One of the key preconditions for making a stable profit in the financial markets is seamless risk management. There is a common belief among novice traders that success in exchange trading depends on having a highly-profitable algorithm or some secret strategy. That being said, experienced traders are aware that a profitable strategy is not enough if you don’t have a solid money management system.
Trading in financial markets is associated with increased risk: losing your money here is a lot easier than making it. However, a huge advantage of trading is that the risks can be efficiently managed, unlike those in traditional business.
Given the aggressive market environment where big players are fighting for profit, an individual trader has to learn to protect his or her deposit. Virtually, the one who doesn’t lose the money in the market can be considered successful. It may sound less alluring than hearing promises that you will make billions in the stock exchange, but being aware of this will help you profit.
Experienced traders can attest to the fact that you can make money in the market only provided you have and strictly follow a trading algorithm when opening the trades. The profitable trading strategy and seamless money management should lay the foundation for the said algorithm.
It is vital to have clearly outlined rules for entering and exiting positions, calculated risk/reward ratio per trade and volume you open a position with. If the statistics of this algorithm usage proves its profitability, all you have to do is just stick to it.
There is another essential aspect which has a major impact on the trading outcome. It is a trader’s mental state, especially if you trade without using robots. According to the experts’ estimates, the overall success depends on the ability to control emotions by 80 %. More often than not, the human factor is what undermines the effectiveness of the entire algorithm.
Let’s assume that you have a trusted trading strategy that helps you find profitable trades. By using the tools of technical and fundamental analysis, as well as the Volume Indicator, you are able to identify the most accurate entry points.
Aside from that, you use the Trader's Calculator to calculate the volume of trade entry in order to ensure that the potential loss does not exceed the preset size. Having carefully done all the necessary prep work, you open a trade, place a stop loss and take profit orders. It may seem the only thing left to do is sit back and wait for the outcome.
Pro traders know for a fact that this only appears to be simple from a theoretical perspective, and also before a position is opened on a real account. This is, however, typically followed by what a handful of people openly speak about, for admitting own inability to control emotions is embarrassing.
No matter how rational and cool-headed you think you are, the emotions you experience when managing money are a big influencing factor. And there is nothing odd about this, for this is how we are wired: out of 24 emotions, only one accounts for logic. That’s why the stock trading veterans claim that it is impossible to assess the market situation after opening a trade. Because of this, even professionals tend to lose money.
If the price moves against an open position, you might be tempted to move the stop loss or remove it altogether. If you get losses, you may wish to double the position and “bounce back”. On the flipside, after you made profit, euphoria is likely to push you to violate your own rules which may potentially lead to not only the loss of the money made so far but also the entire deposit.
So, how do you get a grip on your emotions? Is it possible to tame them using the willpower alone? If past experience is anything to go by, the only thing that can be effective here is having an unbiased external factor, and this is where Risk Manager for MetaTrader4 trading terminal comes to the Forex trader’s rescue.
Skilled market players know that a lot of energy goes into getting emotions under control. Due to this, the quality of work eventually drops, exhaustion takes over and you lose attention to detail. This is why process automation is so popular, particularly when it comes to trading.
While the use of a trading robot in order to automate your algorithm has many hidden pitfalls, the automation of the risk management process is something you can't go without. Let's take a closer look at how it’s done.
For starters, after having tracked the mathematical expectation of your trading strategy and factored in the terms of the trading account (leverage, minimum lot size, deposit size) and trading style (intraday, swing, position trading), you need to determine the maximum allowable risk per trade.
That is best done in a percentage of the deposit. Typically, the risk per trade should be 1-3% of the deposit in case of intraday and swing trading. The smaller, the better. It is also recommended to set maximum allowable risk per day, week and month, after reaching which you put your trading on hold for a while.
Second of all, you have to find software that automates the fulfilment of the aforementioned terms. Gerchik & Co has come up with a special algorithm allowing the customers to get the risk management process under control. You can download the Risk Manager for MetaTrader4 trading terminal by logging in to your Personal Account on the company's website and use it absolutely free of charge.
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How to get the most out of this algorithm
After you set it up in your Personal Account, the risk limitation will be automatically applied to your trading account which will help protect the deposit against the loss.
To do this, all of the terms and conditions of risk management that you have worked out based on your trading strategy and money management rules have to be transferred to the window of the Risk Manager settings.
After saving them, you can be sure that the rules you have set for yourself being of sound mind and body, before you have opened a position and emotions have taken over you, won’t be violated.
So, what should you enter in the settings? For starters, enter the size of the maximum risk per trade. You can set it both in the deposit currency and as a percentage. If you wish to open a position with a lot that is larger than the preset one, the trading terminal will simply not let you do this.
Aside from that, you won’t be able to set a stop loss order, the size of which with the selected lot exceeds the established risk threshold. Even if you are dying to do it or emotions are running wild, the established algorithm will serve as your common sense.
In addition, using the Risk Manager brought to you by Gerchik & Co, you can set the maximum total risk per day. And once you reach it, the trading will be blocked automatically.
If you are trading in the black and have already made some profit, setting the risk limit on daily profit will prevent you from sending it down the drain in the heat of the moment. This means that if you decide that you cannot lose more than 20% of daily profit, the algorithm won’t let you open new trades till the end of the trading day when you reach this threshold.
It is also recommended to set the size of the maximum monthly drawdown, while limiting your losses in the course of a month. If you reach this threshold within a week, you will have to cool down and abstain from trading till the end of the month.
Aside from the risk expressed in percentage, you can use a limit on the number of losing trades. These parameters are often used by scalpers and intraday traders who open a lot of trades during the day as a part of their strategy.
So, if you are scalping, make sure to set a limit in the form of three losing trades per day, whereupon the trade will be stopped automatically, your negative emotions won’t have an impact on further trading outcome, and you will be able to take a break and recover.
All these parameters will help to protect your trading account against excessive loss, mitigating the impact of emotions on the result of trading. To achieve that, all you need to do is outline money management rules, download the Risk Manager by logging in to your Personal Account and enter limiting values you would like to set.
On top of it, you can also restrict trading regarding those instruments that lead to the biggest losses based on the statistics of your trading strategy, or which you cannot open trades in due to their high price.
As can be seen from the above, the time and energy saved thanks to risk management automation can be channeled towards improvement of trading strategy’s profitability and finding the best entry points, while Risk Manager safeguards your account for you.
Successful traders know one simple truth: you cannot always control how much money you make in the market, but you should always control how much you lose.