- Posted in: Trading Discussion Group
as we all know trading forex/stocks is a game of probabilities, each trade has two sides; gain and loss(reward/risk), traders who end up making consistent money are the one who were able to setup their trading view according to risk/reward principles and controlling their capital in the right way
It makes no sense for a trader to search for trades holding more risk than reward, you must always search for trades that have higher reward than risk.
By getting yourself in trades which involves higher risk than reward you’ll end up losing money instead of making it, also note that even a 1:1 ratio is still considered very risky.
As a first step to recognize high risk trades and avoid them is by calculating the risk and profit; as a human nature, greed always makes us blind, so if we do not recognize our risk, our decision will not be sensible nor mature. the best way i see to really know the risk and reward is by recognizing the risk before calculating the expected profit.
whenever you calculate your profit first, you’ll be blinded to notice how high the risk is and that’s because of greed for sure.
I will keep repeating this: trading involves very high risk and may cause huge losses.
So, one very important advise is limiting risk, never over trade or exceed your capabilities, you do not want to see your account vanishing.
Limiting risk is the major weapon you have to protect your capital.
Never overtrade: overtrading is one major cause for losing; either by overtrading in size or in time, whenever you enter trades with bigger sizes than you can afford, you put your account and money under the mercy of the price action, also whenever you’re overtrading by spending more time in the markets than you should, then you’re exposed to continuous risk; as long as you’re entering new trades you expose yourself to risk.
Greed must be put aside, and commonsense must be the dominant, never risk your capital.
If greed commands you, you won’t be able to control trades; if your loss reached the acceptable rate set by you, then loss must be stopped and capital must be protected, even if it’s hard to accept the loss, but accepting one loss is better than losing your whole capital.
Don’t keep all your eggs in one basket; the more you invest in a variety of stocks the less you expose yourself to exposure as it is so hard to find all your trades going against you at the same time. Also if one trade had a bad trading period other trade might cover its’ losses.
Never trade without stop loss and take profit orders.
Stop loss and profit targets are “a must do” actions once you enter a trade, why?
Profit targets and stop loss are supposed to be set according to analysis, not according to what a trader is looking for or can afford; so, if you decided to work without them you might miss the potential profit and turn this into endless loss.Many traders suffer from the fact that they witnessed their trades moving from noticeable profits into huge losses, because they didn’t use profit targets and were not fast enough to get any profit or cut their losses when they should have done that.
Stop loss has two kinds, one of them is the soft stop loss, which means that the trader won’t actually place the stop loss order, but he/she will watch and act, this kind of orders is considered a very high risk one, and nobody advises to uses.
The second one is the hard stop loss, which is a “must use” one, as you’ll never know when the action might happen and you’re not always capable of acting at the right time.
You must always place your take profit and stop loss orders to protect your capital and raise it consistently.
One main advantage you get from using stop loss orders and take profit orders, is the protection of your trades from overnight gapping risk, and also because we should trade according to the chart not feeling therefore when the orders is all in the system there will be no emotion involved anymore.
keeping your stop losses tight is a must
soft stops are always a way to get margin calls
but are you placing a right stop loss?
sometimes you bring loss to yourself because of misplacing your stop loss
stop loss must be placed upon analysis only, and always keep on mind to get a little bit far from the tech. point and not exactly on it because this point will work as support/resistance point which means price may hit your point and return in the right direction
i see many traders acting in a strange way; they just decide that their risk in a trade is 30 pips for example and place the stop loss depending on this idea and ignoring any technicals, these kind of acts are a complete mess.
as for risky trades, for myself i prefer involving in trades with a 2/1 ratio(reward/risk) which means if the reward wasn’t double the risk i won’t get in it
also note that any irresponsible acts turn a safe trade into a risky ones, such as maximizing the lot size or opening new trades just before news releases, this turns you from trader into a gambler
thanks that’s highly useful to know. but how do you know for example that such a trade has a 2/1 reward/risk before you get in? A trade may only prove risky when you get in and it goes against you; for the lot size i stall well under the limits right now. thanks again
let’s agree that any trade you open is based upon a strategy or analysis not trading by luck
whenever you analyse a pair you must recognize two issues, your target and your stop loss and one main thing is the entry point
if you now know where is your target point and where is your stop loss then you’re almost done
if your stop loss will be greater than your target then it’s a risky trade.
if your stop loss is so close to market price then it’s a risky trade
if you missed the best entry point and price is already moving towards the target then you might be rising your risks if you decided to trade by a late entry.
any trade might move against you and that’s normal but that’s not risky, you must know for sure that losing trades must come nobody wins forever but you must be clever to rise your reward above risk to benefit from trading and cover any losing trade from winning ones
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