How To Set Up The Forex Trading Risk Of The Powerful.
Forex trading business is a business that has a high profit potential but you should be wary of high risk as well. High risk high return most people say. Then you are required to learn how to set up a powerful trading risk.
Ok, for example you test two beginner traders who are faced to the front of the screen. Give them your best strategy that has a high probability of making a profit, then each beginner trader to take the opposite trading position, one buy and one sell. Most likely, both will end up losing money (losers).
However, if you are testing experienced traders and they are trading in opposite directions, often both experienced traders will make money – though there are still contradictions of reason. What is the difference? What is the most important factor of separating experienced traders from beginners? The answer is risk management and financial management (money management).
Financial management is something that most traders just talk about in the mouth, but the fact is that little is practiced or misplaced. The reason is simple: managing financial trading is not fun. Traders should constantly monitor their positions and take the required stop loss and unfortunately few traders do it.
The purpose of trading is to gain profits up to many fold.
The Big One
Most traders start their trading career by visualizing “The Big One”. Trading will make them a millionaire fast and allow them to retire at a young age and live without work for the rest of their lives.
In forex, this fantasy is further reinforced by folklore from the market. Who can forget George Soros who then made a short on the pound and earned a profit of 1 billion dollars in one day?. But the truth is the opposite for most retail traders that instead of experiencing “Big Win”, most retail traders fall victim to the “Big Loss” that can keep them down forever.
Often we hear stories about traders who experience MC because of one losing position and erase all the benefits gained before. Typically, such losses are the result of reckless financial management, without the use of a stop loss and expect the price to reverse (in the direction of its position) in the short term.
Continuing with previous articles
Traders can avoid losses by controlling their risk through Stop Loss. Many books on trading advise you to trade only risk 1% of your equity value and do not have to care about what others say. This is a very good approach. You could be wrong and lose up to 20 times in a row and still have 80% of the equity.
The reality is that very few traders have the discipline to practice this method consistently. Most traders can only absorb the lessons of risk discipline through their experience of losses. This is the reason why you should use speculative capital when first entering the forex market.
When a beginner trader asks how much money should be deposited to start trading? So the answer is: As much as you can accept the loss of the capital fund completely. Now divide the amount by five because your initial attempts at trading are likely to end in losses.
There are two ways to do a successful financial management. First, you can take a lot of small profits (many op positions) and try to harvest the profits of some great wins. Secondly, you can choose to earn a lot of benefits and rarely use stop but once stop losses in bulk.
Of course, the method you choose depends on your personality / trading character. This is part of the character discovery process for every trader.
For example, in EUR / USD, most traders will face a 3 pip spread as a transaction fee. With the use of different lots, these costs will be uniform, in percentages. Will traders use 1 or 0.1 or 0.01 lots? Transaction costs are the same.
However, forex traders benefit from uniform pricing and can practice their respective financial management styles without concerns about variable transaction costs.