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Risk and Your Forex Trading Style

November 14, 2009

The most valuable part of any style of investing, is understanding your personal risk tolerance. Without a good understanding 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 tie in directly with your risk tolerance. Then there is your style of trading, conservative, moderate, and aggressive.

 Initially you may decide to trade a day chart. The bar movement over a day can be 100’s of pips, so when you determine your stop position you have to assess what your drawdown parameters are. If your money management dictates a 3% funds exposure, you will get into problems on day charts unless your account is significant.

 The 5M or 30M charts maybe more appropriate since the pip range tends to be smaller, so your stop positions can fall within your management criteria.

 Yes, we all want good returns from out trades, but risking ones account to wide stop positions and vast draw-downs is going to burn out your account and trading career in no time at all.

 An avarage risk level is 3% or $300 on a $10,000 account.  Change 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 reversed trades and your account has gone!

 An aggressive trader is prepared to take riskier trades that a conservative trader. They may be prepared to expose bigger sums or money in riskier trades with the hope of achieving larger returns – often over longer trading time frames but they may still use the similar strategies for shorter times as well. Very much the ’all risk’ trader.

 So where do you consider your trading style to be? Are you a highly controlled trader with good money management and risk rates, or a trader that will take over the top risks with all or nothing 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 learn more, so commence 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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