Risk Management

[OscarR123]

How do you manage risk when the market suddenly turns against your position?

[TradingDream]

The first & most important is you must always trade with a stop-loss, an amount you don’t care losing if the trade goes against you. There should be enough money left in your account even after some losses. Then, ofcourse, you’ve always the option of closing a part of your position size if you feel like it’s not going according to your strategy.

[Emi.s]

Before you enter a trade, you need to plan your exit strategy in advance, like setting stop-loss orders, choosing the right position size, or using protective options, so you can quickly react and protect yourself if the market moves against you.

[EmeraldEyes]

I reenter with a larger position when the market suddenly goes against my initial position.

Using a very small initial entry, placing the larger position further away will give a better average price. The rarest form of price action in liquid FX pairs is one-way without a retrace. The key is keeping the initial position very small, so that a 3rd or 4th reentry would be considered a normal trade amount. Managing risk is keeping the lots small.

Ie; EurUsd short 0.02 lot @ 1.0505 (-$59), 0.04 lot @ 1.0690 (-$44), 0.08 lot @ 1.0950 (+$120).

[Thira]

It will depend on how far the price moves against me.

If it hits my stop loss, then I have no choice. If not, then I either do nothing or close the trade by hand if I dislike it. And await the next trade. There is always another trade.

My stop loss is where I decide before trading that I want to get out if the price moves against me. If my trade is stopped out, it must be where I want to be out. This is the purpose of a stop loss, of course?

I don’t do anything like @EmeraldEyes but he has good eyes.

[MattyMoney]

@EmeraldEyes

The key is keeping the initial position very small, so that a 3rd or 4th reentry would be considered a normal trade amount.

I do like this approach, but it takes a lot of patience, especially on the higher TF’s like daily charts.

@Emi.s

Before you enter a trade, you need to plan your exit strategy in advance, like setting stop-loss orders, choosing the right position size, or using protective options, so you can quickly react and protect yourself if the market moves against you.

For most, especially beginners, this is simple, solid advice,

[Amy95]

@OscarR123

How do you manage risk when the market suddenly turns against your position?

Well, I always make sure to set a stop-loss before entering any trade. That way, I limit losses if things go south. Also, it helps to regularly adjust your stop-loss as the trade moves in your favor to lock in profits.

[Statistyx]

@Amy95

it helps to regularly adjust your stop-loss as the trade moves in your favor to lock in profits.

I have found that the more often I do that, the more often a small retracement closes my trade (with only a small profit) and the opportunity cost is very big, because when there’s no re-entry signal I lose all the bigger profits.

For this reason I do worse, in the long run, if I do what you suggest above.

Am I alone, in that?

[TheodoreThring]

@Statistyx

Am I alone, in that?

Far from it.

Is it good to use a trailing stop?

i know you weren’t asking me, so please excuse me for interfering! for what it’s worth, if anything, i offer my own answer to that question i have four reasons (listed below very much in order of importance!) why it isn’t ok for me to use a trailing stop every single time i’ve ever tested it, over the decades (and i’ve really done a lot of backtesting and forward-testing of trailing stops, because superficially they seem so attractive!), i’ve found that everything i’ve ever done has perfor…

[EmeraldEyes]

I’ve ran the numbers, trailing stops have the same expected value as do fixed stops… in respect to their R value. If looking for infinite Reward, expect to be stopped out almost always.
It keeps coming down to trade size to actually limit risk, or account Risk of Ruin. May just depend on the trader’s personal appetite for risk.

I had marked 100 pip trailing stop levels on XauUsd for trade entries as most retail traders use stops and trailing stops within 100 pips of price. It looked to be respected as an equalibrium between latent and demand order balance.

[pink_hat_trader]

@EmeraldEyes

I’ve ran the numbers, trailing stops have the same expected value as do fixed stops…

to be fair, Ryan, some people have apparently run different numbers from yourself, on this point. Including both Michael Harris (author of “Profitability & Systematic Trading”) and Van K. Tharp (author of several books, as you know, one of which considers this exact subject in some detail and offers a different conclusion from your own, you know? ).

[Quebecoise]

@OscarR123

How do you manage risk when the market suddenly turns against your position

i like to think that I’ve already allowed for it, in advance, with the positioning of my stop loss, every time I enter a trade.

So when it happens, i just “take the loss” knowing that there’ll always be some losers, and keep monitoring and updating my win-rate, so that I can tell reliably whether what I’m doing is deteriorating.

[John9517]

When I started, I thought stop-losses were enough. Now, I see risk management is more about how I set up the trade before I enter, small size, a clear plan, and knowing when I’m wrong.
If the market turns, I either let the stop hit or cut it manually if it feels off. No revenge trades, no panic adds.
For me, it’s not about never losing, it’s about keeping losses small so I’m ready for the next setup. That’s real risk management.

[ontario]

That looks like a really solid risk management foundation, especially the “stop trading after 3 consecutive losses” rule. I’m also working on defining mine, and seeing a clear plan like yours is helpful for newbies like me

[TheodoreThring]

@ontario

That looks like a really solid risk management foundation, especially the “stop trading after 3 consecutive losses” rule

Let’s all hope that the best trade of the day is never the 4th, 5th or 6th one, then.

If your system has a genuine proven edge, why should losing 3 trades stop you from using it? What that is, really, is just a sign that you know, deep down, that you haven’t got a genuine proven edge.

[pink_hat_trader]

@TheodoreThring

Let’s all hope that the best trade of the day is never the 4th

This.

The idea of stopping after 3 losers is statistically “unsound” (let’s be ultra-polite, here! ).

Its only logical or reasonable claim to any kind of validity would be if three losers were going to go to your head so much that you don’t trust yourself to “play on”, but if that’s the case, you shouldn’t be trading for money in the first place [end of “psychological” rant].

[Emi.s]

@MattyMoney

For most, especially beginners, this is simple, solid advice

But unfortunately, 99% of them don’t know it.

[EmeraldEyes]

@pink_hat_trader

some people have apparently run different numbers from yourself, on this point.

It’s quantifiable with fixed stops vs trailing stops.

A 69 pip TP with 100 pip trailing stop is exactly the same as a 100 pip TP/100 pip fixed SL. ( 1 to 1 return, 50% win rate)

A 100 pip TP with 100 pip trailing stop is exactly the same as a 170 pip TP/100 pip SL. (1.7 to 1 return, 38% win rate)

Dynamic stop placements like Parabolic SAR, ATR-based exits vary too much to quantify accurately.