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Tuesday, October 5, 2010

How I Apply Risk Management – Part 2

"...If you always do what you've always done, you'll always get what you've always gotten. And, if you always think what you've always thought, you'll always do what you've always done."

Hello:

Shrewd traders ought to know when the market conditions change so they could adapt their trading systems accordingly. The market volatility has changed and thus anyone buying support and selling resistance at this period will really suffer. The best method for long-term trading now is trend-following strategies. As a professional trade, you go to know that the markets should never be smarter than you. You can’t avoid losses – but your ultimate goal is to make more money than you lose.

Here are my trading results last week:

AUDUSD

Order: Sell

Status: Closed

Profit/Loss: -150 pips

EURCAD

Order: Buy

Status: Open

Profit/Loss: 957 pips

AUDJPY

Order: Sell

Status: Open

Profit/Loss: 12 pips

NZDUSD

Order: Sell

Status: Closed

Profit/Loss: 0 pips

EURNZD

Order: Sell

Status: Closed

Profit/Loss: -54 pips

There are many great trading opportunities awaiting me on my favorite long-term trading instruments. The best action a trader can take is to be ready for her/his trading opportunities when they come.

GBPJPY Strategy

Order: Sell

Status: Closed

Profit/Loss: 135 pips

Order: Buy

Status: Closed

Profit/Loss: -85 pips

Other Strategies

EURUSD

Order: Sell

Status: Closed

Profit/Loss: -40 pips

USDCHF

Order: Sell

Status: Closed

Profit/Loss: 120 pips

EURNZD

Order: Buy

Status: Closed

Profit/Loss: 150 pips

Order: Sell

Status: Closed

Profit/Loss: -60 pips

My article this Friday would be about a sensitive but interesting trading topic, and next Friday (October 15, 2010) would feature intriguing questions from my potential and existing subscribers, with detailed answers. These questions are in the mind of certain traders and the answers to them are supposed to help traders greatly. Around October 23, 2010, the past results on my GBPJPY strategy would be displayed while the concept behind the strategy is explained. Before the end of November 2010, my subscribers would start enjoying other EURUSD, USDCHF and short-term EURNZD strategies, in addition to the ones at hand right now.

How I Apply Risk Management – Part 2

The importance of risk management in trading is without question and can’t be over-emphasized. I just feel a need to explain how I currently apply risk management to my swing cum position trading. Once again, the major purpose for managing trading risk is to preserve your trading portfolio during periods when the market isn’t favorable to your trading system, so that it’ll be easier for you to recover and move ahead when the market is smiling at you. It also ensures that you don’t give a significant profit back to the market, and sometimes you might break even instead of going negative from being remarkably positive. You would even ride the trend while creating some leeway for the market volatility. Risk management is more important than any trading system whatsoever on the earth (it’s second only to trading psychology). Yet marketers will forever eulogize trading systems and mayn’t even mention anything like risk management.

This is my risk management recommendation for those who’re interested in my long-term trading strategy on EURNZD, EURAUD, EURCAD, AUDUSD, NZDUSD and AUDJPY: ‘Leverage 100:1 recommended and 0.01 lots per $1000 recommended. Once you've gained up to 100 pips, you simply move your stop loss to breakeven i.e. to your entry price (thus eliminating the risk on the trade). Then if your profit goes up to 200 pips, you may lock 100 pips (50% of the profit). If you gain up to 300 pips, you lock 150 pips. If you gain 400 pips, you then lock 200 pips. It's all about locking 50% of any profits you make, starting from 200+ pips, while giving some room for the market to run. This locking can be done by applying Trailing Stop in the VPS or moving your Stop manually. If the price hits a highly significant support or resistance level, I'll send an exit signal or suggest that the Stop be moved closer to the current price. If the price retraces down to, say 50 pips after you moved your Stop to breakeven, please exit the trade with that little profit. The worst drawdown per trade is 1.5% (meaning that we mayn't even wait till the Stop is hit before we exit, perhaps exiting around -100 pips and limiting the risk to 1%), and the predetermined worst-case scenario per week is 3% drawdown. Please note that pending orders serve as an additional filter for potentially bad trades. So if the pending order is eventually not filled, it's cancelled.”

The interesting narrative below certainly shows the pedigree of a novice trader. Whether you remain a novice trader for 20 years or you become a consistently profitable trader within months; it got to do with your mindset. I’ll continue saying that your survival on the markets has nothing to do with any mysitcally great or complicated system, giving you (apparent) reasons to take trades. The trader described below is about to start trading, and as such, he has high hopes. You might even want to put yourself in this’ trader’s shoes. Please enjoy!

“So you've invested in the new trading system and you're raring to go...

The post arrives and you rip open the package.

You digest the contents of the guide with your coffee, boot up your laptop and you're ready for action.

You set up your trading account, deposit some cash, open your charts and then follow the instructions for the trading signal.

And your trades may go something like this:

1st Trade Signal - you place your trade following the rules, and it's stopped out for a loss.

You're disappointed, but still positive. You've only lost 2% of your account balance, you stuck to the rules.

2nd Trade Signal - you see the trade signal and place the trade, it hits the profit target.

You feel great, you followed the rules, you're more confident in the new system and in yourself as a trader.

And your account is 1% in profit already.

3rd Trade Signal - you see another trade signal and take the trade.

It's another winner, you're over the moon.

You're now 4% in profit.

And you feel like you've finally cracked it.

You've found something that really works.

You're on your way to untold riches, you start planning your resignation letter.

4th Trade Signal - another trade signal and you take it.

But this time you're so confident you decide to double your stake.

And it's a losing trade.

You're back to square one, your accounts at break even.

5th Trade Signal - you take the trade and stay with the double stake level.

You've guessed it, it's another loser and now you're down 4% of your account balance.

It's starting to get to you now. It must be a bogus system after all.

6th Trade signal - you take the trade, it's another loser, your account is now down 8%.

You feel like you want to cry, you're now sure you've been ripped off.

7th Trade Signal - you don't take it, you lack confidence in the system.

It's a winner but you missed out, your account is still down 8%.

You're now totally frustrated with trading.

It was supposed to be easy money.

8th Trade - one last chance to get your losses back.

The trading system doesn't give you a signal.

But you want your money back so bad that you take a trade anyway.

It's stopped out, and you lose another 4% of your account.

Your account is now down 12% overall.

You've now lost confidence in your ability to follow the system.

And you've lost confidence in the system as well.

You quit and apply for a refund; the system clearly was not all it was cracked up to be.

But there's an obvious problem.

Had you just followed the trading rules, your account would have had a small profit of 2%.

Even with the losing streak of trades.

But a small profit is still a profit.

But if this trading log sounds familiar, don't despair: we've all done this at some point.

But just remember when you try the next trading system, take things slowly.

Enjoy the fact that you're learning something new.

And make your goal to follow the simple trading rules next time.

Plus your confidence in your trading ability should increase.

And you may find a trading system that works for you after all.

Best wishes,” --- Forex Round Up


Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC

Email: amustapha@fxinstructor.com

Get my Forex trading signals at: http://www.fxinstructor.com/en/analytics/ituglobal

Nice trading tips are available at: www.ituglobalforex.com

And my past articles are also available at: www.ituglobalforex.blogspot.com

Yahoo! Messenger ID: saazalmu

NB: There is risk of loss in trading, but it is possible to be a successful trader.

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