Successful trading will by definition have a positive expectation. But what does this mean?
It means that in the long run, S1X Financial trading system will make money. It does not mean you will win every single trade. We may take a position in the market when our algorithm expect a profitable outcome, but due to unforeseen and unpredictable events (political, geo-political, central banks decisions, ..) no trade is a sure thing.
If we expect our high probability trades to make money in the long term, the number one aim must be to protect your trading capital to stay in the game.
This is where money management comes in.
Adequate money management allows you to keep trading through the bad stretches (negative curve) that will inevitably occur.
Money management can be very simple.
As always, to succeed at trading you will need a complete trading plan. A complete trading plan will tell you when to enter, when to exit, which currency pair, indices, commodities to trade, these are the signals provided by our algorithms. Money management is as vitally important as our signals.
Please follow the following money management rules when trading our signals.
Read through the list and see how best you can implement them as part of your trading and money management strategy.
Amount of risk capital
All important aspects of money management proceeds from this key value. The size of your overall risk capital available to trade (equity) will be a factor determining the upper limit of your position size.
You should never risk more than 1-2% of your overall risk capital in any one trade.
Avoid trading too aggressively
Trading too aggressively is perhaps the biggest mistake new traders make. If a small sequence of losses would be enough to eradicate most of your risk capital, it suggests each trade has too much risk.
A way to aim for the correct level of risk is to adjust the position size given with the trade signals in relation to your available capital. For example when you receive a signal with a contract size of 10 (which is based on a 10’000 £/$/€ available equity and you have an available equity of 1’000 you should divide the contract size by 10 and take a single contract [10’000 (base account size) / 1’000 (your available equity)] = risk adjustment factor=10; [Contract size / risk adjustment factor] =1. But remember to also adjust with respect to the 1% per trade rule (see above).
You will also need to restrict the amount of trades you take at any given time. You should not have more than 10 trades open in your account (10% of your capital at risk).
One of the reasons that new traders are overly aggressive is because their expectations are not realistic. They think that aggressive trading will help them get rich quickly.
However, the best traders make steady returns. These profits can become very large over the years, through the power of compounding. But you cannot get compounded returns if you quickly blow up all your capital.
Realistic goals and a conservative approach is the right way to start trading.
Make use of hedging, counter trading and offsetting
Make use of signals giving you a possibility to hedge or counter trade a position. By hedging positions when they are running against you, you get an additional chance to close your position in a profit instead of closing your position at a loss.
Do not open multiple trades (signals) in the same direction. Always try to balance out your account. When receiving multiple short signals as an example EURUSD do not take all of them wait to either receive a long signal to counter trade or hedge your position or wait for your original trade to close.
Prepare for the worst
We don’t know the future of a market, but we have plenty of evidence of the past. Our algorithms predict with +90% probability the next exit point of an underlying but every single position could run against us for a while before hitting the mathematical calculated exit target price.
Please always plan with the worse and plan on a potential negative curve (drawdown) of 500 or more pips against you. Think about what action you would need to take to protect yourself in such a scenario. Do not underestimate the chances of price shocks occurring. To be taken out by an adverse price movement is not unlucky – it’s a natural part of trading. So, you should have a plan for such a contingency.
You don’t have to look back far into the past to find examples of price shocks. In January 2015, the Swiss franc surged roughly 30% against the euro in a matter of minutes.
Use some form of stop
Stops help to cut losses and are especially useful for when you are not able to monitor the market. We do not use stop loss but use hedging and counter trading instead. At the very least, you should use a mental stop if you don’t want to use an actual order in the market. Price alerts are also useful to remind you of taking an action before it’s too late.
Don’t trade on tilt
At some point, you may suffer a bad loss or burn through a substantial portion of your risk capital. There is a temptation after a big loss to try and win it all back with the next trade.
But here’s a problem. Increasing your risk when your risk capital has been stressed, is the worst time to do it.
Instead, consider reducing your trading size in a losing streak or taking a break until you can identify a high-probability trade. Always stay on an even keel, both emotionally and in terms of your position sizes.
Respect and understand leverage
One of the advantages of Forex & CFDs trading is powerful leverage ratios. Leverage allows you to command an FX position that is much larger than the capital you deposit.
This offers the opportunity to magnify profits made from the risk capital you have available, but it also increases the potential for risk. In other words, it allows you to ramp up the risk to get greater profits.
This is a useful tool, but it is very important to understand the size of your overall exposure.
We advice on using no more than 1:100 leverage in your account for beginners even 1:50.
Think long term
It stands to reason that the success or failure of a trading system, will be determined by its performance in the long term. So be wary of apportioning too much importance to the success or failure of your current trade. Do not bend or ignore the rules of your system to make your current trade work.
Some traders are willing to tolerate more risk than others. But if you are a beginner trader, then no matter who you are, a robust tip is to start conservatively.
Ask your Mentors
Premium members can always ask our point of view regarding signals and positions. Please use the message board or email to seek advice.
Adapted from Admiral Markets Source: top 10 forex money management tip ©Admiral Markets