Risk and Your Forex Trading Style
The most important part of any style of investing, is knowing what your risk tolerance is. Without a good comprehension of this, you will not only tend to over extend yourself but also jeopardize your capital base. Each type of Forex trade carries its own risk parameters and these will closely relate to your risk tolerance. Then there is your personal approach to trading, conservative, moderate, and aggressive.
At the beginning you may decide to trade a day chart. The trading movement over a day can be hundreds of pips, so when you select your stop-loss position you have to assess what your drawdown parameters are. If your money management stipulates a 3% funds exposure, you will find problems on day charts unless your account is significant.
The 5M or 30M charts maybe more appropriate since the pip variation tends to be less, so your stop positions can fall within your management margins.
Yes, we all want good returns from out trades, but jeopardising ones account to large stop positions and vast draw-downs is going to wipe out your account and trading career in the blink of an eye.
A practical risk level is 3% or $300 on a $10,000 account. Convert this to pips, 1 standard lot ($100,000) has a pip value of $10 so if you trade end of day and your stop loss positioning, whether count-back or support and resistance or any other, dictates a 100 pip stop position, then you are not risking 3% but 30%! Three adverse trades and your account has vaporised!
An aggressive trader is prepared to take riskier trades that a conservative trader. They will expose a larger proportion of their capital in riskier trades with the hope of achieving larger returns – often over extended trading time frames but they may still use the similar strategies for shorter times as well. Very much the ‘crash and burn’ trader.
So where do you place yourself? Are you a disciplined trader with good money management and risk rates, or a trader that will take exaggerated risks for big gains? If you are the latter, you will not be trading for long, that’s a guarantee.
If any of this leaves you a bit uncertain, you need to gain some knowledge, so start your Forex training with Top Dog Trading, you will learn a considerable amount and it will help you trade with safety to win pips not risk everything.
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