Forex Trading Money Making | Handling risk | Risk management #1

Welcome back, traders and true believers of Forex Trading.

Welcome to the McDuck trading family.

In our last post, we reviewed a renowned trading signals provider called Tools Trade, if you missed it make sure to check it out!

Traders prefer to pay more attention to the profit side of an investment when it comes to trading. It's not the only side of the coin, however. Typically the other side of the coin is linked to money management and the essence of risk.

We may assume that money management is a part of a whole calculation framework designed to prevent financial disaster. It is related to calculating and managing the risk of failure, and how to make the most effective use of your resources.

There generally exists a trade-off between reward and risk in trading. Neither of these two concepts can be accurately measured whereas the amount of risk to be rewarded is a matter of how tolerable you tend to be for risk. When being rewarded, it is in human nature to feel happy but different traders usually have different thoughts about the level of risk they can accept. No profit is guaranteed when trading, but sadly risk is present all the time.

Risk is the amount and probability of a loss or series of losses that a trader may know while trading on the world markets. The possibility of a loss happening is as important as the size of the loss itself.

Beginner traders should remember that even a successful trading system is not protected against failure if it does not consider risk. Money management can make such a system a secure one, but the management of money alone can not do much to support a system that doesn't work.

The first step any trader should make when developing a strategy is to find a workable system, one which consistently shows a greater number of successful trades than losses. The method may be based on fundamental indicators, technological indicators, or both. Trading signals tend to combine both of the fundamental and technological indicators in order to get the best of both worlds and with providers such as Tools Trades you can come a long way even if you haven't fully developed a trading strategy.

The second step is to determine where the system will trade in markets and what events/indicators it will focus on.

The last step is to incorporate these processes and events into a plan, a stage where the money management principle comes to life.

Another fact worth noting is that the theories of money management focus mostly on price and size (that is why money management is also known as "position sizing"). That means that risk assessment and control are technical notions in their nature.

We may conclude that the aim of money management is to optimize the best situations and to prevent or minimize those situations which could lead to capital loss.

Next, we will discuss the different sorts of risk.

Our concerns are pointed out as a loss of capital against risk. That would be our definition of risk and in this post, we'll use the word "risk" with exactly the same context.

In finance, a fundamental idea is a relationship between risk and return. The higher the risk a trader is willing to take, the better the potential return. This is because traders deserve to be rewarded for taking extra risk.

Reward to Risk

What could be regarded as an acceptable risk/reward ratio in Forex trading? – Risk/reward ratio of 1:3 or 1:5 can be reached if you manage to enter a new emerging trend on time.

Having acquired enough practice, you will be able to identify the top and bottom of the patterns regardless of the time frame in which you trade. Even if you happen to be entering in the middle of the action, the pattern will still be able to provide another major step and you can make a profit 3 or 5 times greater than your stop loss.

There are a couple of issues though.

1. Quite often they don't form a trend, but rather trade sideways

2. Some trends aren't strong enough to ensure a risk-to-reward ratio of 1:3 or 1:5 if you enter them late in their middle phase

3. Very often the hesitation of entering a trend or not causes you to miss it and get into it too late when the trend actually ends and the price reversal triggers your stop loss.

Moving the stop loss is one possible solution. It is advisable not to allow your stop loss to stay at its initial position, but rather to move it as the price action grows. Every trader, of course, must evaluate for himself how much to raise the stop.

Unusual Risks

Trading and investing are primarily psychological. The movement of economic assets is due in large part to buyers and sellers making rational and irrational decisions. Profiting from this price change is an emotional experience for the trader.

An experienced trader must be careful not to be caught up in the crowd's emotions, and in many instances, he should act against the crowd, even though that is against human nature.

Outside interventions may affect the trader's psychological well-being, such as lack of sleep, family hardship, illness or lack of success. Unfortunately, as failure to succeed starts, loss of confidence follows.

The aim of designing a system is to reduce those emotional factors and help traders get back on track, which diminishes its negative effects.

Temporal

The risk increases with time. The longer a position is held, the more risky the position is. For this reason, long-term interest rates tend to be higher than short-term rates. On the other hand, profit doesn't increase over time in the markets. A position should therefore not be held beyond the time that the reward ends, in order to reduce risk.

That is everything for today, feel free to check out the video below on this topic, stay safe and I will see you soon with more tips and tricks, trading signals and guidelines for Forex trading!

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