11

Risk management 101

risk management

This article is for you if you want a starter on risk management that is practical and simple to follow. I have written recently on the attitude required to manage money. See this article here on talking about the M-word. I have also written previously on the use of leverage and how using too much leverage is the bane of many traders accounts: 5 trading mistakes to avoid: Mistake#1 over leveraging. This article combines those two principles into a practical guide to follow. In order to get the most of this article it will help if you have read the first two. This article is primarily aimed at those starting FX trading or those who have never laid out a risk management plan. I will make three points in this article all of which are designed to help you preserve your capital:


  1. Decide to trade with little leverage
  2. Decide when you will stop trading: The 10% rule
  3. Decide how to use your FX funds for the maximum benefit.

Some starting assumptions

Before we get into the point above, I want to outline two assumptions I have made.

 

Assumption #1

I am assuming that you want to manage your account in a way that allows you to grow that account so that you are trading a significant sum for yourself.


Assumption #2

I am assuming that you are wanting to responsibly manage your risk, so that you can make changes to your trading once certain parameters have been hit

With those two assumptions aside, let us look at a hypothetical example of a trader who has 10,000 units of currency in their account.

1. Decide to trade with little leverage

Leverage is simply the ability to trade a position sizes larger than your account size. Think of your account size vs your account size.If you have a 10,000 size account then trading without leverage will involve trading a lot size that is equivalent to your account size. So, if your account size is 10000 then trading without leverage will involve trading a mini lot of 0.10 See screenshot below for an example of a non-leveraged trade on a 10,000 account.

trading pyschology


The less leverage you use, the easier it is on your trading psychology. So, do yourself a massive favour and de-leverage. I personally trade without leverage and only leverage up on the highest conviction trades, e.g interest rate surprises on major central banks. Furthermore, I rarely have more than two positions open at the same time on different pairs.


2. Decide when to stop trading: The 10% rule

Take this rule from me, it will save you money. So, let's say you take this lesson on board that you are trading without leverage on your account and your account keeps going down. When do you stop trading and realise that you are not quite ready to trade? Don't wait until you have lost 50%+ of your account. You can know that something is wrong when you have lost 10% of your account. This is the point where you say, 'Ok, I am trading without leverage and I have lost 10%, so I need to reassess what I am doing'. Take an FX trading course, pay someone to mentor you, just stop doing what you are doing as you need more practise.


3. Decide how to use your FX funds for the maximum benefit.

This is when you can make leverage work for you. Say you have put aside 10,000 units of currency for trading and you are trading without leverage. In this instance there is no need to put all of your trading balance in with your broker. Instead, why don't you put aside some of the money into another investment. A good example in the UK would be to invest in premium bonds. You could put 8,000 units in premium bonds with no risk of devaluation (aside from inflation) of your investment and a chance of outperforming, but you can access your funds quickly if you needed to pull them across into your trading account. It is a good balance between offering a chance of growth vs safety and accessibility. I have bought premium bonds as a place to put my annual tax contributions before I have to hand them over to HMRC and had two winning bonds since April this year. Including one while I was on holiday, nice bonus on money that would otherwise be doing nothing.


can I make money trading forex

Answering some common objections.

Objection #1 : But I won't make much money trading without leverage?

This may be true in the short term, but medium to longer term you will make money. If you can generate double digit returns over the course of a year you will be right up there with the best of them. Also, if you can prove to yourself that you can manage money responsibly you will have much more confidence adding extra capital into your trading account. You don't want huge equity swings in large accounts as they are not acceptable or practical for your trading psychology.


Objection #2 : But I don't want to stop trading if I lose 10% of my account?

Trading can be addictive, so don't get hooked. Why not take 3 months out of your trading to stick to demo trading. Then, after 3 months of profitable demo trading, get back onto your live account


Objection #3 : But I like the thrill of the market by using high leverage

The 90/90/90 rule is that 90% of new traders lose 90% of their account in 90 days. Even experienced traders can succumb to the pull of the markets. You are never above needing to manage risk. The moment you think you are above the 'rest of them' is often the final thought before a fall. The number one cause of trading disasters is using too much leverage. If you want to keep enjoying the thrill of the market in an irresponsible way you need to budget for it in the way that you would budget for a holiday or household expense. In other words, it is money that you should already considered as spent. You are also establishingterrible habits that will prevent trading ever becoming a full time business for you as you will be unable to either attract investors or safely manage larger personal funds. Finally, the thrill can be addictive and may end up in you losing way too much money and that impact will overspill in other areas of your life impacting your relationships which you cherish and your own mental well being.

ForexLive

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Fri 20 Sep 2019 20:47:03 GMT

13

ForexLive Americas FX news wrap: Ominous cancellation from China

Forex news for North American trade on September 20, 2019: Markets: - Gold up $17 to $1516 - WTI crude flat at $58.09 - US 10-year yields down 6.6 bps to 1.72% The session turned on vague headlines about Chinese officials canceling a hastily-planned trip to visit Montana and Nebraska. The report said Chinese negotiators would be headed home instead.

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ForexLive Americas FX news wrap: Ominous cancellation from China


//az705044.vo.msecnd.net/20190920/2019-09-20_16-30-30.png Adam Button
Fri 20 Sep 2019 20:47:03 GMT
Author: Adam Button
Category: News
13


Forex news for North American trade on September 20, 2019: Markets: - Gold up $17 to $1516 - WTI crude flat at $58.09 - US 10-year yields down 6.6 bps to 1.72% The session turned on vague headlines about Chinese officials canceling a hastily-planned trip to visit Montana and Nebraska. The report said Chinese negotiators would be headed home instead.

Asset 24 View More
Trade ideas thread - European session 19 September 2019
Asset 41
Fri 20 Sep 2019 20:29:27 GMT

GBPUSD can't keep upside momentum going this week. What levels will be eyed next week.

Closing back below the 100 day MA... The GBPUSD last Friday at 1.2496. That was just below the 38.2% of the move down from the March high at 1.25009 and below the 100 day MA.   On Monday, the price opened near the close but moved lower. On Tueday the price moved higher and extended above the 100 day MA, but could not sustain the upside momentum. The price closed near the MA level (blue line in the daily chart below).

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GBPUSD can't keep upside momentum going this week. What levels will be eyed next week.


//az705044.vo.msecnd.net/20190920/2019-09-20_13-17-48.jpg Greg Michalowski
Fri 20 Sep 2019 20:29:27 GMT
Category: Technical Analysis
0
Closing back below the 100 day MA... The GBPUSD last Friday at 1.2496. That was just below the 38.2% of the move down from the March high at 1.25009 and below the 100 day MA.   On Monday, the price opened near the close but moved lower. On Tueday the price moved higher and extended above the 100 day MA, but could not sustain the upside momentum. The price closed near the MA level (blue line in the daily chart below).

Asset 24 View More
Fri 20 Sep 2019 20:17:38 GMT

US stocks close the day down and also close lower on the week

Nasdaq falls 0.8% to today The major US stock indices are ending the session in the red for the day. The declines today also helped push/keep the week lower.

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US stocks close the day down and also close lower on the week


Greg Michalowski
Fri 20 Sep 2019 20:17:38 GMT
Category: Technical Analysis
0
Nasdaq falls 0.8% to today The major US stock indices are ending the session in the red for the day. The declines today also helped push/keep the week lower.

Asset 24 View More
Fri 20 Sep 2019 20:06:40 GMT

Spain raised to A from A- by S&P, outlook stable

Spain gets an upgrade from Standard & Poor's A glorious day for Spain, who is already at borrowing at +0.236% for 10 years. ForexLive

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Spain raised to A from A- by S&P, outlook stable


//az705044.vo.msecnd.net/20190920/spain-a-rating.png Adam Button
Fri 20 Sep 2019 20:06:40 GMT
Author: Adam Button
Category: News
0
Spain gets an upgrade from Standard & Poor's A glorious day for Spain, who is already at borrowing at +0.236% for 10 years. ForexLive

Asset 24 View More
Fri 20 Sep 2019 19:39:02 GMT

CFTC commitment of traders: EUR shorts are being rebuilt over the last few weeks.

For exit futures positioning data among noncommercial traders the week ending September 17, 2019 - EUR short 69K vs 50K short last week. Shorts increased by 19K The EUR shorts have started to be built over September. Shorts have increased from -38K to -68K since the end of August. 

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CFTC commitment of traders: EUR shorts are being rebuilt over the last few weeks.


//az705044.vo.msecnd.net/20190920/2019-09-20_12-36-16.jpg Greg Michalowski
Fri 20 Sep 2019 19:39:02 GMT
Category: Technical Analysis
0
For exit futures positioning data among noncommercial traders the week ending September 17, 2019 - EUR short 69K vs 50K short last week. Shorts increased by 19K The EUR shorts have started to be built over September. Shorts have increased from -38K to -68K since the end of August. 

Asset 24 View More
Fri 20 Sep 2019 19:39:00 GMT

Risk trades continue to tilt towards deeper worries

Except stock markets Here's a quick rundown: Those are all session extremes in a sign that the market is increasingly worried about China-US talks falling apart.

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Risk trades continue to tilt towards deeper worries


Adam Button
Fri 20 Sep 2019 19:39:00 GMT
Author: Adam Button
Category: News
0
Except stock markets Here's a quick rundown: Those are all session extremes in a sign that the market is increasingly worried about China-US talks falling apart.

Asset 24 View More
Fri 20 Sep 2019 19:02:00 GMT

Fed's Kaplan says he doesn't see another cut this year but is open minded

Comments from Kaplan: ForexLive

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Fed's Kaplan says he doesn't see another cut this year but is open minded


Adam Button
Fri 20 Sep 2019 19:02:00 GMT
Author: Adam Button
Category: Central Banks
0
Comments from Kaplan: ForexLive

Asset 24 View More
Fri 20 Sep 2019 18:54:51 GMT

3

Is the silence on the China story right now telling?

You would think there would be quick denials if there were no problems News travels faster than ever. It's been 90 minutes since the news of China cancelling agricultural visits for early next week hit the newswires.

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Is the silence on the China story right now telling?


//az705044.vo.msecnd.net/20190920/2019-09-20_14-51-33.png Adam Button
Fri 20 Sep 2019 18:54:51 GMT
Author: Adam Button
Category: News
3
You would think there would be quick denials if there were no problems News travels faster than ever. It's been 90 minutes since the news of China cancelling agricultural visits for early next week hit the newswires.

Asset 24 View More
Fri 20 Sep 2019 18:45:54 GMT

1

What does the price action and technicals say about the EURUSD into the new week

The high and low stalled within the "value" area for the pair Traders can define the "value area" as the price area where most of the price action takes place.   Extremes are the area outside the value area that are rejected when the market trades in an up and down range.

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What does the price action and technicals say about the EURUSD into the new week


//az705044.vo.msecnd.net/20190920/2019-09-20_11-08-03.jpg Greg Michalowski
Fri 20 Sep 2019 18:45:54 GMT
Category: Technical Analysis
1
The high and low stalled within the "value" area for the pair Traders can define the "value area" as the price area where most of the price action takes place.   Extremes are the area outside the value area that are rejected when the market trades in an up and down range.

Asset 24 View More
Fri 20 Sep 2019 18:25:16 GMT

8

Montana agricultural official says China visit was only scheduled yesterday

Maybe it was a scheduling issue? A spokeswoman on CNBC from the Montana agricultural bureau said that the China visit to the area was hastily arranged yesterday but that they got a call today that it was cancelled.

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Montana agricultural official says China visit was only scheduled yesterday


Adam Button
Fri 20 Sep 2019 18:25:16 GMT
Author: Adam Button
Category: News
8
Maybe it was a scheduling issue? A spokeswoman on CNBC from the Montana agricultural bureau said that the China visit to the area was hastily arranged yesterday but that they got a call today that it was cancelled.

Asset 24 View More
Fri 20 Sep 2019 18:05:11 GMT

1

USDJPY dips back below 100 day MA as the week works toward the close. What does it tell us about next week's trading?

High was near 50% midpoint... The USDJPY moved lower on Monday after the bombing of the Saudi oil facilities.  That run ower took the price down to the broken 38.2% of the move down from the April 2019 high to the August low at 107.475. The price bottomed and ended up closing higher on the day.  

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USDJPY dips back below 100 day MA as the week works toward the close. What does it tell us about next week's trading?


//az705044.vo.msecnd.net/20190920/2019-09-20_10-57-51aaa.jpg Greg Michalowski
Fri 20 Sep 2019 18:05:11 GMT
Category: Technical Analysis
1
High was near 50% midpoint... The USDJPY moved lower on Monday after the bombing of the Saudi oil facilities.  That run ower took the price down to the broken 38.2% of the move down from the April 2019 high to the August low at 107.475. The price bottomed and ended up closing higher on the day.  

Asset 24 View More
Fri 20 Sep 2019 18:00:37 GMT

6

Nebraska dept of agriculture also says China has cancelled visit

Fresh China headlines I don't think this moves the needle any more than the Montana news. The big question is they cancelled. why The market doesn't want to jump to conclusions but when we get word, there is going to be a big move in one direction or the other.

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Nebraska dept of agriculture also says China has cancelled visit


Adam Button
Fri 20 Sep 2019 18:00:37 GMT
Author: Adam Button
Category: News
6
Fresh China headlines I don't think this moves the needle any more than the Montana news. The big question is they cancelled. why The market doesn't want to jump to conclusions but when we get word, there is going to be a big move in one direction or the other.

Asset 24 View More
Fri 20 Sep 2019 17:55:39 GMT

1

USD/JPY slides after China cancels planned trip to Montana

The Chinese delegation is going home Risk trades have been upended by the news that China's trade delegation is leaving the United States earlier than planned.

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USD/JPY slides after China cancels planned trip to Montana


//az705044.vo.msecnd.net/20190920/usdjpy-daily-chart-1-hour.png Adam Button
Fri 20 Sep 2019 17:55:39 GMT
Author: Adam Button
Category: News
1
The Chinese delegation is going home Risk trades have been upended by the news that China's trade delegation is leaving the United States earlier than planned.

Asset 24 View More
Fri 20 Sep 2019 17:45:37 GMT

Fed's Kaplan: If we wait to see evidence of weak consumer, will have waited too long

Comments from the Dallas Fed President: This is similar to what he's been saying for the past six weeks. What's notable now is that he's repeating it after two cuts, which is a hint that he's prepared to do more.

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Fed's Kaplan: If we wait to see evidence of weak consumer, will have waited too long


Adam Button
Fri 20 Sep 2019 17:45:37 GMT
Author: Adam Button
Category: Central Banks
0
Comments from the Dallas Fed President: This is similar to what he's been saying for the past six weeks. What's notable now is that he's repeating it after two cuts, which is a hint that he's prepared to do more.

Asset 24 View More
Fri 20 Sep 2019 17:15:48 GMT

20

China cancelled a planned agricultural trip to Montana, raising questions on trade

China packs up and goes home That doesn't sound good. Stocks drop hard, USD/JPY too. The Montana Farm Bureau says China's delegation has cancelled a planned trip to view US agriculture. Chinese officials will return to Beijing sooner than expected.

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China cancelled a planned agricultural trip to Montana, raising questions on trade


//az705044.vo.msecnd.net/20190920/asdfasdfsa.png Adam Button
Fri 20 Sep 2019 17:15:48 GMT
Author: Adam Button
Category: News
20
China packs up and goes home That doesn't sound good. Stocks drop hard, USD/JPY too. The Montana Farm Bureau says China's delegation has cancelled a planned trip to view US agriculture. Chinese officials will return to Beijing sooner than expected.

Asset 24 View More
Fri 20 Sep 2019 17:12:56 GMT

Fed's Bullard: Shouldn't ignore market signals on a potential recession

Bullard on Wharton Business Radio The interview is ongoing. Bullard dissented in favor of a 50 bps cut so expect some dovish comments. ForexLive

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Fed's Bullard: Shouldn't ignore market signals on a potential recession


Adam Button
Fri 20 Sep 2019 17:12:56 GMT
Author: Adam Button
Category: Central Banks
0
Bullard on Wharton Business Radio The interview is ongoing. Bullard dissented in favor of a 50 bps cut so expect some dovish comments. ForexLive

Asset 24 View More
Fri 20 Sep 2019 17:00:37 GMT

1

Baker Hughes US oil rig count 719 vs 733 prior

Weekly rig count from Baker Hughes Rigs fell 14 this week in the fifth consecutive week of declines. Operational rigs have been falling all year and I'm starting to wonder if these projections for US oil output next year and beyond are realistic. Rigs are down 166 year-to-date.

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Baker Hughes US oil rig count 719 vs 733 prior


Adam Button
Fri 20 Sep 2019 17:00:37 GMT
Author: Adam Button
Category: News
1
Weekly rig count from Baker Hughes Rigs fell 14 this week in the fifth consecutive week of declines. Operational rigs have been falling all year and I'm starting to wonder if these projections for US oil output next year and beyond are realistic. Rigs are down 166 year-to-date.

Asset 24 View More
Fri 20 Sep 2019 16:51:56 GMT

Baker Hughes rig count data do at the top of the hour

It's Friday so it's time for the weekly Baker Hughes rig count The weekly Baker Hughes recount will be released at the top of the hour. The expectations are for:

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Baker Hughes rig count data do at the top of the hour


Greg Michalowski
Fri 20 Sep 2019 16:51:56 GMT
Category: News
0
It's Friday so it's time for the weekly Baker Hughes rig count The weekly Baker Hughes recount will be released at the top of the hour. The expectations are for:

Asset 24 View More
Fri 20 Sep 2019 16:27:11 GMT

3

Pres. Trump: China agricultural purchases is not enough

President Trump speaking at a press conference with Australia's prime minister - China agricultural purchases is not enough - looking for complete deal with China ForexLive

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Pres. Trump: China agricultural purchases is not enough


Greg Michalowski
Fri 20 Sep 2019 16:27:11 GMT
Category: News
3
President Trump speaking at a press conference with Australia's prime minister - China agricultural purchases is not enough - looking for complete deal with China ForexLive

Asset 24 View More
Fri 20 Sep 2019 16:10:05 GMT

US household net worth for Q2 rose to $113.5 trillion from $111.6 trillion in Q1

Increase of $1.83 trillion for the quarter US household net worth for the second quarter rose by $1.83 trillion to $113.5 trillion. The prior quarter saw a increase of $5.1 trillion.

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US household net worth for Q2 rose to $113.5 trillion from $111.6 trillion in Q1


Greg Michalowski
Fri 20 Sep 2019 16:10:05 GMT
Category: News
0
Increase of $1.83 trillion for the quarter US household net worth for the second quarter rose by $1.83 trillion to $113.5 trillion. The prior quarter saw a increase of $5.1 trillion.

Asset 24 View More
Fri 20 Sep 2019 15:55:25 GMT

AUD/USD continues the slow rollover. A sign of things to come?

Not a great look The Australian dollar has fallen to the lowest since September 3. Early in the month, AUD/USD rebounded from a triple bottom near 0.6700 largely due to optimism about a US-China trade deal and better global growth.

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AUD/USD continues the slow rollover. A sign of things to come?


//az705044.vo.msecnd.net/20190920/audusd-technical-analysis.png Adam Button
Fri 20 Sep 2019 15:55:25 GMT
Author: Adam Button
Category: News
0
Not a great look The Australian dollar has fallen to the lowest since September 3. Early in the month, AUD/USD rebounded from a triple bottom near 0.6700 largely due to optimism about a US-China trade deal and better global growth.

Asset 24 View More
Fri 20 Sep 2019 15:48:23 GMT

1

European shares end the day with modest gains

German DAX little changed. France's CAC Up 0.5%. For the week, the major indices are ending with modest changes: In the benchmark 10 year note sector, yields are ending mostly lower with Italy the exception:

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European shares end the day with modest gains


//az705044.vo.msecnd.net/20190920/2019-09-20_8-43-02.jpg Greg Michalowski
Fri 20 Sep 2019 15:48:23 GMT
Category: Technical Analysis
1
German DAX little changed. France's CAC Up 0.5%. For the week, the major indices are ending with modest changes: In the benchmark 10 year note sector, yields are ending mostly lower with Italy the exception:

Asset 24 View More
Fri 20 Sep 2019 15:42:21 GMT

Global Times editor: US tariff exemptions seen as a sign of goodwill

Tweet from Hu Xijin The US exempts more than 400 Chinese products from tariffs, which is seen as a goodwill signal by China. Interaction of goodwill between China and the US is still fragile. Political determination from decision-making circle of the two countries is needed in order to reach a deal. Is there going to be a deal? It's fair to say that no one really knows but it depends on what the US is asking for from China. It's tough to believe they will relent on everything.

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Global Times editor: US tariff exemptions seen as a sign of goodwill


Adam Button
Fri 20 Sep 2019 15:42:21 GMT
Author: Adam Button
Category: News
0
Tweet from Hu Xijin The US exempts more than 400 Chinese products from tariffs, which is seen as a goodwill signal by China. Interaction of goodwill between China and the US is still fragile. Political determination from decision-making circle of the two countries is needed in order to reach a deal. Is there going to be a deal? It's fair to say that no one really knows but it depends on what the US is asking for from China. It's tough to believe they will relent on everything.

Asset 24 View More
Fri 20 Sep 2019 15:22:54 GMT

1

Fed's Rosengren: Data suggests economy healthy despite shocks

Comments from Rosengren He also took some shots at WeWork (without naming the company), saying co-working firms face a bigger risk of default in a downturn and that could hurt commercial real estate.

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Fed's Rosengren: Data suggests economy healthy despite shocks


Adam Button
Fri 20 Sep 2019 15:22:54 GMT
Author: Adam Button
Category: News
1
Comments from Rosengren He also took some shots at WeWork (without naming the company), saying co-working firms face a bigger risk of default in a downturn and that could hurt commercial real estate.

Asset 24 View More

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