The most critical part of any type of investing, is understanding your personal risk tolerance. Without a good comprehension of this, you will not only tend to over extend yourself but also jeopardize your capital base. There are many different types of trades you can make on the Forex, each possesses its own risk parameters and these will closely relate to your risk tolerance. Then there is your trading approach, conservative, moderate, and aggressive.
Initially you may decide to trade a day chart. The pip movement over a day can be hundreds of pips, so when you protect your position you have to assess what your drawdown risks are. If your money management dictates a 3% funds exposure, you will find problems on day charts unless your account is significant.
The 5M or 30M charts maybe more appropriate since the pip movement tends to be less, so your stop strategies can fall within your management margins.
Yes, we all want increase our wealth from out trades, but jeopardising ones account to wide stop positions and excessive draw-downs is going to clean out your account and trading career in no time at all.
An avarage risk level is 3% or $300 on a $10,000 account. Convert this to pips, 1 standard lot ($100,000) has a pip value of $10 so if you trade end of day and your stop loss placement, whether count-back or support and resistance or any other, indicates a 100 pip stop position, then you are not risking 3% but 30%! Three reversed trades and your account has vaporised!
An aggressive trader is willing to take riskier trades that a conservative trader. They will expose bigger sums or money in riskier trades with the hope of achieving larger returns – often over longer trading time frames but they may still use the similar strategies for shorter times as well. Very much the ‘crash and burn’ trader.
So where do you consider your trading style to be? Are you a disciplined trader with appropriate money management and risk rates, or a trader that will take exaggerated risks for big gains? If you are the latter, you will not be trading for long, that’s a guarantee.
If any of this leaves you a bit uncertain, you need to gain some knowledge, so commence your Forex training with Top Dog Trading, you will learn an enormous amount and it will help you trade with safety to win pips not risk everything.
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