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Level of risk in a Forex trading operations

This is a discussion on Level of risk in a Forex trading operations within the Forex Trading forums, part of the Trading Forum category; There are a high level of risk in a Forex trading operations. For such instances, How can they identify key ...

          
   
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    Level of risk in a Forex trading operations

    There are a high level of risk in a Forex trading operations. For such instances, How can they identify key risk areas and issues that might happen? What method of application do they use? As for security reasons, are there support for monitoring the build up of credit risk?

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    Understanding Forex Risk Management

    Betting Strategies
    There are three basic ways to take a bet: Martingale, anti-Martingale or speculative. Speculation comes from the Latin word "speculari," meaning to spy out or look forward.
    Know the Odds
    So, the first rule in risk management is to calculate the odds of your trade being successful. To do that, you need to grasp both fundamental and technical analysis. You will need to understand the dynamics of the market in which you are trading, and also know where the likely psychological price trigger points are, which a price chart can help you decide.
    Liquidity
    The next risk factor to study is liquidity. Liquidity means that there are a sufficient number of buyers and sellers at current prices to easily and efficiently take your trade. In the case of the forex markets, liquidity, at least in the major currencies, is never a problem. This liquidity is known as market liquidity, and in the spot cash forex market, it accounts for some $2 trillion per day in trading volume.
    Risk per Trade
    Another aspect of risk is determined by how much trading capital you have available. Risk per trade should always be a small percentage of your total capital. A good starting percentage could be 2% of your available trading capital. So, for example, if you have $5000 in your account, the maximum loss allowable should be no more than 2%. With these parameters your maximum loss would be $100 per trade. A 2% loss per trade would mean you can be wrong 50 times in a row before you wipe out your account. This is an unlikely scenario if you have a proper system for stacking the odds in your favor.
    Leverage
    The next big risk magnifier is leverage. Leverage is the use of the bank's or broker's money rather than the strict use of your own. The spot forex market is a very leveraged market, in that you could put down a deposit of just $1,000 to actually trade $100,000. This is a 100:1 leverage factor. A one pip loss in a 100:1 leveraged situation is equal to $10. So if you had 10 mini lots in the trade, and you lost 50 pips, your loss would be $500, not $50.
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    Risk Management Techniques For Active Traders

    Planning Your Trades
    As Chinese military general Sun Tzu's famously said: "Every battle is won before it is fought." The phrase implies that planning and strategy - not the battles - win wars. Similarly, successful traders commonly quote the phrase: "Plan the trade and trade the plan." Just like in war, planning ahead can often mean the difference between success and failure.
    Stop-Loss and Take-Profit Points
    A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. Often this happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the "it will come back" mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.
    How to Effectively Set Stop-Loss Points
    Setting stop-loss and take-profit points is often done using technical analysis, but fundamental analysis can also play a key role in timing. For example, if a trader is holding a stock ahead of earnings as excitement builds, he or she may want to sell before the news hits the market if expectations have become too high, regardless of whether the take-profit price was hit.
    Calculating Expected Return
    Setting stop-loss and take-profit points is also necessary to calculate expected return. The importance of this calculation cannot be overstated, as it forces traders to think through their trades and rationalize them. As well, it gives them a systematic way to compare various trades and select only the most profitable ones.
    [ (Probability of Gain) x (Take Profit % Gain) ] + [ (Probability of Loss) x (Stop Loss % Loss) ]

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    How to create a risk and money management module

    MQL5 WIZARD: HOW TO CREATE A RISK AND MONEY MANAGEMENT MODULE

    Level of risk in a Forex trading operations-backtesting_results.png


    MetaTrader 5 provides a powerful tool that allows you to quickly check various trading ideas. This is generation of Expert Advisors using the MQL5 Wizard on the basis of ready trading strategies. An Expert Advisor created with the MQL5 Wizard, is based on four pillars - four base classes:
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    Forex Trading For Beginners - Risk Management

    Risk management to most new traders usually goes in one ear and out the other. They soon realize how important it is when they lose a big chunk of their money or even worse blow out their account.

    In a way we think this is healthy for investors as long as the amount of money they lose is small. Every single Forex trader that has lost a lot of money or even lost their account, get's that feeling stuck in their head and it scares many investors to never do it again.

    The reason why we think it is a good thing is because, it's good to get that feeling into your head so that you know how awful it feels, so that in the future you do everything in your power to make it never happen again, it's better to learn the feeling with a small amount than a big amount.

    Many Foreign Exchange investors have never learned from a profession trading education provider to teach them how their risk should be calculated.

    They learn from sources online that give them a certain amount of pips or money to lose per trade and then they tell them to cut their losses.

    This is the worst advice you can ever hear or follow, every single stop loss is different, so this means every single position size is different!

    You see your risk management is calculated by how far your stop loss is, now if you watched this training video you saw how we find our stop losses! It's always at the previous high or low based on the trend that is happening!

    For uptrends you will want to put your stop loss at the previous low & for downtrends you want to put it at the previous high.

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    Wow! Lots of helpful info. Thank you very much!
    Anyway, I think quantitative risk filtering would be helpful, right? I already asked to try it out. I'm hoping that it can be useful for trading.

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    Risk Evaluation

    Risk Evaluation in the Sequence of Deals with One Asset

    Level of risk in a Forex trading operations-intro4.png


    In this article, we will draw on the idea of Ralph Vince on managing position volumes (in this connection, it will be useful to recall the Kelly formula as well). This is also known as the optimal f. In this theory, f is the fraction of funds that is at risk in every deal. According to Vince, f is chosen depending on the conditions of optimization (maximization) of profit. There are two problems arising when using this theory in trading. They are:


    1. Too large account drawdown.
    2. f is known only on the history of deals.

    An attempt to solve these problems is only one of the aims of this article. Another problem is yet another attempt to introduce the theory of probability and mathematical statistics into the analysis of trading systems. This will cause occasional deviation from the main topic. I will refrain from expounding the basics. If the necessity arises, the reader can refer to the book "The Mathematics of Technical Analysis: Applying Statistics to Trading Stocks, Options and Futures".

    This article features examples. They are just an illustration of the theory considered in the article, therefore, they are not recommended to be used in real trading.
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