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Home » Online Forex Trading Blog » Forex Guide to Risk Aversion

Forex Guide to Risk Aversion

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I came across this great guy, an equities trader, on twitter. As we started tweeting to each other more, I learned that he was starting out in the forex market and felt very apprehensive about trading currencies. He’s quite a risk averse type of guy who likes to take his time over the analysis of equities, but has the impression that Forex is different. Well is Forex risk different I wondered? As a Forex only girl, I’m not sure I can answer that, but I can show you what system I use to control my aversion to risk.

10 Forex Rules of Risk Management for Equities Traders

1. Be Logical not Emotional

  • Decide your rules to enter and exit trades Spock Uses Logic When Trading Forex
  • Decide your rules to exit losing trades
  • Write your rules down
  • Always adhere to your rules
  • Before you place a trade:
  • Know your profit target
  • Know your loss limit
  • Understand your strengths and weaknesses
  • Build on your strengths, control your weaknesses

2. Trade, don’t Gamble

  • Trading DiceDon’t sell after a period of selling
  • Don’t buy after a period of buying
  • Don’t take overnight trades (you can’t control what happens)
  • Don’t trade at major news announcement times. Volatility at major news times can blow your trading account
  • Don’t ever trade without a Stop Loss

3. Use a small ‘lot’ size until you’re comfortable with your results

  • Build a buffer bank
  • Stage lot size up slowly
  • Stage lot size down when your strategy doesn’t respond

4. Don’t Add to Losers

  • You can wipe out your account waiting for the market to come back to you

5. When in doubt Get Out!

  • EXIT YOUR TRADESImmediately
  • A flat is a good trade, nothing was lost

6. Have a Daily Loss Limit

  • Ultra conservative – 0.5% to 1% of risk capital
  • Conservative – 1% – 2% of risk capital
  • Experienced Conservative – 3%

7. Don’t increase your lot size to recoup losses

  • The table below shows why you should not increase your lot size (and therefore your risk) to recoup losses.
  • A recommended amount to risk at one time (not per trade but at any one time) is no more than 3% of the account balance.

Risk Aversion Chart

 So in percentage terms, you can see that the higher the percentage of your trading capital you risk, the higher the percentage return you need to get back to where you started!

8. Don’t Overtrade

  • Set a daily goal Stop Trading
  • Stop trading when you reach your goal
  • Keep your lot size the same throughout a trading day

9. Be Disciplined

  • Do your homework (your research)
  • Plan your trade
  • Trade the plan
  • Focus on the trade, don’t get distracted
  • Keep a trade journal
  • Analyse your journal to identify learning points

10. Be Careful of your Computer System

  • Computer Explodes From Trading
  • Don’t trade if you notice problems with your system or data flow is slow
  • Have a check list and if something is wrong don’t trade

 

I really hope this helped my equities trader pal. The same rules of risk aversion and money management apply to Forex as they do to trading equities, commodities and even chicken feet! The most important rule to learn is: decide your tolerance to risk, decide your risk aversion rules and….. Don’t bend your rules. Your trading account will thank you for it.

I send my thanks to my Twitter trading pal; it was a great idea for a blog. If you like to trade equities see http://350trader.com/

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About the Author -

Myra has always been fascinated with the different currencies of the world, particularly what makes them ebb and flow. When the opportunity presented itself for her to give up her day job in Internal Corporate Communications to learn about the forex market she jumped at the chance. Little did she know that the currency market would become an all-consuming interest for her and she would become a full time forex trader. She still retains a passion for communication and has started her own blog, www.forexforgirls.blogspot.com to record her progress and hopefully encourage any ‘girl’ traders out there who may come across it. Outside of the forex world, she has two lovely and talented grown up daughters and lives in a beautiful part of the English countryside. Her hobbies include horse riding and hill walking, music, literature and the psychology of trading’.

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