HOW TO TAKE RISKS IN FOREX MARKET
Taking risks in the trade is the only thing that can determine your profit.
Risk-Reward Ratio
The risk: reward ratio is something that you may hear a fair bit about. Some will
say that you should never trade with a risk:reward ratio of less than 1:1, or 1:2, or
1:3 etc. All it is doing is comparing your risk to your reward. Here is an example to
make it very easy to understand.
If we had a risk:reward of 1:2, then for every one unit we are risking, we would be
looking for two units in return. Or to put it in trading jargon, if we had a trade on
with a 30 pip stop, we would be looking for a profit of at least 60 pips to give us our
1:2 risk:reward. If it was a risk:reward of 1:3, then we would be looking for a 90 pip
profit on the same example.
Now, why is risk:reward important? Well, it is and it isn't. It all depends on your
trading success rate.
If you had a trading system, where you had a fixed 20 pip stop and a fixed 40 pip
profit target on all trades, then your risk:reward is 1:2. If you were successful on
40% of your trades, then in the long run you would be a profitable trader. So that is
not a problem. But if your success rate dropped below 35%, then you would start to
have problems long-term.
Where a trader may have a trading method where they use a 20 pip stop and a 10 pip
target on all trades, which gives you a negative risk:reward of 2:1, which is a lot of
traders' opinions would be considered a surefire way to ruin. But if that same method
had a success rate of 70%, then this trader would be profitable overall. And there are
plenty of successful traders that trade like this.
To take this further, a trader may have a method where they have a 20 pip stop and a
100 pip target on all trades. Great risk:reward at 1:5. Here, they would only need a
the success rate of just under 20% to be a profitable trader. Whether you could stand the
a high number of losers is another issue.
Don't be scared off by what others say about risk:reward. There is nothing set in
the stone here, but just make sure you have a fair idea of the success rate of your
trading method, so you can see where you should end up over the longer term if
things were to remain constant. If you are losing long term, then something has to
Types of Orders
Trading Forex and placing orders are very similar to other types of trading. Not
much changes here. But I'll go over the more common order types for those that are
new to trading.
Market order - this is where we jump straight in or out of a trade at the current
market price. This is where you may experience some slippage on some platforms
if the market is moving quickly, which is something to be aware of! If you miss the
price you hit the buy or sell button at, you will be asked if you want to go with the
new price. It will give you a couple of seconds to decide, and if you don't do
anything, the order is canceled. This is called a re-quote and it can be a little
frustrating at times.
Buy Stop or Sell Stop - this is where you enter the market going with the trend.
That's probably the easiest way to explain it. In the case of a Buy Stop order, you are
placing an order to buy above the current market price, so when the market moves
up, your order is filled on the way through, where you want the market to continue
to rise. The Sell Stop order is the opposite. You set an order to sell below the
current price, and when the market falls, your order is filled on the way through,
and you are looking for the market to continue to fall.
Buy Limit or Sell Limit - this is where you are looking for a reversal and going
against the current trend. With the Buy Limit order, you are placing an order to buy
below the current market price, looking for the market to drop down to your entry-
level, where you will be filled, and then hopefully the market would turn around and
head up. A trader may use this if they are trading off Fib levels or Pivot points etc.
They would have a specific reason as to why they would think the market is going to
turn around near their entry point. Dare I say it, but a Sell Limit order is the opposite.
You would be placing an order to sell above the current market price, where you
would be looking for a price to continue to your sell order, be filled, and then turn
back down. Again, there may be some resistance level, Bollinger bands, or
something else that makes the trader think that price is going to reverse
e near their
entry point.
At the time you place your trade, a lot of platforms allow you to set your stop loss
and profit target at the same time. This is up to you, but I would strongly suggest at
least a stop loss is set as soon as possible. It doesn't have to be your desired stop, but
as long as one is set, once the dust is settled and you are in the trade, you can quite easily adjust the stop to the preferred position.
This is where Oanda is good as you can set defaults for entry size, stop and profit.
Once these are set, and then it is quite simple and quick to place the trade, then you
can just go back and adjust anything you wish, and this can be done directly off the
chart also. Position size on Oanda can either be set as 'unit size', 'US dollar amount'
or a 'percentage'. There is also an option of setting a trailing stop, which can also be
set as a default. You would use this just to trail your stop at a certain level behind the
current price to lock in profit as the trade develops. It is not something I use, so I can't
comment on the benefits of using a trailing stop but some may find it handy.
Keep in mind that a lot of these different brokers or different platforms have their
rules for how close you can place stops, profit targets, etc. This can vary on what
time of day you are trading also, and if there is major news coming out. You will
find that broker A is good for something that broker B is not, however broker B
may offer another item on their platform that is far superior to broker A. There is
always a trade-off when it comes to brokers. The trick is to find a nice balance of
honesty (very important), reliability, spreads, execution, charts, support, etc. Do your
How Many Pips is Enough?
This is something that may get your attention, as you may be surprised at what little
profit is required to make a success of Forex trading.
Previously I have spoken about the average daily move of the major pairs like the
EUR/USD and the GBP/USD, which is normally around the 80 - 120 pips mark.
Remember this is not necessarily from the low to the high or vice versa, as the
market may start and finish at the same price in that period. So as you can see, there
is normally a fair amount of movement in the day and therefore plenty of
opportunities to grab some of that action.
I don't know what your lifestyle is like or what you would consider a decent
income from trading to maintain your present lifestyle, so let’s just talk in general
terms.
You are an average Monday to Friday worker and maybe work the odd Saturday.
That's typical here in Australia. Your wage may be in the vicinity of AU $800 -
$1000 per week. So we are looking at roughly a 40hr week plus travel time and
expenses etc.
In your spare time after work, you dabble in the world of Forex and you aren't too
bad at it. You trade for a few hours on your $10,000 account, keeping your risk per
trade at the 2% mark, keeping your stops nice and tight, and locking in profits quickly.
After a few hours each night, you can consistently take 20 pips out of the market and
then call it quits
It doesn't sound like much and it also doesn't seem to be too hard. Yeah right!
20 pips a day.
Now on the $10,000 account with 2% risk and tight stops, trading one (1) standard
lot would be quite possible. Remember I generally say that one (1) pip on a standard
lot is equal to US$10. If you were trading the EUR, GBP, AUD, or NZD, then that
would be exact.
Now 20 pips x US$10 = US$200. For us Aussies, that is about AU$220 (depending
on the exchange rate at the time). I know, it doesn't sound that impressive yet.
Do this
for 5 days, however, you end up with 100 pips or US$1,000 or AU$1,100.
Already, I can see a good improvement on my average 40hr working week here in
Australia.
I don't know about you guys, but US$1,000 per week is a handy sum in any man's
language (or woman's). Some will be used to more and may consider US$1,000 not
worth getting out of bed for. If this is the case, then I'm sure you can start trading
with much larger account size or I can show you a way to increase the amount
without any further risk using the power of compounding!
If you can make 20 pips
daily, you would be crazy not to try and improve your profit without
increasing your risk. How do we do this?
Using our above $10,000 account and trading one (1) standard lot for the week. We
make the 100 pips for the week; therefore end up with a profit of $1,000. Now
assuming we have a normal job and we don't need the $1,000 for living expenses, so
we leave it in our trading account. The following week our account balance is now
$11,000, and with the same 2% risk per trade, we can now trade 1.1 standard lots (or
11 mini lots). If we make the same 20 pips per day, we are then making $220 profit
for the day or $1,100 for the week. Where the following week, our account balance
would stand at $12,100 and our position size would be around 1.2 standard lots, and
so on.
As you can see, our profit is 10% per week, and that is a very good return. Now
some of you may think that this is pie-in-the-sky stuff and a little unbelievable. This
is probably understandable as that is the way we have been trained to think, where
we believe anything over 20% profit for the year is a good result.
I can assure you that 10% per week is not that spectacular in the world of Forex
trading. Mind you, most traders would kill for those results, but I know of one chap
who is well known amongst traders that target 5% per day, and he does this all by
chasing 20 - 25 pips per day on 2% risk, just trading the EUR/USD.
The above may be possible to achieve in a perfect world, but who lives in one of
those? We all know that it isn't that easy as there is something about traders.
seem to just stuff it all up. I think trading psychology has a lot to do with it, and that
is another chapter in itself and coming up next.
Most of the above revolved around a day trading type method. If you
were trading off the 60 min, 4h,r, or daily charts, you would have da different daily
targets,s, etc. But there is nothing to stop you from aiming for the $1,000 weekly
target and adjusting your position size accordingly.
The above examples are simply to give you an idea of what is possible and realize
that you only need to make a small consistent profit regularly. You
don't have to go for the big kill every trade. Control the losses, hit your targets, and
then call it quits for the day. 20 pips profit a day will do it!
I told you Forex trading is easy!!
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