FX risk management fundamentals
The key to risk management in trading is to understand the process from entry to exit in advance. So, before you trade, determine your conditions for entering and exiting your position.
The key to long-term profitability is to increase profits and minimize losses. Focusing only on your win rate can result in accumulated profits blown away in just one trade. The key to success as a trader is making small losses and large gains.
In addition, having a simple and easy-to-understand trading strategy is the key to risk management. A simple process will allow you to adapt flexibly to market movements, and you will be able to concentrate on your trading.
For example, when you start trading, use a simple rule of 10 pip target and 5 pip stop. Learn to be patient until the market hits your target and accept losses. Once you can follow your own rules, adjust your targets and stops.
Even if you accumulate small profits, your account balance can fall if you incur significant losses on a single trade. Also, if you increase your target, the price may not reach the target, but accept this. Balance is the key. From a long-term perspective, aiming for large profits is a surefire way to achieve good results.
Gradually aim for larger targets
It is helpful to experience trading successes until you are comfortable with trading. Even if it is only a few pips, it does not change the fact that you have profited from the market. Once you have mastered the operation of the trading tools and basic knowledge, consider increasing your profit margin.
For example, if you were taking a 5 pip profit, try setting the target at 7 to 10 pips. Depending on the market, if the trend momentum is strong, you should raise the target. If the trend's momentum weakens, you can exit the market while there is still profit.
Since each market moves differently, changing your strategy for each market is beneficial. In addition, the method of where to enter and exit your positions will improve with experience.
Identify the next resistance and support
Support and resistance are price areas where the market may change direction. For example, a price that turns back down from a rise is called "resistance," and a price that turns up from a fall is called support.
Sometimes if the market momentum is strong, you can extend your profits significantly by not exiting at support or resistance. In that case, you should delay your exit for a bit. However, when the market stops moving in your direction, close your position quickly to secure a profit.
If you make a profit as soon as you trade, your target could be hit quickly. If you see that the market has reversed before your target, it may be better to close out and close your position before reaching your pre-set stop. A "trailing stop" is the best way to extend your profits as much as possible while maintaining a profit. For example, if a trade returns 2 pips of unrealized profit, change the stop range to 5 pips to 3 pips. If the price is closer to the target, you can move the stop to the entry price, so there is no risk of loss.
When a trade that had been profitable turns into a loss, it can be disappointing, causing you to make poor decisions on subsequent trades. A trailing stop is an excellent way to maximize profits and minimize losses.
Short-term trades in normal conditions usually reach their target within 5 to 15 minutes. Stress can increase the longer you hold a position. If the profit target is not achieved after a certain amount of time, you should consider exiting the position. When the market starts to move again, you can resume trading. The earlier you close a position, the less tired you will be and the fewer mistakes you will make.