Don't play with Risk, Newbie!

A new trader must not play with risk and go for big capitals, rather go slow, get friendly with the market and when you are a pro then you can play how much you want… :slightly_smiling_face:

Money management is the key; with a greedy plan no one can exist here; that’s the story!

In short : Do not risk what you can`t afford to lose.

Risk is the absolute key to understanding the market.

Many times you will see ‘oh don’t play with FX, stick with stocks’ or maybe ’ with proper money management all will be well’ or even ‘get to learn certain TA patterns’.

These are all good things on their own but they are not what the market is about - it’s about risk - those that have money and risk it to make more, those who have money and are unwilling to embrace risk to make more.

Get to learn risk and how the market revolves around it.

I’m a believer of recent examples, so perhaps look at USD/JPY yesterday:

Yen buying:

USD_JPY_hr1

Learn that the Japanese are a nation of savers/investors and that in times of trouble (risk off) the market expects that those investors repatriate their savings - hence Yen buying.

(Does not matter whether they actually do that or that the risk off was triggered re Iran, it is what the market thinks that is important)

Imagine this, you have money to invest and you want a big return - you want to embrace risk.

Not much point in buying large caps (large capitalized stocks, they are the safe stocks) - so you seek the next Apple or Microsoft.

Head over to the small caps, that’s where the apples and microsofts were born - so risk on would mean the Russell 2000 (index of small caps) would rise - and the opposite, Yen buying, risk off and dump the small caps:

US2000 Friday:

USD2000HR1

Mostly boring but maybe not play with risk but get to learn it :slight_smile:

Yes, we have heard the proverb: slow and steady wins the race. And it is indeed true for the beginners in the forex market. At first a trader should try to understand the market features which will allow him to make profit from the behaviors prevailing in the market. Slowly a trader will get expertise and experience to play with big amount.

There are three variables when trading financial markets:

  1. Risk ( What traders obsess about most of the time)

  2. Reward ( Beginner’s obsession with 1:2 and above)

  3. Probability ( Most have never heard of it or ever consider it, but is just as important as the other two)

On any given time frame, on any chart, trading any instrument, you have between a 40-60% probability of making money on any trade. That means the three variables above dictate what chance you have of exiting with a profit, and how much that profit will be.

For example, look at the chart below:

The 5 Min. Aussie/Dollar had been in a tight bear channel. Price then broke out to form three weak legs up, only to reverse back to what may be a trend resumption. This is confirmed by the two huge bear bars closing near their lows and barreling through the moving average. If you were to go short right now, what do you think the probability would be of price going down further? 50 percent? 60% percent? Some may even say 80%

The problem is, in order to have that level of probability in your trade, your protective stop loss order must be around where the red line is. In other words, up around the last higher high. But the beginner only fixates on risk and does not consider probability. He sees the wide stop and balks at a trade that looks pretty certain for quick profits.

Also, because the stop is so far away, you’re giving up more than 1/2 your profits, a mortal sin for risk/reward obsessed beginners! But the alternative is to turn your 60% probability trade into a 40% probability, by simply moving the stop loss really close. The problem is, if this turns out to be a two-leg move down and you get a 50% pull-back, you’re stopped out. This is how most beginners slowly blow through their accounts. They take one low probability trade after another and further reduce their chances of being profitable by using tight stops in inappropriate places.

The solution to the example above is to reduce your normal lot size by half. In this case, if my normal position size is $100,000 (1 Lot), I would trade between 30,000 and 50,000 (.3 to .5 lot). This way my risk is about the same as when I have a tighter stop.

I will concede that most traders should swing instead of scalp. This means going for a reward that is at least two times your risk. The theory is, even if the probability is only 40%, you make up for the 60% loss rate by having higher profits. Unfortunately, most beginners don’t have the discipline to hold until 1:2 profit targets are realized; they get out early due to fear of losing what profits they have gained.

But it’s not just about risk and reward. If you are going to trade the financial markets on a regular basis, you must factor in probability, also.