You may have come across the subject of the Risk Management under different names, such as Money Management, Risk Management, Trade Management, Order Management and so on. Call it hatever you like but one thing is indis!utable, it"s the essence of trading. The most im!ortant as!ect of trading. #t"s almost the holy grail of trading.
#t"s ironic though, that for ne traders, Risk Management is the least im!ortant as!ect of trading. $verybody ants to learn about best entries and such first. They think that"s here the money is. #t"s human nature% e usually tend to look for the easy ay regardless of hether it"s the correct ay or not.
#"m a big fan of old Martial &rt movies. 'ot the ones here they effortlessly jum! on to! of ( storey buildings, but those here young !eo!le go to a Martial &rts master to teach them his craft. Once the master acce!ts them as his student)trainee, he sets them mundane tasks such as cleaning the floor, moving certain items from one !lace to another etc. day in day out. $ventually most students get really frustrated ith e*treme disa!!ointment. &fter all, they anted to be the best kung+fu fighters, not handymen or cleaners.
Most dro! out. The ones that stay the course, hoever, start to reali,e that Martial &rts is a life style !ractice, not a fighting one. They also come to understanding of mastering the art takes time and hard ork.
$s!ecially after hearing and reading all those stories ho so+and+so made lots of money by trading currencies. -ild est gold rush begins... .ooking into it a bit further then donload some trading !latforms and start trading !a!er money. -atching !rice moving.. seeing all those dollar !i!s rolling fast on most likely M1 and M/ charts. 0ure e are e*cited by no and thinking the !ros!ect of making a lot of money ithout any hard ork. &lready e start to imagine)dream about rich life style. &t this stage our reasoning logic should be telling us 1hang on, this looks too good to be true1, but ho cares about sensible reasoning here. #t"s all blocked by our greed. That devil in us starting to take control. 2
Then e discover all those onderful indicators and oscillators. Magic...
1#t looks so easy... $ven using sim!le M& crosses can make a lot of money. # don"t have to do anything. 3ust atch the crosses and enter1. One thing, the deadly im!ortant as!ect e overlook here is that these indicators are shoing the !ast, not the !resent.
&ll indicators are lagging. # have not seen any orking non+lagging or non+re!rinting indicator to date. # su!!ose once time travel is invented it"ll be !ossible to make non+ lagging indicator.
-hen e discover the lagging as!ect of these indicators e most likely ill have some noticeable disa!!ointment but at this stage e still are e*cited.
These onderful indicators are much like a chea! hooker.
1That"s fine1 e say, 1#"ll go for classy e*!ensive hookers1. -e imagine e can find a fine tuned, !erfect indicator or system that !roduces inners consistently.. Then e start searching for that magical indicator or system, donload and test many of them, try to fine tune them, buy some systems, enrol in some courses and so on.
0ome of us end u! asting considerable amounts of money on these useless systems and courses. 4y the end of this stage most traders get asted or give u! on trading. On the other hand some decide to go back to the draing board and re+start from scratch ith the understanding that learning to trade may take a lot more time than they had antici!ated at the start.
#"d like to make it clear that # am not against using certain indicators for information !ur!oses such indicators that shos !rice, highs, los and so on. The key is not to base your trading decisions on any indicator other than your main indicator5 the chart itself and !rice u!on it. Try not to !ollute your charts ith useless indicators until trading becomes your second nature. &t this level it doesn"t matter hat indicators or ho many of them are dis!layed on the chart% you"ll ignore them and look for the !rices and levels automatically, instinctively.
#f you are ne to trading, !lease do yourself a favour before buying any magic system or enrolling in !aid courses, by asking these sim!le 6uestions5
7 #f these bullet !roof black bo* systems are as good as their vendors claim to be, hy are they selling it instead of using it for themselves8 #f # had such a magic system, # ouldn"t sell it, at least not to the !ublic. They"d be orth millions rather than this fe (
hundreds bucks. # myself don"t kno the e*istence of any magic system that orks so far.
7 #f those mentors and teachers ere so great, hy don"t they teach it for free8 # don"t buy the argument that they get greedy and ant to make more money. Think about all the time and effort they !ut into those courses. 0urely it could be utili,ed in trading, a much more rearding career. 9oever, # do buy the argument that some !eo!le are good at teaching but not so good at trading, so they are making their living from the greater talent. 'othing rong ith it. # only recommend to ne traders choose carefully and choose the best ones if you don"t ant to end u! asting your time and money.
Out of the last grou! :Traders ho ent back to the draing board rather than give u!; only the ones ho get to gri!s ith a sound and disci!lined risk management ill survive.
#n my vie, the first thing to teach to a ne trader is risk management. &t least the great im!ortance of it.
& ne trader may not take risk)money management seriously as he or she may be thinking 1hat the heck, # have only a /< account and # kno hat"s there. # kno hat is a loss and # kno hat"s a in.. 0o hat"s to manage there.. # need to im!rove my entries first.. Money management ill take care of itself as long as # have great entries1. 9oever, in reality, the first thing to be mastered is sound risk)money management.
Risk Comes From Not Knowing What Yo !re "oing = Warren Buffett
-arren 4uffett !ut it short and seet as to the source of a risk. Risk is heavily associated ith uncertainty here e do not fully kno the outcome of a certain situation. Consider someone orking on a com!le* !roject. 9e has a much harder task identifying and managing !ossible risks than a trader has. &s traders e have a much sim!ler task hen it comes to identifying the risk)s and managing them. There are only fe variables e need to take into account. 9oever, e have a harder task sticking to !re+defined disci!line, due to the !ersonal as!ects of trading. >reed and ?ear kick in and start messing ith our !sychology.
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Trading !sychology is the end !roduct of ho e manage our fear and greed ithin the frameork of risk management.
The fear !art is easier to understand and deal ith. ?ear originates from the unknon, the risk% e can manage to control it by avoiding stu!idity and a!!lying certain rules based on !ractical knoledge. On the other hand, greed is a totally different kind of beast. #t"s not so easy to control.
#deal traders ould be those that are bored, don"t care about material things in this orld and don"t get on emotional roller coasters easily. ?orget about 9ollyood stuff. They are just movies.
# ill try to illustrate belo that even a mediocre trader ith sound risk)money management can be a consistently !rofitable trader over a !eriod of a time.
.ets say, as a ne trader you just learned the basics of su!!ly and demand ,ones)levels. Alus engulfing candle !attern. :0ee here for detailed e*!lanation of englfing #andle $attern;. You can identify here to dra your su!!ly and demand ,ones. #f you find it difficult to s!ot the ,ones at first instances, then use 0u!Bem indicator hich dras it for you automatically. #t"s not !erfect but it does the job. # still use 0u!Bem indicator. -hy8 Can"t # s!ot them8 0ure # can but there are certain situation hen farther left ,ones are easily not visible unless you kee! scrolling your chart. #f the 0u!Bem indicator doing it for me hy should # do it manually8
&s a ne trader. #"d suggest you start trading on higher timeframe :9T?s; charts such as 9@ or 91. -hy is that8 #s it easier to trade on 9T?s charts8 ?rom a technical !oint of vie there is no difference. You"ll have the same !rice movement, and the same !rinci!les a!!ly both higher and loer T?s. The main difference is relative s!eed. There are other as!ects, but that ould be a subject of another article and not needed here. $ven though, for better entry o!!ortunities, looking at loer T?s is a good idea but let"s leave that until e learn and understand overall !rice action and structure ithin ,ones better. This ay you"ll avoid immature !anic and fear to a certain degree. That"s all.
# as thinking to use sim!le illustrations but for the sake of realism and clarity lets use actual charts. &s most ne traders ill likely choose $CR)C0B to trade, #"ll also stick to it in this e*ercise. Once you learn to read charts !ro!erly after 1DDDs of hours of screen time, you"ll come to understand the saying 1&ny !air, any time frame1.
T9$ R#0< ARO?#.$
?irst e need to define our risk !rofile in line ith our account si,e. Bon"t overlook T9$ R#0< ARO?#.$. #t"s the heart of the matter. $*tremely im!ortant.
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#f it doesn"t make much sense at the beginning, take your time until you gras! the essence of it. Bo it right... Bo it isely.
'ever, $ver !ut your real money in any trading before you fully understand the risk management, and can define your very on R#0< ARO?#.$.
Cnderstanding and defining it is just the beginning. You MC0T a!!ly it to your trading ith disci!line as if your life de!ends on it.
What do we in#lde in Risk %rofile&
1. -hat levels of Risk5Reard :R5R; ratio ill e be orking ith8 2. -hat"s the ma*imum !ercentage of our account e are illing to risk on any one or more trade)s8 (. -hat"s the ma*imum !osition si,e e can use8 @. #n terms of !i!s value hat"s the ma*imum sto! e"ll be using8 /. &re e going to use break+even and trailing8 E. -hat time frame ill e be trading8
1' (inimm R)R *Risk)Reward+ ratio e"ll ork ith is 1 to 2. This means that for every !i! e risk e ant to gain 2 !i!s.
2' We don"t ant to live fast and die young and !retty. We will not risk more than 2, of or a##ont in any one or more trade)s. You may have come cross similar !hrases before in books and articles. One thing is some of them don"t make it very clear5 Boes 2F is a!!ly to an individual trade8 #f so, can # o!en other trades simultaneously as long as # don"t risk more that 2F of my account on any one of them8 Of course not. Remember, e are talking about our total available account value, not the count of o!en trades at any one time. Be!ending on your account si,e, !osition si,e and sto! value you may only be able to o!en one trade if the trade risk value is close or e6ual to 2F of your total available account value + available margin.
9oever, you can still o!en more than one trade even though hen you o!en the first trade it"s risk value may have been 2F of your available account value. 9o8 0im!ly by locking your first trade hen it"s moving in your favor as long as you take into account s!read and sli!!age. -hat this means is you have decent distance beteen your entry and current !rice so that you are able to move your sto! at least break+even to G1D)1/ !i!s. Trade is locked and the risk is reduced almost to ,ero. Be!ending on your available margin you may be able to enter another trade. &n im!ortant !oint to remember is that markets can ga! in either direction over the eekends. #"d strongly advise never leave such trades o!en over the eekend. &s a beginner, #"d say do not leave even a single trade o!en over the eekend. &dditionally, kee! in mind that an une*!ected big incident can cause ga!s too, such as natural disasters etc. Cnfortunately, e cannot do much about these.
-' %osition si.e e can use ill de!end on the account si,e. $ven H/k ill !rovide you ith enough margin to trade a standard :std; lot if your broker gives 151DD leverage. Csing this kind of account setu! and trading it ith std lot ill most likely kill your account in no time. #n my o!inion a suitable relationshi! beteen account si,e and !osition si,e as follos
E
o 1DDkG for trading in std lots + 1 std lot :1.DD; !er !i! value I H1D o 2DkG for trading in mini lots + 1 mini lot :D.1D; !er !i! value I H1 o /kG for trading in micro lots + 1 micro lot :D.D1; !er !i! value I HD.1D
Ps/. Please note the above lots values refers to certain instruments such as EUR/USD etc. Some other instruments have different lot values. While 1 standard lot value of EUR/USD pair is equal to US1!" 1 standard lot value of Silver is equal to US#!.
/' We will se a ma0imm of /1 $i$s sto$s' 9oever, e ill try to s!ot entry o!!ortunities ith less than @D !i!s sto!s too but e ill not take entries ith more than @D !i!s sto! value. Therefore e"ll be taking on trades that offers JDG !i!s here entry re6uired @D !i!s sto! :minimum 152 RR e already defined;. -ell, ho do e kno if the entry offers minimum of tice the our sto! value8 &re e magicians or hat8 -e of course don"t kno the outcome in advance, but su!!ly and demand ,ones give us some idea. #f e are buying in a demand ,one ith @D !i!s sto! and e see @/ !i!s above su!!ly ,one the most likely there is not enough room to get our minimum JD !i!s.
Alease understand that, not all offered !ossible reards are reali,ed at all times. Arice may turn at any time against us before reaching our !re+defined target. This is here using break+even sto!s becomes handy. -e shouldn"t let a inning trade turning into a loser.
2' We will se 3reak4e5en and Trailing. -hen !rice moves in our direction. &round /DF of our target e ill move our sto! to break+even. Alease note, break+even means here% e ill move our sto! to entry !rice G s!read. #f the s!read for the !air e are trading is 2 !i!s and our entry as at say 1.@22/ then e"d be moving sto! to 1.@22K. #f !rice is moving nicely in our direction, instead of closing the trade after it reaches our initial target of 251 e"ll consider trailing it by moving our sto! to initial target hen !rice advanced further in our favor.
6' 7et say we #hoose to trade the horly #hart as e are ne and bit nervous. #t"s also im!ortant to decide on timeframe as our sto!s and !osition si,ing ill vary according to the time frame e decide to trade on. -ith higher time frames, e ill need bigger sto!s and smaller !ositions de!ending on our available account value + available margin.
0o, e have orked out our Risk Arofile as follos5
o -e ill use minimum of 152 Risk Reard ratio o -e ill not risk more than 2F of our total available account :available margin; o &s e have only 2Ek account e ill only trade using mini lots as our ma*imum !osition si,e !er trade o -e ill ork ith ma*imum of @D !i!s sto!s o -e ill be using break+even and trailing as defined above. o -e ill trade on hourly charts only.
&s long as e can stick to the above risk !rofile defined, e can enter 1D trades, have E looser and only @ inners but still end u! ith !rofit overall. 'o, this is not one of those too good to be true systems. #t"s a sim!le reality and can be !roven ith numbers.
K
For instan#e8 say e used ma*imum of @D !i!s sto! for all 1D trades and used the minimum 152 reard to sim!lify the e*!lanation here.
-e had E loosing trades hich translates into E*@DI2@D !i!s loss -e had @ inning trades hich translates into @*JDI(2D !i!s gain
0o after 1D trades e have gained JD !i!s overall
#t"s a sim!le fact but many ne traders overlook such !robabilities. #t can do onders for your trading !sychology, es!ecially if you are suffering in the hands of fear. 9oever, for the above to ork you must strictly follo the rules. The rules that you have defined yourself in your on risk !rofile. #f you move your !re+defined sto! against yourself, or e*it trades before reaching the initial target it ill fail miserably.
Alease kee! in mind, the above may vary in terms of trade count in reality. ?or e*am!le you may have E loosing, 2 break+even and 2 inning trades. #n this case after 1D trades your account ould be shoing JD !i!s loss. The !oint is, in certain circumstances it may take more than 1D trades to hit the !lus as long as you do not !anic and avoid doing silly things. -e may also avoid such outcomes by taking trades hen !rice is only in strong ,ones and ignoring eaker mid ,ones.
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The Holy Grail of Trading 2/2
#n the folloing !ractical demonstration of Risk Management, # have scrolled $CR)C0B chart back to Oct 2D1D as the starting !oint of this e*ercise. Chart contains only Chaos 0emafor indicator for shoing ( levels highs and los. Aurely for information not for our entry and e*it decisions.
Time to get on ith our 1D e*ercise trades.
Trade 1 L1)EM
Trade 1)
-e have one fresh su!!ly ,one and one demand ,one. The fresh ord here refers to ,ones are not been visited by !rice yet. Then e have some mid su!!ly ,ones hich e ill ignore unless e see some decent o!!ortunity. 'o e ait and see hat !rice does.
'4. $ use an alert indicator %hich pla&s a sound %hen price is approachin' %herever $ place the alerter(s hori)ontal line. $ don(t have to sit and %atch the price on an& particular chart. Please see end of this article for the indicators mentioned/used in this e*ercise.
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Trade 1 L2)EM
0ee ho !rice sliced through the first mid+eak ,one. -e cannot see any decent A& here to !rom!t us to sell, es!ecially considering demand at bottom as established ith an engulfing candle. 0o e ignore it. #f u!!er su!!ly orks and !rice turns don toards demand then so be it. -e"ll ait for the ne*t o!!ortunity. Bo not orry about missed o!!ortunities. Markets !resent no ends of entry o!!ortunities on a daily basis.
Trade 1 L()EM
1D
&s e*!ected all eak ,ones are taken out. &fter !rice touched the main su!!ly ,one e have been atching, it !roduced a juicy bear engulfing candle. 'o e are looking for an entry o!!ortunity that fits in ith our Risk Arofile. #t comes first and second candle after the engulfing one. 0ince e are all e*cited and cannot ait e enter as soon as !rice hits our sto! range. 'o e have to ait and see ithout doing anything stu!id in the meantime.
Alease note that this entry doesn"t fit conventional su!!ly and demand trading. Te*tbook entry ould have been hen !rice travelled further u! ithin su!!ly ,one so that e can have our @D !i!s sto! just outside :above the u!!er border; the su!!ly ,one. 9oever, after !rice hitting su!!ly ,one then seeing such a nice engulfing bear bar e decided it"s orth taking the risk and entered at first !ossible o!!ortunity.
Trade 1 L@)EM
The !rice hit our first target. Becision time. Bo e close or let it run8 Obviously, e don"t take a long time here to think about closing or not. -e should already have a !retty good idea by no hat e"d be doing hen !rice hit the T>1.
-e already kno that best !ossible signal e ho!e to see on charts is a nice engulfing candle on right !lace. Meaning in and around strong ,ones. -e have a nice engulfing and a decent A&. #n this occasion e decide to move our sto! break+even G, define T>2 and let it run.
11
Trade 1 L/)EM
0ince !rice sliced through our T>2, e decide to move our sto! to T>2 and let it run. .ooking for the !rice to hit the bottom demand or at least come bit more close to it.
Trade 1 LE)EM
-e ere !roven to be right on this occasion. -ith !atience and ithout unreasonable fear e have managed to ma*imi,e our gain by sensible trailing. -e !ut our third and 12
final target just off the demand ,one to ensure 6uick e*it. Often !rice can mess around before hitting the actual ,one.
0ome may ask hy that bull engulfing candle !attern on the ay don didn"t ork. .ook at here it formed8 Bo you see any decent ,one around there8 4esides, e !ut off from our entry radar levels beteen the su!!ly and demand ,ones e decided to trade. Alease note that not all !rice movement as straightforard as the above one. That"s hy it"s very im!ortant that hen e catch a nice o!!ortunity e don"t aste it ith !remature e*its.
Trade 1 is #losed with 291 $i$s gain'
1(
Trade 2)
#n accordance to our Risk Arofile and dirt sim!le trading !lan e take the buy in the demand ,one. Our sto! orks out to be just outside of the demand ,one hich is ideal.
'o, there are various a!!roaches on entries in and around su!!ly and demand ,ones. 0ome enter hen !rice hits the ,one, some ait and see if the the candle makes it into ,one, closes inside the ,one, or goes through therefore invalidate the ,one. There are others ho ait to see if !rice is going to be contained in the ,one by atching A& to give them some clues.
$ach a!!roach has it"s on advantages and disadvantages. -aiting for A& confirmation may take some time and it"ll most likely ill ha!!en outside the ,one thus increasing sto! !i!s count. Of course it"s still not guaranteed it"ll ork. On the other hand taking the trade hen !rice hits the ,one ill reduce our sto! !i!s count but e do not have any indication or clue if it"ll be contained ithin the ,one or not.
#n my case # do not subscribe to any !articular one. # use all of them de!ending on the ,one and ho !rice travels, the s!eed !rice hits the ,one. The above is a good e*am!le of for the first a!!roach. -e have a fresh fairly strong looking ,one hich is established ith an engulfing bull candle and hitting the ,one ith fairly big 91 candle.
1@
Trade 2 L2)@M
&s you can see !rice hit our T>1 nicely. #nstead of closing e e*!anded our T> to about from JD !i!s to 12D !i!s and moved our sto! to break+even G 1N !i!s. Our T>2 is almost hit but not 6uite. 0ince e moved 4$ to !lus 1N !i!s e can afford to ait and see.
&ll looking good so far. -e locked our trade. -e are fairly safe. -e on"t be taking any loss on this trade unless something une*!ected ha!!ens or e leave this trade like this over the eekend and market ga!s don to ell belo our entry !rice.
Trade 2 L()@M
1/
T>2 also hit ith a nice big bull candle. #nstead of closing e decided to trail. Moved T> further u! and moved our sto! to break+even G 122 !i!s.
-e could have moved our T> further u! but notice the left bo*ed dirty !rice action ,one. -e don"t ant to get involved in any dirty !rice action. #t"s best to take hat e have :once hit the dirty ,one; and run. #f T>( hit e"d be achieving over @51 reard ratio. 'o !oint getting greedy. #f it slices through the dirty ,one so be it. -e"ll ait for the ne*t o!!ortunity.
&s this trade is fairly secured, e may go ahead and look for another trading o!!ortunity on another instrument.
1E
Trade 2 L@)@M
T>( is hit comfortably and Trade 2 #losed with 1:1 $i$s gain'
There is a nice bear engulfing candle in dirty ,one hich established a ne su!!ly ,one. -hy didn"t e take a sell order around there. -ell e already decided e"ll only trade clean and strong ,ones.
-hat about that current bull engulfing candle then. &re e not going to trade it8 Yes e ould consider this buy after a good engulfing bull bar around !revious s!ike. &dditionally, !rice has been bounced from fresh demand and not reached any serious su!!ly yet. 9oever, e cannot take this buy trade as sto! ould be bigger than our Risk Arofile allos us. -e need to ait for the ne*t candle and see if it"s going to come to ithin our @D !i!s range.
1K
Trade ( L1)1M
Cnfortunately, !rice didn"t come don enough to allo us enter ith a ma*imum @D !i!s sto! as defined in our Risk !rofile in fresh demand ,one. 9oever, e took a sell order in fresh su!!ly ,one ithout aiting candle finish or A& config. &ll as good other than amount of time !rice took to reach su!!ly ,one.
&s you can see it hit our sto! and this Trade - #losed with /1 $i$s loss'
1J
Trade @ L1)/M
& ne ,one established at ne high ith an bear engulfing candle. #f the risk is small, nely established ,one looks attractive, looks a orth try. -e ill have to ait and see hat kind of risk level it"ll offer on the ne*t candle.
Trade @ L2)/M
-e have our entry ith bit loer than our ma*imum sto! of @D !i!s
1N
Trade @ L()/M
#nstead of closing e decided to trail as the candle folloing the one hit the target orked out nicely. 0o, e moved the sto! to T>1. .ocked our JD !i!s gain and moved the T> further don.
Trade @ L@)/M
&gain instead of closing e decided to trail. 0elling !ressure looks 6uite !romising. &lready sliced through a minor ranging ,one and gunned into bigger one. Becided to go for the full monty by moving target all the ay don. 9oever, this doesn"t mean e ill not kee! trailing at reasonable distance.
2D
Trade @ L/)/M
Target hit on eaker demand ,one. Trade / #losed with /12 $i$s gain'
&re e going to buy here8 'ot as yet. #t"s a eak demand ,one and e don"t see any convincing A& as yet. 0o, e ait and see.
21
Trade / L1)(M
'o e have our bull engulfing candle. Only donside is it"s on a eak ,one. -e can not take the entry as yet. Arice is ell out of our sto! range.
Trade / L2)(M
$ven though A& and levels have some arning signs for buyers e ent ahead and bought it. Managed to reduce sto! si,e to 2K !i!s. 0ometimes e like to go against all odds. #tOs just !art of our self destructive !sychology. Commonly knon as devil in us.
22
Trade / L()(M
0to! is hit. Trade 2 is #losed with 2: $i$s loss'
.oer main ,one hit. -e have to remember it"s no longer fresh ,one. This is the second visit. -e cannot enter a buy. #t"s outside of or sto! range.
0ince the loer demand as not fresh e decided to ait and see the finish of the big bear candle. $ventually, it took out loer demand. $stablished ne su!!ly ,one and selling !ressure is still on.
2(
Trade E L1)(M
$ven though it"s a minor su!!ly e take the sell trade almost ithin the ,one. -e could have sold bit higher and therefore reduce our sto! amount but e anted a bit of A& confirmation. & eak but some indication that sell is still on. -e had better indication as to here !rice may be heading on the near left. 'ote those big engulfing bear candles ithin)around the su!!ly ,one.
0ome call it !revious demand ,one turned into su!!ly ,one. That"s a bit too techie for me. The fact is that sellers are in charge as e can see on the chart. &ll the remaining buyers from the origin of the demand ,one already used their buying !oer and remaining ones are asted at subse6uent visit.
&dditionally orth noting that e see on the charts ne loer highs and to demand ,ones are taken out ithout much difficulty. $s!ecially the loer main one taken out ith such a ,eal that e need to take notice of heavy selling !ressure. -hat this means is that selling the !eaks may be better o!tion than buying in minor demand ,ones.
Trade E L2)(M
2@
-hen T>1 is hit, e moved our sto! 4$GN and T>2 to 11J !i!s. -e let it run% trusting our analysis about heavy selling. -e could have taken ell over 12D !i!s ith further trailing but let it run and it"s almost hitting our sto!.
Trade E L2)(M
On this occasion e got back !revious lo, but sometimes !rice takes the sto! by a cou!le of !i!s or so. ?or those ho cannot handle frustration hen such thing ha!!ens best to trail more closely or close the !osition hen T>1 is reached.
Trade 6 #losed with 219 $i$s gain 2/
Trade K L1)@M
-hy e took this long entry hen e ere convinced there are heavy sellers and ere saying best to sell !eaks. Arice created a form of ga! and hit the rejection !oint. This knoledge may be out of the beginner"s domain. 0o, lets just say e see heavy selling u! to a certain !oint then rejection. 0ince it fits to our sto! range e ant to try this nely established ,one.
Trade K L2)@M
2E
3ust short of our T>1. #t looks turning against us. -e don"t ant the inning trade to turn into a looser so e moved sto! to 4$G1D.
Trade K L()@M
0ince e have a nice bull candle it ould be shame to close here rather than trailing. 0o e move the sto! to T>1 and T> e*!anded to T>2 for 1ED !i!s.
Trade K L@)@M
2K
T>2 is hit and decided to close due to !rice structure on the left. Trade : #losed with 161 $i$s gain'
2J
Trade J L1)KM
0ince e already have a su!!ly ,one just above, e have decided to go ith the nely established su!!ly ,one just belo the e*isting one.
Note: +onventional suppl& and demand tradin' method advises us to %ait for the price to visit the established )one before enterin' the trade. ,he reason for this is that establishin' )one usuall& ta-es more than a couple of candle. .o%ever" in this e*ercise %e have been ta-in' trades /ust after a )one created. We 'o in earl& if %e see attractive P0 %hen establishin' a )one. 0nd of course %e al%a&s -eep left of the chart under constant observation. We loo- at left and trade the ri'ht.
Trade J L2)KM
2N
Trade is develo!ing nicely. T>1 is hit. #nstead of close e have moved sto! to 4$G2N !i!s and e*!anded the target all the ay don to near demand. 'o e are targeting just over 2/D !i!s. #t ould be real nice if e get it. That ould be over 15E reard ratio.
Trade J L()KM
-hat the heck.. 0ince !rice moving nicely in our direction e have the o!!ortunity to move sto! to our T>2 and let it run. 9eavy selling !ressure. -e kno overall market direction is south :don;. The donside is if it turns from here e"d be loosing a buy entry in demand ,one.
(D
Trade J L@)KM
Bemand is taken out ith ease. -e have locked 15K reard ratio by moving our sto! bit further don. 'o e can sit and rela*. .et the !rice do it"s thing. 0ee hat else it may offer. &t this !oint it doesn"t matter a bit if it turns and hit our sto!. #f it doesn"t then e may be onto something bigger here. 9oever, e ill still trail it at a reasonable distance.
Trade J L/)KM
(1
Run is still on. -e have no rush to e*it. -e just have to kee! our greed in check here and let the !rice do it"s thing. &fter all e don"t catch such moves every day.
Trade J LE)KM
Traders ith enough screen time ill kno that once !rice hits an im!ortant !sychological level it"s bound to react. -e are trading $CR)C0B and it hit sub 1.(D. .ets assume e are ne and not familiar ith such stuff. 0o e leave our trailing as it"s at E/2 !i!s.
Trade J LK)KM
(2
&s e*!ected bounced from ne territories of 1.2N. Our sto! is hit. Trade ; is #losed with 622 $i$s gain'
((
Trade N L1)@M
-e have missed the loer demand hile aiting for our !revious trade. Becided to enter a long on u!!er demand. Couldn"t take !revious hits as it as not in range of our sto!. &s you can see our initial T> is already hit. 'ot closing it. Moving sto! to 4$G and e*!anding the T>.
Trade N L2)@M
-e ill start trailing here as e don"t ant to give back most of our gains.
(@
Trade N L()@M
0ince it took out !revious highs e kee! trailing it. &lready secured about 2J2 !i!s. .et see if market is illing to give us more.
Trade N L@)@M
Closed here manually after seeing rejection and es!ecially engulfing bear candle. Trade 9 #losed with -1: $i$s gain'
(/
Trade 1D L1)(M
-e couldn"t take the sell order as it as just outside our sto! range by 1 or 2 !i!s. -e just cannot say hat"s 1 or 2 !i!s. -e could take that sell. .ook ho it orked fine. Yes, but e cannot com!romise on our Risk !rofile. Once it"s defined e must kee! it"s rules to the !i!s, until e decide to ork out a ne one. -e just cannot ork out a ne Risk Arofile to fit in our current trade. 0o best is too kee! it if it"s orking until it doesn"t over a !eriod of time. Bisci!line must be there at all times.
-e enter a buy order in nely established demand ,one ith smaller sto! than our ma*imum.
Trade 1D L2)(M (E
#nitial T> is hit. &gain instead of close e started to trail by moving sto! 4$G(/ and e*!anding the T>.
Trade 1D L()(M
Cnfortunately, on this occasion !rice didn"t go in our direction. #t hit our sto!. Trade 11 is #losed with -2 $i$s gain'
Now that we ha5e finished or 11 trades8 lets ha5e a look or $i$s and time in5entory'
(K
0tarted on 1/ Oct 2D1D ?ished on N Bec 2D1D 'early 2 Calendar Months
o Trade 1 is closed ith 2ND !i!s gain o Trade 2 closed ith 1KD !i!s gain o Trade ( closed ith @D !i!s loss o Trade @ closed ith @D/ !i!s gain o Trade / is closed ith 2K !i!s loss o Trade E closed ith 2DN !i!s gain o Trade K closed ith 1ED !i!s gain o Trade J is closed ith E/2 !i!s gain o Trade N closed ith (DK !i!s gain o Trade 1D is closed ith (/ !i!s gain
Gained $i$s #ont) 222; 7ost $i$s #ont) 6:
444444444444444444444444444444 <alan#e 2161 =
-e took only 1D trades in the !eriod of almost 2 calendar month and come out ith 21E1 !i!s gain. That"s about 1DJD !i!s !er month and /@ !i!s !er day for 2D trading days in a month.
This results is based on 1 instrument traded. -e could have been trading multi!le instruments and results may have been different in either ay. # ke!t it to 1 !air to save myself ca!turing a lot of charts and riting more.
# have tried to demonstrate the im!ortance of a Risk Management and its im!lications. &long the ay # have added further information on other as!ects of trading as and hen a!!ro!riate beside risk management.
!s long as we #an define a sensi3le Risk %rofile for orsel5es and stri#tly adhere to it8 we are more than halfway there' To 3e a #onsistent $rofita3le trader'
17et winners rn and #t losers >i#kly1 may be considered as a cliche by some but it"s a golden one. # have also tried to demonstrate the !oer of this cliche.
# already have tried to highlight the im!ortance of Risk Management in 1The Holy Grail of Trading 4 Risk (anagement1 article !art 1. 'o !oint to re!eat it here but allo me to re!eat just a bit. The first task of any new traders mst 3e to master risk management, not ho to identify best !ossible entries. 0ure, it"s im!ortant too but before having full understanding and a!!lication of sond risk management, it"s !retty useless.
#t may be beneficial to build a clear understanding of 1R#0<1 in general first. Thanks to #nternet you have no ends of resources online. >o on and make bit of research and reading about risk. -hat is it8 9o can e identify !ossible risks8 9o can e manage risk8 'othing serious or detailed. -e are not trying to rite an academic AhB !a!er here. 3ust trying to build a clear understanding of 1Risk1
The most im!ortant !art of your trading !lan is Risk Management. There are many books have been ritten about the subjects, but at the starting !oint you don"t need to go into too much details. Cnderstanding basics of Risk Management and im!lementing ith disci!line ill go long ay.
Risk management itself is a general subject. 9o do e use it. 9o do e im!lement it so that it"s a!!ro!riate for our !ersonal situation8
We define a ?Risk %rofile? of or 5ery own'
-hat the heck is 1Risk Arofile18 # thought it"s called 1Money Management1 in trading. Money is just a tool. #n order to gain more money, e need to do something. That something is not straight forard. -e may do !lenty 1something1 but still end u! loosing money even though hen e are trying to gain. That"s hen the 1Risk1 comes into the e6uation. $verything e do involves a certain degree of risk. Then the key for a gain + achieving our objective + is ho ell e identify and manage risks. &re e going to jum! over a fence ithout knoing hat is on other side of the fence just because e can do8 On the other side may be a cliff, shark !ool and so on. Bo you still ant to jum!8
(N
.ets carry on ith our fence e*am!le. #f e are unable to see hat"s on other side of the fence and e really like to jum! over it. -hat e should do8
1. ?irst thing to gauge ould be, if e are able to jum! that fence. -hat"s the height of the fence8 #s it ithin our ca!abilities8
2. &ssuming the fence height ithin our ca!abilities of jum!. -hat"s ne*t8 -e can just take risk and jum! ith the feeling of being lucky.
(. -e can try to find hat might be on the other side by !erha!s throing !iece a stone and listening the sound, trying to find a little hole to see the other side, trying to find ladder or something similar to claim and see the other side and so on. #f and hen all our attem!ts to gain information about the other side fails, then best course of action ould be not to go ahead ith the jum! and find another fence to jum! here e are able to gather information about the other side to minimi,e our risks. The fen#e that@s #om$ati3le with or ?Risk %rofile?
The above item 1 refers to our !ersonal 1Risk Arofile1 hile item ( em!loying our 1Risk Arofile1 in a !ro!er manner + knoing basics of trading such as su!!ly and demand, !rice action and screen time. -ithout having the 1st item in !lace majority of our attem!ts of jum!ing likely to fail. >oing ith the item 2 ill save us from some collateral damages but small damages adds and they can translate into big one eventually. 0o, e definitely need the item ( to com!lete our !u,,le.
1Risk Arofile1 is like any other !rofile. -e detail our ca!abilities in realistic manner and act ithin our ca!abilities. #n terms of trading e define the ca!abilities of our account + ca!ital and restrict our trading activities ithin defined ca!abilities.
@D
What do we in#lde in trading Risk %rofile& How do we define $t in a#tion or own trading Risk %rofile&
1' "e#ide and define what le5els of Risk)Reward *R)R+ ratio will yo 3e working with&
?or every H e risk in a trade ho many dollars do you ant to gain. # use the ord gain instead of in as e on"t be !laying lottery or black jack. # like to think that there are bit more to trading com!are to gambling. The more risk factors e take out from our trading activity, it becomes less of gambling. Your risk reard ratio should be at least 1 to 2. Means every dollar you risk you ant to gain 2 dollars. 0ome may ask hy so high8 There are many successful businesses o!erating on say 2DF return.
Trading is not like any other ordinary business. #t"s very high risk business. ?or e*am!le, you may be in business of buying and selling used cars. -hen you buy a used car for 2< ith e*!ectation of selling it for 2./< you"d be risking 2< to gain D./<. Much less then hat e are talking in trading in financial markets.
-hy is that8
-ell hen you buy a car for 2< it"s unlikely that you"ll be loosing all your investment in case you are unable to sell it for 2./<, unless you kno nothing about cars and made mistake of buying a cardboard car instead of the real one. #n orst case scenarios you may take some loss on your original investment of 2< but you on"t loose all your original investment. On the other hand, hen you o!en a 2< trading !osition in ?ore* you alays stand to loose all of it. Once !rice hits your sto!, you have to say goodbye to 2<.
# ho!e the above e*am!le illustrates the need of defining high gain targets. For e0am$le8 if we ado$t minimm of 1)2 risk reward ratio8 we #an afford to 3e wrong 6 times and right only / times ot of e5ery 11 trades and still 3e in $rofit on o5erall unless you let sa! charges eat your !rofit on certain circumstances. 3ust do the sim!le math to !rove it yourselves5
1or instance" sa& %e used ma*imum of 6! pips stop for all 1! trades and used the minimum 178 ris-7re%ard ratio7
-e had E loosing trades hich translates into E*@DI2@D !i!s loss. -e had @ inning trades hich translates into @*JDI(2D !i!s gain :152 risk5reard ratio;
0o after 1D trades e have gained JD !i!s overall
0ome traders orks ith higher R5R in their favour. ?or those above e*am!le ill change. They may only need to be right ith 2 trades out of 1D trades to stay in !rofit. Cse your math and calculate it yourself.
!nother >estion # tend to get hen talking about risk reard ratio. #t"s all fine defining defining risk5reard ratio but ho do e kno our entry has enough room to com!ly ith !re+defined R5R value8 -e don"t but if e have some basic knoledge of @1
reading charts, using su!!ly and demand e ill have some idea about !ossibilities. &gain, !lease note, not absolute but !ossibilities. .et me try to illustrate5
Alease understand this, the area marked as 1clear distance1 on the e*am!les above doesn"t mean !rice ill alays travel to ne*t demand or su!!ly ,one hen e take the trade. #t may sto! and turn before reaching our desired destination or it may go through our destination. -e are only orking ith !robabilities here. &ll e can do is to im!rove !robabilities in our favor ith knoledge and e*!erience e have. 'othing is sure in highly s!eculative financial markets. #f e add the mani!ulation as!ect into this mi* our task of trading successfully become even more harder. #f you ere thinking Trading in ?inancial markets is an easy ay of earning a living and !erha!s more, then !lease allo me kindly warn you by saying 1Think again1.
2' What@s the ma0imm $er#entage of or a##ont we are willing to risk on any one or more trade/s&
'e*t thing to define is to risk !ercentage. #n other ords your ma*imum e*!osure to markets. #t"s strongly advised to kee! the F risk value 6uite lo. 0ure, nobody forcing you to kee! it lo. You can have very high e*!osure. You can risk /DF of your account ca!ital if you ant to. #f you take such a high risk in a high risk business it"ll only take to consecutive loosing trades to blo your account. #t"s acce!ted and !racticed by many successful traders ma*imum amount risked at any one time should be /F or @2
loer. A wold strongly ad5i#e to new traders to kee$ risk $er#entage 2, or $refera3ly 3elow. Order of the day is to !reserve your trading ca!ital so that you can have chance to fight another day.
-' What@s the ma0imm $osition si.e we #an se&
/' An terms of $i$s 5ale what@s the ma0imm sto$ we@ll 3e sing&
&nser to the to 6uestions above ill be !rovided by our defined Risk5Reard ratio and Risk !ercentage. -e do not take an subjective value. .ets try to ork out our !osition si,e sto! values ith an e*am!le5
.ets assume e have a 1D< round figure account and it"s in C0H. ?or this e*am!le lets assume e have defined our Risk5Reard ratio as 152 minimum and trading ca!ital risk !ercentage as ma*imum 2F -ith these definitions e can easily find our !osition si,e and sto! values. 2F of 1D< is H2DD. #n terms of monetary value e cannot take any trade re6uiring more than H2DD risk at any one time.
'e*t thing is to translate it into !i!s so that e can easily identify our risk in terms of !i!s hen e !ut our sto! loss. #n $CR)C0B !air H2DD is about 2D !i!s less s!read charge. :1 $CR)C0B !i!s I H1D; 0ay our broker s!read charge is 2 !i!s on average. Then hen e take a trade ith standard lot e can only take 1J !i!s sto! loss. Cnless, you are scal!ing ith tight sto! loss, 1J !i!s sto! ill not be sufficient enough. That"s hy # advice traders ith such small account ork on your !osition si,e, use mini lots rather than standard one.
This brings us to !osition si,ing. -ith 2F risk, using 1D< account, 1J !i!s sto! ill not be sufficient enough to trade using standard lot si,e. Consider this, you s!ot a nice looking entry o!!ortunity but it re6uires (J !i!s. -e cannot take this trade using standard lot si,e, if ere to stick ith our Risk Arofile.
-e still can if e anted. -hat e do is, e adjust our !osition si,e. #nstead of using 1 standard lot si,e e use half lot :D./ !i!s I H/; (J !i!s * H/ I H1ND. 9ang on, e said our ma*imum risk value e6uals to H2DD. Yes e did but e also said our broker"s s!read charge is 2 !i!s hich e6uals to H1D in case of using D./ lot si,e. Remember, as soon as you o!en a trade you start ith minus figure as broker charge their s!read in advance.
&s you can see anser to the 6uestion number @ above can be fle*ible as long e are illing to adjust our !osition si,e. What we do not adBst is our defined risk $er#entage. #t ould not be 6uite correct to have a rule in our Risk Arofile such as 1# ill use ma*imum of (D !i!s sto!1 and so on unless, e !refer to ork ith fi*ed sto! value as long as our sto! value ithin our defined risk !ercentage.
ps/ $ have used a fi*ed ma*imum 6! pips stop in 9,he .ol& :rail of ,radin' ; Ris- <ana'ement9 for the purpose of illustratin' the e*ample %ithout %ritin' man& more pa'es. $ma'ine" if $ used variable positions si)es ho% man& more trades $ ma& have ta-en and pa'es $(d have to %rite.
2' !re we going to se 3reak4e5en and trailing&
@(
#t"s alays a good idea to use break even :4$; 'othing orse to see letting a !ositive trade turning into a negative one. -hen e move our sto! to 4$8 The anser ill de!ends on our trading style and !rice action. -e need to avoid getting our 4$ hit 6uickly by moving our sto! hen !rice is fe !i!s aay from our entry. Trailing is alays a good idea. -e may end u! leaving some big or small !i!s on the table but if it"s done correctly, it"ll save us some e*tra !i!s and enable us to ride most of the move in our favour.
6' What time frame will we 3e trading&
#t"s not im!ortant for e*!erienced trader. 9oever, for beginner, it is best to stick higher time frames such as 9@. 'othing rong checking loer time frames to identify A& structure and better entry !oints but best to base our entry decision on higher time frames. Regardless, e trade or not on them but alays need to check daily and eekly charts to have a better vie about overall sentiment of the market.