Risk Management advice wanted

Trading Discussion Risk Management Practices
1

Hello - I’ve recently had a dicusion with Tommor on this, which has lead me to question my strategy, and if it’s one which i should persue.

Below is a recent successfull trade, using an account of £900 at the time:

Recent Successful trade on USD CHF
Recent Successful trade on USD CHF1920×846 228 KB

I would like to get some wider thoughts on this - for it was a winning trade but i feel conflicted about how i got there.

So - I’d looked at the USD/CHF pair and saw a lovely rangebound pattern i wanted to get in on. On the 1H timeframe i drew support & resisistance which the market had respected for a couple of months now. This seemed like a great opportunity to short. if you zoom into the first green dot you’ll see the price caps, rebounds and double tops, so i jumped in when the market hit that point. remember at this point that’s all there is to see, history shows price to touch the top a couple of times and then head back down.

On this occaision that clearly didn’t happen, it hovered around the resistance for 1-2 days before actually going higher which made me nervous. It even used the trend line i’d drawn as a new support for further highs where the red arrow reached. So i was at a crossroads, do i take the loss here at £60 (Which is too much anyway) or do i wait it out? I had time to think, i still felt it would drop, all indicators were pointing to overbought so i risked £60 with a SL set to -£100 and knew this was not smart since i’m risking too much.

As you can see it did drop and i as expected it bounced back at the trend line i’d drawn - So my analysis seems somewhat on point. I took this as a signal to exit and was very happy with my £65 win. But how should i feel about this? The market ended up where i thought it would - So i was right? Well yes, but look at what i HAD to risk to get there. And look at how much further it fell after my TP, retrospectively i could have doubled my earnings and slashed my risk, but how would i of known any better? When you remove any of the graph past the first green dot that’s all the info you have to make your judgements, how can you know that where you enter isn’t the top and where you exit isn’t the bottom? Is it even possible? or is this just the nature of range-bound trades?
I’d love to hear from experienced traders on this. I currently have another trade on this market going long, i got in where it sits now, the thin red line at the bottom of the graph, risking £45 and earning £75 which is a little more sensible, though again, too much to risk with £1000 - is the issue that my position size needs to be halved? so same RR ratio but only £20:£40 size? I guess i went larger because i felt confident it will once again follow rise to meet resistance - I’m aware my confidence in a trade has nothing to do with how likely it is to actually live up to my expectations, but just to point out that i do feel confident nontheless.

What do you all think?
Thanks!

2

  1. In my experience Overbought or Oversell indicator mostly lead to my loss, so i never use it again

  2. Support and Resistance will be broken,if its not market will be in forever range,
    Maybe close half profit and let the profit run

  3. Im always enter at what i think is retracment ,which is offer better RR

We never know how market act and react

My trading approach,
Im risking 30$ , when im in profit for 60$,
I close half of my profit,and let it run to get better profit
im not change my sl
So i lock 15$ profit if price turn against me

Disclaimer : im not experienced trader

3

Your trade was pretty good being that you’re a very new trader. I could not have made this trade at your level of experience. So, congratulations! However, the trade could just as easily have gone the other way and you may have lost a large % of your account. I suggest that you take some time to learn price action analysis and trade on a demo account until you get the hang of it.

Here’s a little something to get you started on it. It is very difficult to convey this information in any appreciable detail in a single forum post so I’m going to merely whet your appetite and let you explore price action analysis for yourself later. You will undoubtedly have many questions and I’m not sure how much time I will have to respond or elaborate; but a little info is better than no info. :slight_smile:

Basic Price Movement
Price reaches for previous highs and lows. These could be significant pivot points in the middle of long runs (not referring to the daily pivot points, etc). S/Rs form at these points (highs & lows). Consider S/Rs as being regions and not exact price points. To demarcate an S/R region, consider the bearish or bullish candle that forms just before a high or low occurs. So, for instance, the bullish candle just before price falls off a high will form the S/R region that you need to target. Conversely, the bearish candle just before price rises from a low will form the S/R region that you will target.

Price will come back to these S/R regions as it moves up and down toward previous highs and lows. It is at these regions that you will see price react and turn as it reverses its direction.

Determining a Trend Change
For an uptrend, when price makes a lower high and violates a previous low, we have a high probability of a trend reversal. For a downtrend when price makes a higher low and takes out a previous high we have a high probability of a trend reversal.

Given the above basic information, here’s one way that you could have traded this pair with a little less risk than you had to bear.

Trade Execution
Entry: Consider the low at 0.9982. If price prints below this low then we have a high probability of the trend changing. Therefore, I would place a limit short order to enter the market at 0.9982 once it is clear that price has made that low.

You could have moved your entry order up higher when new lows formed above but those entry points would have carried too much risk because the bearish candle just before the impulse upward from the 0.9982 low would represent an S/R region and therefore it was necessary for price to take out that low before we could ascertain a high probability of a trend change.

Stop: For the stop, in this case, once the low is taken out, price could not have exceeded 0.9986 but just to be ultra safe I would put the SL at 1.0011, which is 2 pips above a previous high.

For now, until you get a handle on price action, I would suggest that you place your stop above or below the high or low that price reached for as it changes trend (look left). If you were to do that for this trade then your SL would be at a few pips above 1.0028.

Take Profit: Your TP Limit Buy Order will take into account the S/R region at the low that price is reaching for. The high on the bearish candle (highlighted in yellow) before price moves from the low at the left comes in at 0.9881. Therefore, given say a 2 pip spread, your TP order will be at 0.9883. You may get more conservative than that and set it at 0.9885 or higher if you expect TP to be reached when spreads are wider. This gives you almost 100 pips profit.

I’ve attached a screen shot of a marked up 1H chart. In addition to the Entry, SL & TP, I have also marked up opportunities to add to your short position at various lows along the left side to gain the maximum from this trade. You could choose to keep your risk low at the entry point and stack larger shorts as you go along.

As price continues to move in your favor, you can adjust your SL to move it to the next short opportunity point, keeping a gap of one opportunity point. For example, when price takes out the low at 0.9967, you can move your stop to your entry point. Subsequently, when price takes out 0.9960, you can move your SL to 0.9974 and so on and so forth.

If the above makes sense to you then practice this method in a demo account and you will certainly gain a much better understanding within a few weeks.

14 PM
14 PM3360×2100 456 KB

2 Likes
4

Hi nick533a

The question you should be asking yourself before you take the trade is “Can I take this trade?”

That sounds simple and blatantly obvious so let me explain.

This is a question I ask myself everytime I take a trade because I strongly believe in capital preservation. You are a dead duck without capital and so protecting that capital is critical.

I personally work on a trade management and position sizing that allows me to risk just 0.05% of my capital. That 0.05% is the maximum stop loss position that I will take. Hence if the trade requires a stop loss greater than that I look at two options.

Option 1: Don’t take the trade. I am risking too much of my capital.

Option 2: Dial down to a smaller time frame to see if I can reduce my risk.

0.05% is very conservative however that is just me and that is why I have never blown up an account or had a margin call and why, I believe, is the reason that I have been able to become successful.

Most trading books will say risk no more than 2% of your capital on any one trade. So on a 900 pound account the max you can lose on any trade at 2% is only 18 pound.

That sounds harsh but, in my opinion, it is the only way to prevent that dreaded margin call.

So in summary, and it is up to you, either trade small enough so as to stay in that 2% threshold and trade small until you are able to boost your account with extra finance that will allow you to take more substantial trades.

Hope that helps.

Happy trading

Blackduck

5

i have a very simple and common question about this topic , there is any difference between money risk management ? sometimes i feel it is all about same issue.

6

They overlap. To keep things straight, use the principles -
risk is what you might lose in the trade
money is what you will use in the trade

7

@QuadPip Hi - thanks for your involvement, i’ve read through yout post many times and will take time to digest what you say. I have been trading demo account for 6 months before become profitable on it, whilst simultaneously reading books and surrounding myself with informtation on how to succeed in the game. When i went to a real account, i lost half of my account in the first 2 weeks which i believe is a valuable lesson in real world trading psychology, and learning to adjust to real losses.I spent the next 2 months on much more considered trades - what you see above is an example of a trade unlike most others of mine, it was too risky, not smart but since it paid off i wanted to discuss. Eventually i broke even again and seem to be on a steady upward path and am trying to keep it that way.

Maybe you could offer insight into my next question? once that trade finished and the price fell to previous support, consolidated and showed its first strong bullish break, i jumped in on the pullback on friday, which is where the price is sitting now.

I did this because my take out from the last trade was that i jumped in too early and it went higher, i could have waited for a better opportunity, so this time i thought to wait until i see bullish momemtum. The question now is - have i done the right thing? because while i feel confident the market has shown intent to rise to the major resistance again -

  1. price action is further from support, questioning where to set my SL
  2. profits can be minimised a little since price has travelled part way there already.
  3. how do i know the pullback i jumped in on was the best entry?
  4. is entering at 4pm on a friday the smartest thing to do with a weekend of potential economic upset ahead?

Thanks

8

@Blackduck Hi and thanks for the comment.

After reading it a few times i’ve decided to commit to lower maximum risk in trades, £20 of my £1000 will be the most i should set to lose so i will adjust my position size so that losses will not exceed this.
Thanks for the reinforcement!

9

it looks a general question but in practical very difficult to answer. i dont think so its all about same issue.

10

Hi Nick. I shall refrain from commenting on this while the market is unfolding because, in the event that I’m wrong, I do not wish to be the cause of your losses.

It seems to me that you’re jumping to conclusions on the market and believing in your mind that you’re right when the market is telling you otherwise. This is a dangerous way to trade. I suggest that you go back to trading a demo account, take the time to learn price action analysis and then form an educated analysis and thesis of what the market might be trying to do and where price is reaching for. Wait for confirmation and then jump in with controlled risk.

When you’re able to read the market better you will find that you won’t need to risk much for your trades and you won’t need to wait for confirmation either. You will “know”. Your stop loss will merely be placed for catestrophic and unusual events. You will start to use a mental SL. In my post above I stated that price will not exceed 0.9986 once the low at 0.9982 was taken out. 0.9987 would have been your mental stop so your real risk should have been about 6 - 8 pips when considering the spread and any slippage. But you can only arrive at this once you’ve studied price action for a while.

2 Likes
11

:+1::grinning::santa:

12

its a good summary ,
thanks for your nice post.

13

You make a good point because there is initial risk and then there is actual risk and in reality you never want that inital risk target to be hit. I refer to initial risk as my parachute stop. My emergency stop should my computer fail or I lose power. My ulitmate aim is to get my stop loss to break even ASAP.

Cheers

Blackduck

14

i think when market moves at random, no risk managing approach not work. its all about short time approach , nothing without it.

15

This is what I call ‘Advice from Experience’

16

Here’s another very important price action nugget. Once a level has been breached, price will almost always retest that level. In our example you can see on the 1H that price retested the 0.9982 level. It went to 0.9983 and fell off. Sometimes you will need to go down to a lower time frame to see this retest. This means that you can watch the market and when a key level is breached you can place your limit order to enter the market 2-3 pips above or below the breached level (+ 1/2 of the spread). This way you can enter with a larger position with minimal drawdown and almost no risk.

2 Likes
17

Spot on.

Cheers

Blackduck

18

I have learned these rules that l apply without question or reservation

  1. Preserve capital
    2 Preserve capital
    3 Preserver capital

I never risk more the .05% of my account size on any trade. Stick to the rules and you will be fine

Kim

19

I must say, its a great rule. Someone who knows the importance of risks in trading,can never go wrong.

20

Thanks l believe without managing risk you are heading for a failure.