Recently, we had an article discussing the risk to rewards of trading. Risk is a huge part of trading and in unavoidable. But how can we reduce and manage the risk that we have in the FOREX markets? There are certain strategies such as the Wobble Technique that Shawn Lucas teaches that minimize risk, and there are also more defined ways such as setting up stop losses closer to the trades.
Let’s first look at what Apiary Fund and Trader on the Street do about risk. Alveo, the trading platform used by Trader on the Street and Apiary Fund, has built-in risk rules that trigger certain events to prevent certain things from happening. The first of these risk requirements that's important to note is that no single trade can lose 2% or more of your account balance for the day. An important note on this is that it looks at the balance at the start of the day, not the current balance. So, if you increase your account 10% from $10,000 to $11,000, you still can’t lose over $200. Knowing what your balance was at the start of the day (00:00 GMT) vs what it is now is important in monitoring your risk.
The second risk rule that Alveo uses is not being able to draw your account down over 5% in a single day. If the total risk in your account hits -5%, then your trades will all be closed and your account will be on hold until the next day (00:00 GMT). This hold that prevents trades is meant to be a reflection period where you can see what caused the drawdown and you can retrace your trades with the plot trade scripts or the drawing tools combined with your trade history. The hope is that your strategy will improve from there in terms of closures and stop losses and take profits.
Now, that it's known what Alveo in specific looks for risk-wise, what can we do to mitigate that and manage it better. Certain strategies can reduce your risk. You can trade Shawn Lucas’ wobble technique and be in multiple trades at one and use a hedging strategy to reduce your risk. Or, on the other hand, you can use a non-hedging scalping technique where the trades aren’t open long enough to pose large risks.
If you're utilizing a longer term strategy, then backtesting and proper stop losses and take profits are going to be the mitigating risk factors. Backtesting, regardless of long-term or short-term strategy, will help. It's just more of a risk managing skill in longer term. Knowing the average movements in the market and what leads up to those historically will help be more accurate with the future moves of the markets.
A primary tool is trying new things on a pair that isn’t going to whipsaw you out of the market in a minute without any news. Attempting new strategies and assessment tools are best done on the less wild pairs until you have developed a full picture of what the strategy entails. From there, you are able to move onto more risky pairs with the notion of reduced risk due to repetition and practice of the strategy.
Making sure you're comfortable in the markets is key to reducing your risk. The constant fear that individuals have of trading can cause complications in the trade and increase the potential for loss. So, on top of these factors, having confidence without cockiness helps further reduce potential loss and helps to lead down a more successful trading path like that of Shawn Lucas and other professional traders.