I'd have to say that EVERYTIME Bill Poulos is a guest blogger, he gets almost as many comments and attention as Adam...ALMOST. Today should be no different. I called Bill and asked him to write an article on risk management in Forex. I read the article and it delivers, so you won't be disappointed. This article focuses on the method he uses and he's produced two videos (Flexible Forex Discovery VIDEO ONE.....Flexible Forex in Action VIDEO TWO) so check out the videos, enjoy the article, and let the comments fly as I told him he'll have to teach in the comment section!
When trading anything, risk management is first and foremost. Without it you will lose, period. When trading the Forex markets or any highly leveraged market, you must have a risk management plan that accounts for that leverage.
Forex broker’s are fond of touting the fact that they provide 100:1 or even 400:1 leverage, but the truth is, if a trader ever takes on position sizes that take full or even partial advantage of that leverage, the account will soon be wiped out. That is because the maximum % of one’s account size that could be risked on each trade allowed by the broker, would lead to excessively large position sizes and levels of risk far beyond what a good risk management system would allow.
However, with a good risk management system and at least one good trading method that puts the odds in your favor and the discipline to trade it, you have the opportunity to enjoy the tremendous profit potential that these Forex markets have to offer.
First, never risk (the amount you would lose) more than 2% of your account size per trade. This means for a $10,000 account, you would not plan to lose more than $200 on any given trade. If the number of pips of risk (The difference between your entry point and initial stop) for a EURUSD trade, for example, was 10 Pips, at $10/Pip for a standard lot, you could only trade 2 standard lots ($200/$100). On the other hand, a broker providing 400:1 leverage would allow you to trade as many as 25 standard lots or more on that one trade. If the trade is a loss, with the 2% rule, you would lose $200, with the broker’s allowable position size, you would lose $2500. If you lost 4 trades in a row, with the 2% rule you would be down $800 and live to trade another day. With the maximum leverage rule, you would be wiped out. I think you can readily see, why you would never want to set your position size based on the allowable leverage or more importantly anything more than the 2% rule.
So once you enter a trade with the correct position size, you want to protect the position with an initial stop and then reduce the risk to zero as the trade moves in your favor and then exit the trade profitably.
But how do you do that? Follow what I teach you in these free videos (Flexible Forex Discovery ONE.....Flexible Forex in Action TWO), and the next series of videos, where you'll see exactly how and where to place your initial stop, so it's far enough away from the entry price so that you are not stopped out prematurely but close enough so that your risk in the trade is kept to a minimum. Once in the trade, the aim of all of our trades is to move the stop to breakeven as soon as possible, but no sooner to achieve what I call a Free Trade where the risk has been driven to zero. And then to manage the trade to exit profitably. The exit strategy is designed to sell into strength in an uptrend and buy into weakness in a downtrend by exiting the trade in two steps. First, to exit ½ of the position at a Profit Target based on 1 x Average True Range and then to exit the remaining ½ position at a Profit Target based on 2 x Average True Range together with a trailing stop.
By managing the trade this way, you dramatically alter the risk reward dynamics in your favor as you apply the Free Trade strategy. In so doing, you are able to withstand the inevitable losses that come with trading and be in a position to take advantage of the great profit opportunities that occur in these Forex markets over and over again.
Thank you for enjoying the article as it's my sincere hope that I can help you improve your Forex trading by perfecting exactly what I do...and make money with. Thank you Adam for allowing me to teach you, and please don't hesitate to comment with any questions. Also please take some time and watch my two videos showing in a bit more detail exactly how I do it, Flexible Forex Discovery VIDEO ONE.....Flexible Forex in Action VIDEO TWO.