of trades below, keeping in mind there is a winning edge over the market. This is a small five trade sample with three of these trades being winners and two losers.

NOTE: These numbers are for illustration purposes only to highlight risk rewards.

The longer the trader plays out this management, the longer they would lose money.

Starting amount: $100. Each profit in this example is 0.5 reward or 50% for simplicity.

Start: $100

Winner: $100 + 50% = $150

Loser $150 – $100 = $50

Winner: $50 + 50% = $75

Winner $75 + 50% = $112

Loser: $112 – $100 = $12

TOTAL = $12

Total Loss = $88 (started with $100)

Another five trades with a different order that also has a winning edge over the market with three winners and two losses, but ends in a losing outcome is below;

Start: $100

Winner: $100 + 50% = $150

Winner: $150 + 50% = $225

Loser: $225 – $100 = $125

Loser: $125 – $100 = $25

Winner: $25 + 50% = $37.5

TOTAL = $38

Total Loss = $62 (started with $100)

This applies to the strategies you use for entries and how you manage / exit your trades.

Do you often switch quickly after a few losses or if you think the grass over the other side of the pond could potentially be greener?

Do you know what really stands out massively from that last set of numbers? As highlighted below and also just discussed at length; when we lose, we get stopped for a 100%.

In our example scenarios above, what would happen if all you did is take full profit at the very first profit target instead of only 50% profit? That’s not much to ask right? We are not even shooting for bigger rewards.

There is a lot to factor in overall, but just say with these five trades, you just take profit at the first profit target at 1/1 RR. What then happens in the same scenario, how does it change?

Starting amount: $100. Each profit in this example is 1 reward or 100% for simplicity.

Start: $100

Winner: $100 + 100% = $200

Loser $200 – $100 = $100

Winner: $100 + 100% = $200

Winner $200 + 100% = $400

Loser: $400 – $100 = $300

TOTAL = $300

Total Profit = $200 (started with $100)

Start: $100

Winner: $100 + 100% = $200

Winner: $200 + 100% = $400

Loser: $400 – $100 = $300

Loser: $300 – $100 = $200

Winner: $200 + 100% = $400

TOTAL = $400

Total Profit = $300 (started with $100)

Small change, but huge difference with the same trades and method.

By not taking a different trigger for entry there can be a massive difference in either profit or loss.

Traders want to make money, but they get very nervous when they are not doing it straight away or think they are missing out.

We recommend using break-even in my trading. However a lot of traders do not use it correctly.

Instead of using it as a ‘free trade’ where a stop can be moved to let a trade continue to run, or to look for further profits where there is a potential for higher rewards, many traders use it as a psychological tool to shelter from losses.

This might happen regularly when it is placed too frequently, in the wrong market types and too close to the price.

Often traders have not practiced the strategy they are using to manage their trades and are instead in the live markets ‘hoping’ their management strategies will work.

On too many occasions to count we have seen traders get stopped at break-even and be really frustrated. The very next trade because they are frustrated, what do they do? They scrap their plan.

They throw out the plan they have built and known and instead of moving to break-even and taking profits where they normally do, they let their profits ride.

They do this because they are annoyed. The markets annoyed them. Like it is the market’s fault. As if the market was out to get them.

What Type of Trader are You?

Do you like bigger winners or a steadier account rise?

You need to know your trading flavour and you need to back-test, forward test and perfect it.

It is so important you do not go anywhere near a live account until you are 100% confident and you know your method thoroughly.

If you are getting stopped at break-even and you have 100% confidence and faith in your trade management method, then you will continue to pull the trigger on trades and will continue to manage your trades in a business-like manner.

However if you have real doubts and concerns, the next time you get stopped at break-even, all of a sudden you will question your method. You will ask whether you should be trading differently, if what you are doing works, if you should have entered a different trigger and on it goes.

Both the high reward and also high win rate are solid and logical methods of managing your trading money with positives and negatives.

The question you need to ask yourself when thinking about either trade management methods is;

  • Do you want bigger winners with the downside being a far higher chance of more losing trades? Or,
  • Do you want a potentially steadier rising equity curve from regular, but from smaller winners?

So which method is better between the two and what money management method are you going to be better off using in your own trading?

To answer that question, we need to flip the question back over to you and ask you; what sort of personality do you have and what are you more comfortable with?

Don’t know what sort of trader you are or what flavour is for you? That’s okay. That exactly what you will come to work out as you start to make and also manage more and more trades.

You Need to Practice the Hell Out of it!

 The more trades you manage, the more of an understanding you will begin to get of your own trading personality.

It is absolutely amazing how trading has the ability to teach us things about ourselves and our personalities that we didn’t know existed because we are put into positions of stress, fear, greed and other emotional states that we would never be put into otherwise.

It is under these emotional extremes from the market that we really learn about ourselves and how we behave.

We learn what we like, we learn what we are prone to do when put under pressure and we especially learn what we will do when we are forced to act.

It is through all of these experiences we begin to really understand and workout our own trading personalities. Just as some like certain shades of blue and green, you may like the colour red or purple because we see things differently and we behave slightly differently given the same scenario.

This is a good thing. To manage your trades for profits consistently over the long-term, you need to begin understanding your trading personality and your ‘flavour’.

You need to work with it, because if you are always looking to fight it, it will just become another thing you are trying to depress and work against, rather than use to your advantage.

The decision on the method you use to manage your trades is going to have a very large bearing on your trade’s outcome.

Lastly – You Can Change Methods or Flavours

Note: Remember that the type of trader you are is not fixed and set in stone.

It also denotes if you are a high reward trader it does not mean that you are cannot grow on to make a change to becoming a high win rate trader.

However, remember this you cannot just flip from one trade management method to the next.

This will cause massive consequences within your trading.

If on one trade you were using one system as your edge and you decided that it was not working, so you stopped using it and then the very next trade you started using another system, that would cause massive differences and consequences.

Chopping and changing with your trade management will do the same.

You need to make sure that if you change your trade management method you go back to basics, practice it and give it time to work within the new plan.

Risk Management:

This is a process that takes time, dedication, commitment, and patience, if you want to be successful and profitable in the Forex market in the long run.

You can’t just open a position in your trading platform without taking into account the trading conditions set by your broker, the currency risk, and the trading risk that can affect your invested capital.

You also need to apply tools and techniques to manage your money and risks – if you don’t do those things, you wouldn’t be trading – you’d be gambling.

Check out these forex management tips:

It might sound obvious, but the first rule in currency trading, or any other kind of trading for that matter, is to only risk the money you can afford to lose. Many traders, especially beginners, skip this rule because they assume that it “won’t happen to them”.

If trading were like gambling at a casino, you wouldn’t take all the money you have to the casino to bet on black, right? Well, it’s the same with trading – don’t take unnecessary risks by using money you need to live.

Because it’s possible to lose all your trading capital, and secondly, because trading with funds you live on will add extra pressure and emotional stress to your trading, compromising your decision-making abilities and increasing the chances of making mistakes.

The Foreign Exchange market is a very volatile and unpredictable market, so it’s better to trade “conservative amounts” from your disposable income.

Before you start trading, you need to determine your risk tolerance, depending on:

  • Your age
  • Your knowledge of FX trading
  • Your experience
  • How much you’re willing to lose
  • And your investment goals

Knowing your risk tolerance is not just about helping you sleep better at night, or stress less about currency fluctuations.

It’s about knowing you are in control of the situation, because you’re investing the right amount of money vis-à-vis your personal financial situation in relation to your financial objectives.

Keep your investing within your risk tolerance and you decrease the likelihood of trading ruin.

Knowing about risk/reward ratio (RRR) will definitely improve your chances of becoming profitable in the long run, setting limit orders (stop-loss and take-profit) that protect your capital.

A RRR measures and compares the distance between your entry point and your stop-loss and take-profit orders.

For example:

Let’s say that you’re investing on the EUR/USD.

If the distance between your entry level and your stop-loss is 50 pips, and the distance between your entry point and your take-profit is 150 pips, then you would be using a RRR of 1:3, because you’re risking 50 pips to earn 150 pips (150/50 = 3).

The risk/reward ratio is a necessary tool to set your stop-loss and take-profit orders depending on your risk tolerance, and every wise trader should control the downside risk.

Even though determining a RRR depends on each trader’s risk tolerance, it’s common to use a risk/reward ratio of 1:3, where you expect to earn 3 times what you’re willing to lose.

When thinking about risks, you also need to consider your trading capital.

You should only invest a small portion of your trading capital per trade: a good starting point would be to not invest more than 2% of your available capital per trade.

If you have $10,000 in your Forex trading account, the maximum loss allowable would be $200 per trade.

Determining the risk per trade is a helpful tool if you go through a losing streak, so then you can better protect your trading capital, and avoid large drawdowns in your trading account.

The importance of position sizing

The secret of limiting losses lies in the triad Position sizing – Leverage – Stop Loss. Position sizing is a technique that determines how many units you should trade to achieve the desired level of risk.

It’s very important to choose your position size wisely. Here’s the golden rule of experienced traders:

Risk no more than 1-2% of deposit for 1 trade.

Have a look at the table below. It shows 2 traders with the same initial amount of money $20,000. The difference is that the first one risks 2% of his account on each trade, while the second one risks 10% of his account on each trade. If each trader has 10 losing trades in a row, the first one will have $16,675 left, while the second will remain with only $7,748.

Risk Management and Position Sizing are two sides of the same coin. You can’t apply risk management without proper position sizing.

How to calculate position size in forex 

  • You have a $10,000USD trading account and you’re risking 1% on each trade
  • You want to short GBP/USD at 1.2700 because it’s a Resistance area
  • You have a stop loss of 200pips

“How many units do you short so you only risk 1% of your trading account?”

Forex risk management – position size formula

Here’s the formula:

Position size = Amount you’re risking / (stop loss * value per pip)

  • The amount you’re risking = 1% of $10,000 = $100
  • Value per pip for 1 standard lot = $10USD/pip
  • Stop loss = 200pips

Plug and play the numbers into the formula and you get:

Position size = 100 / (200*10)

= 0.05 lot (or 5 micro lots)

This means you can trade 5 micro lots on GBP/USD with a stop loss of 200 pips; the maximum loss on this trade is $100 (which is 1% of your trading account).

How to calculate position size in stock trading

Once you understand how position sizing works, you can apply it across all markets. This means you can manage your risk like a pro no matter what instruments you’re trading.

Here’s an example for stock:

  • You have a $50,000USD trading account and you’re risking 1% on each trade.
  • You want to long Mcdonalds at 118.5 because it’s an area of Support
  • You have a stop loss of 250 ticks (which is $2.5)

How many shares of Mcdonalds do you buy so you risk only 1% of your trading account?

 Stock risk management – position size formula

Here’s the formula:

Position size = Amount you’re risking / (stop loss * value per tick)

  • The amount you’re risking is 1% of $50,000 = $500
  • Value per tick for 1 share = $0.01
  • Stop loss = 250 ticks

Insert these numbers into the formula and you get:

Position size = 500 / (250*0.01)= 200 shares

This means you can trade 200 shares of Mcdonalds with a stop loss of 250 ticks. If it’s triggered, the loss on this trade is $500 (which is 1% of your trading account).

The secret to finding low risk and high reward trades

The larger the size of your stop loss, the smaller your position size.

  • Assume you’re risking $1000 on each trade
  • Value per pip for 1 standard lot is $10USD/pip
  • Your stop loss is 500 pips on EUR/USD

Position size = 1000 / (500 * 10)

= 0.2 lot (or 2 mini lots)

For this trade, if the market moves 500 pips in your favour, you’ll gain $1000.

But what if you can reduce your stop loss to 200 pips?

Position size = 1000 / (200 * 10)

= 0.5 lot (or 5 mini lots)

For this trade, if the market moves 500 pips in your favour, you’ll gain $2500.

The bottom line is this tighter stop loss allows you to put on a larger position size for the same level of risk.

Most beginners will increase the size of their positions as soon as they’re making profits, which is one of the best ways to get your account wiped out. Keep your risk consistent.

Just because you’ve made a few winning trades doesn’t mean that the next one is going to be profitable.

Do not become over-confident and less risk-averse, as that will lead to you changing your money and risk management rules without solid reasons.

When you worked on your trading plan, you had to set up rules to decide about an effective size for your positions. This is just one step in establishing a successful trading method, now you need to stick to and follow your investment plan.

The Forex market is a leveraged market, because of its high liquidity.

Leverage means that you can invest more money than your initial deposit, thanks to margin trading. Your broker will only ask you to put aside a small portion of the total value of the position you want to open as collateral.

When using leverage, your profits can be magnified quickly, but remember that the same applies to your losses. This is why you need to understand how leverage and margin trading work, as well as how they impact your overall performance and trading.

Forex traders are often tempted to use high leverage to make significant profits, but if you’re over-leveraged one quick change in the market could easily wipe you out.

Because currencies are priced in pairs, it’s important to understand that currencies are linked to each other, or correlated.

Knowing about Forex correlations will help you better control your Forex portfolio’s exposure by reducing the overall risks.

Correlation represents a measure of how one asset evolves in relation to another.

If two assets are positively correlated, it means that they tend to evolve in the same direction, while if they are negatively correlated, they will evolve in opposite directions.

To use FX correlations to your advantage, you need to remember a few things:

  • Avoid opening several positions that cancel out each other For instance, if you go long on the EUR/USD and the USD/CHF, you can expect both currency pairs to evolve in opposite directions, which is almost like having no trading position in your account.


Because the USD is used once as a base currency (USD/CHF), and once as the quote currency (EUR/USD), which means that if the USD strengthens against its major counterparts, then the EUR/USD will go down, while the USD/CHD will go up – the evolution of one exchange rate cancelling out the other one.


  • Avoid opening positions with the same base currency, or quote currency

For instance, if you go long on the EUR/USD, the AUD/USD, and the GBP/USD, you can expect these currency pairs to be positively correlated because they all have the same quote currency, the USD.

It means that when the USD strengthens/weakens, your portfolio will go up/down.

  • Be aware of commodity currencies

Commodity currencies represent currencies that move in accordance with commodity prices, because the countries they represent are heavily-dependant on the export of these commodities.

As a general rule, if the price of commodities strengthen, then the currencies of the commodity producers will go up and vice-versa.

The main correlations to know about are the Canadian Dollar (CAD) and oil, the Australian Dollar (AUD) and gold/iron core, as well as the New-Zealand Dollar (NZD) and wool and dairy products.

To improve your Forex trading performance, you should understand your exposure of some currency pairs move together, while others evolve in opposite directions. The key is to diversify your portfolio to mitigate risks.

Before using a live trading account, try to back-test your trading plan on a demo account, and improve your strategy if needed.

Hope now you have a better idea about trade and risk management.

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