1:1.5 Risk Management Strategy


Professional trading and risk management

Every day new Forex strategies appears, every day hundreds of people claims that they succeeded in the Forex because they make the holy strategy which can make millions of dollars and the strange thing that they want to sell it to you by 30-40 dollar, really if you search in the net about Forex strategies you will find tons of them but that’s not changing the fact that most traders lose their money in the market.

Why we lose in Forex:

  • Technical analysis is not enough :
You can read one or two books about technical analysis and then become good technical but you may read many books in technical, Japanese candles, divergence, Elliot, astrology and Gann, but you feel that you are not able to trade and if you open life account you lose all money very quickly.I mean by saying “technical analysis is not enough” that you may be wonderful technical but big Forex loser.

  • Fundamental analysis is not enough:

A lot of people knows a lot about countries finance and very careful to follow and predict the life news of counties markets, but really that’s not working because they ignore price levels and the ability for any currency to go up or down due to technical situations.

  • Forex strategy is not working well:

There are tons of Forex strategies based on classical, candles,reversal, price action ….etc and also strategies based on astrology and astronomy. A lot of strategies based on price level and little of them based on time.

Most new traders try to find the “holy strategy” which he/she think that it will be the golden egg which will make them millionaires quickly, really, that’s not logic nor accepted for any market in the world, you can spend one thousand dollar to buy “holy strategy” but you may lose all your money in one day and sometimes in one hour.

Forex strategy is not working well due to some reasons:

  1. The strategy is failed one and gives false signs or may be sometimes change its signs from up to down and confused you because it is cheating strategy.
  2. The strategy is not working by you because you can not understand the rules and the concepts of the strategy well, because you want to make profits quickly. you concentrate your thought in strategy signs -up or down- not in the concept and rules of strategy signs. Briefly you may have the 99% succeeded strategy but you also fail.

  • Impetuosity in trading Forex:
Someone knows about Forex from friend in Saturday night , then he/she reads some Technics about Forex in Sunday, then in Monday thinks that trading and making profits is easy because he/she has found great Forex strategy in the net, honestly the logic says that you are not prepared and you will lose your money quickly maybe in one hour and if you lose your money in one or two
weeks, you are lucky.

1:1.5 Risk management as solution for Forex uncertainty

Forex market is very complex and so it very difficult to predict or explain its movements but the good idea in Forex is volatility and
fluctuation, theoretically, the market goes up and down and you can make profits from these movements. practically, you can double your account in one day but lose the whole account in the second day.

Risk management is the most important tool needed in Forex because Technicals predict support and resistance areas from the past, the price respect these levels in the past but no warranty to respect it in the future, the real price is driven by liquidity and flow cash by banks and big market players.

1:1.5 Risk management strategy:

This strategy is very important especially for beginners and intermediate traders, it is simple, every trade target should be 1.5 % of
capital, stop loss does not exceed 1 % of capital, tables below indicates how this strategy will not make you out the market and your will make money very soon.

Why not 1:2 risk management:

Life trading and accumulated experience have been teaching us that 1:2 risk management is not reliable and cannot be done easily in Forex markets. It can be done easily to make trade with 30 pip stop loss and 45 as target but it is hard to make trade with 30 pips stop loss and 60 pips target.someone can say I can make successful trades by setting 30 pips as stop loss and 100 pips as target. That’s right for professional trader but for most traders, it is very practical to begin with 1:1.5 risk management and then when accumulating experience the ratio can reach 1:2 and may be 1:3.

Case study for 1:1.5 strategy:

  • Random results for strategy:
Suppose that talent trader from Dukascopy community members –with 10,1000 dollar capital- has found good technical strategy and want to respect the 1:1.5 risk management strategy, in the first week of trading , results were as table below (from MS EXCEL) :

Figure shows Table of a trader made 20 trades using 1:1.5 risk management.

From the last table, the results were wonderful, the trader made 20 trading ,13 of them hit the stop loss and only 7 trades reach the target, the trader lost 15 dollar (0.15 %) only, it is not good luck, it is risk management.

  • when strategy is considered profitable:

Someone searches everyday to find the perfect strategy, the strategy which will give 99% true entry signs to make trades, but is that necessary to make profits ?. When using 1:1.5 risk management strategy what is the accepted strategy for everyone, sure it is the one which at the end make profits. The table below shows the probability of 20 trading profits and losses – capital 10,0000 dollar- and the net capital value at each probability.


Table shows the importance of risk management

From the table, if only 8 trades from 20 trades reached the target profit your account will not lose any dollar, if 9 trades reach target
profit you begin to make gains.

So the strategy which will not make you lose money should give at least 8 true entry signs from the 20 signs which means that =8/20*100 =40 %. Yes with 40 % successive strategy only, you can make money if you respect 1:1.5 risk management.

So if you find good strategy which gives you 20 entry signs every month, you can make gains if the successes of the strategy exceeded 40 %. Professional traders may have strategies which gives 80 or 90 % true entry signs, that means that they can make 20-30 % monthly and that is very high profits nowadays.

Summary

Use any simple strategy with risk management analysis and you will make gains soon or at least you will not kicked out off the market.

Thanks for reading my article.
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