It must be personal to your strategy
What is the number one reason we lose money trading FX?
Risk Management is not simply a theoretical subject that we can put in place once we decide how our trading strategy is going to work It should be an integral part of the strategy. I may sound flippant or glib, but risk management should be based on risk.
Obvious isn’t it but consider what I mean by that comment. It is not sufficient to say my stop loss will always be ten pips or twenty pips or even fifty pips if you don’t understand the risk of the underlying currency pair.
The volatility of the asset is vital to the consideration. Also, the setting of the “other half” of an order is not a mathematical calculation. It is not correct to say “OK I can see two hundred points upside in this trade, therefore my stop should be eighty pips lower than the entry point. So much should be taken into consideration. The stop loss is the mainstay of the risk management. It is the amount you are prepared to risk. Two hundred pips may well be the upside potential, but does that determine the risk you should be prepared to take? No!
Live to fight another day
If you can’t trade, you cannot make money and if you have had a losing run (it happens to us all) then you feel pressured to make it all back as quickly as possible. This pressure can lead to poor decision making as the road ahead looks long and just getting back to where you started feels soul destroying.
Of course, the other side of the argument is also true. We can have periods where we seem able to do no wrong. That can be almost as dangerous as the sense of euphoria can lead us, again, into poor decision making. By altering risk management parameters as we “have more to play with” is not only foolish it is a “cardinal sin” of trading.
A “purple patch” can happen at any point but it is more dangerous, the sooner you meet it in your “trading life”.
Making twenty pips every other trade and losing fifteen on every other trade illustrates a poor strategy but at the end of the day, you will have made a profit. That is more desirable than any greater risk and it should be remembered that a profit is a profit so look at your indicators and analyse why the losers lost.
Don’t be fooled into thinking you have discovered alchemy as in this market it is the trader who “takes his medicine”, runs his profits and stops himself out early who lives to fight another day.
Why are brokers pushing Crypto?
Most brokers offer a wide range of assets that we can trade that, by and large, fit into our view of risk management while treading Crypto’s certainly doesn’t but, more importantly, cannot.
I will use Bitcoin as a proxy but what I say here can relate just as easily to Bitcoin cash, Ethereum or any other liquid coin.
First, they do not react as we would expect a fiat currency do, to news, data or technical analysis. We are relying on finding a seller willing to sell to us and since we will only be buying if we consider the market to be either rallying or about to why would he sell to us, that can create a squeeze. The same is true if the market is moving in the opposite direction. If we want to sell we see the market falling as will other traders so a panic can start and given the nature of trading Bitcoins that is a much more serious issue since most will be playing from the long side, certainly in the short term.
If you want something different to trade look at gold or oil or cocoa, they may be occasionally volatile, but they at least obey the rules!