Some notes pasted from my trading journal about risk management I learned since my last post:
o Mistake # 1. I am taking unnecessarily big losses. Setting stop losses and trailing stop losses has helped me mitigate these loses, but I still need to improve upon its implementation. o I need to consider my “risk to reward” ratio when entering a position, and how large of stop loss to create. (See: "trade like a casino..." youtube video). o Setting a wide stop loss is only needed if you want to give a pair some room to “breathe” or develop. o Paying closer attention to support, resistance, Fibonacci levels, and other indicators can also help determine when to stay in and when to leave a trade. o Mistake #2. I am risking too much of my “bankroll”. § Consider only using 5% of your bankroll each day – (calculate this amount at the beginning of the trading day and don’t use any more than 5%). § If you are already holding positions from the previous day, include that with your 5% allotment. § Hypothetically, If your account is worth $25,000.00, then ($25,000) * 5% = $1,250.00. I usually hold 4-5 pairs at a time, so $1250/4.5 = $277.78 available to trade with per position. § If you assume 33.33:1 (3%) margin on each transaction, then 277.78 * 33.33 = approximately 9258 of buying power, or size lots you can purchase. Ø 50:1 (2%) = 13,889 Ø 20:1 (5%) = 5,555 Ø The range of lot sizes you trade should fall between these numbers as you broker offers mostly leverage at these levels. o Mistake #3. I am not taking profits soon enough. o Utilize taking partial profits as gains are made. Example: Take a third of your profits every time your pairs gain 10 pips (or another arbitrary number). § In my above example lets bring 9258 down to 9250, so it’s a nice round number to work with. Assuming the goal is to reach 30 pips and to take profits every 10 pips, then 9250/3 = 3083 is the amount of pairs I need to close every 10 pips. § It might be easier to decide first what you want your stop loss to be. If its 15 pips away, then you want a goal of at least 30 pips to make your reward more than what you are risking (2:1 in this example). So, if you have a larger stop loss such as 50 pips, then you need to be expecting or have a target of a 100 pip gain (at least). If you are taking profits every 10 pips with a 100 pip target, then 9250/10 = 925 pairs that need to be closed at every 10th pip gained. § Ideally, a better way to decrease your risk while maintaining a wider stop loss is to decrease your position size (ßthis is advice from babypips).