3 Tips for Risk Management

Here are three tips that will help you have a better risk management now:

Risk management dominoes
The words “Risk Management” in a red domino held up by a man who is also stopping dominoes from falling.

1.     Move away from break-even stops

Putting the stop loss at the point of entry creates a no risk trade, but is a rather dangerous and mostly unprofitable move. Even though it’s a good idea to protect your position, the break-even strategy often creates a number of different problems.

This is more accurate if you trade based on common technical analysis.

With technical analysis, your point of entry is usually positioned very obviously. This then lets a lot of traders to have very similar entry. The professionals already know this and can therefore show price retracing back and pushed amateurs to really obvious price levels. This happens right before turns back to its original direction.

Employing a break-even stop will prevent you from having potentially profitable trades if you put stops too soon.

Learn more about proper risk control when forex trading.

2.     Avoid using daily performance targets

Most traders randomly set daily or weekly performance targets. This kind of approach is rather dangerous and something you should probably stop doing. “Setting yourself daily goals create great amount of pressure and also a “need to trade” feeling.

Here are some ideas you can do for setting trade goals instead:

  • Daily and weekly: shorter range of focus but can allot more time and attention.
  • Weekly and monthly: follow professional routine, review all your trades to make sure you’re making the best decisions.
  • Semiannually: more time to review all your trades, find the strength and weakness, takes longer time before reaching profitable trading.
Risk management on clipboard
Risk management in bold words printed on a paper in a clipboard.

3.     Spread should be taken seriously

For the most liquid instruments, spreads usually amounts to a few pips. This then makes traders see them as next to nothing.

Research shows that an average trader usually holds his trades between 5 and 200 pips. If your spread is on 2 pips this will mean that you pay 10 percent on trades that has a profit of 20 pips. So if you hold your trade at 50 pips, the spread reaches 5 percent.

These costs could mark significant drawbacks for your trading system and even turn a winning system into a losing one. You should start monitoring spreads more closely and avoid those that offer where spreads are high.

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