Risk and Your Forex Trading Style
The most important part of any style of investing, is being aware of what level of risk you are comfortable with. Without a good comprehension of this, you will not only tend to over extend yourself but also jeopardize your capital base. There are many different types of trades you can make on the Forex, each possesses its own risk parameters and these will closely relate to your risk tolerance. Then there is your style of trading, conservative, moderate, and aggressive.
Initially you may decide to trade a day chart. The trading movement over a day can be hundreds of pips, so when you determine your stop position you have to assess what your drawdown limits are. If your money management stipulates a 3% funds exposure, you will encounter problems on day charts unless your account is substantial.
The 5M or 30M charts maybe more suitable since the pip variation tends to be less, so your stop placements can fall within your management range.
Yes, we all want good returns from out trades, but jeopardising ones account to significant stop positions and vast draw-downs is going to wipe out your account and trading career in the blink of an eye.
A common risk level is 3% or $300 on a $10,000 account. Switch 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, determines a 100 pip stop position, then you are not risking 3% but 30%! Three adverse trades and your account has vanished!
An aggressive trader is open to taking 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 ‘out in a blaze of glory’ trader.
So where do you think you sit? Are you a level headed trader with appropriate money management and risk rates, or a trader that will take exaggerated risks for big gains? If you are the latter, you won’t be around for long, that’s a guarantee.
If any of this leaves you a bit bewildered, you need to gain some knowledge, so start your Forex training with Top Dog Trading, you will learn an enormous amount and it will help you trade with safety to win pips not risk everything.
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