Forex Trading Articles

CONSISTENCY IN RISK CONTROL

By Vic Noble for Forexmentor.com
© 2007, Currex Investment Services Inc.

Jan 17, 2007

Over the past week or so we’ve discussed the importance of applying consistency to your trading, and we’ve identified 3 key areas that really require your attention. First, we talked about how important it is to be consistent in how you approach the markets, and that it’s important not to be oscillating between trading systems and technical indicators, forever in search of the Holy Grail.

Next, we focused on the importance of consistent execution of your trading plan, without hesitation, when a viable opportunity does present itself. This means being patient and waiting for truly good set ups and not just trading because of a need for action—yet being fully prepared to enter a trade with confidence and conviction when there is a good trade set up. And we noted that it’s extremely important to be even-keeled emotionally, meaning that we don’t have a big hysterical reaction win or lose.

Today we’re going to examine the area of risk control. Most traders I’ve worked with tend to gloss over the area of risk control. I’ll tell you an interesting story that I found quite sobering when I heard it. I was a futures broker for many years for one of the largest futures trading companies in the world, and while I was there I had that unique opportunity to see how people handled their accounts. We had many forex clients as well, and in talking with the head of our forex department one day, he gave me some facts that really floored me. He told me that in ALL of the company, the average opening account size for a forex client was about $5000 USD, but, and here’s the shocker, the average life of that account was…about 3 months! Sound familiar? Well if it does, you’re among a majority. I’ll tell you one thing right now. If you only risked a VERY small percentage of your account on any one trade, and you consistently risked the same percentage of your account every time you could not possibly lose the $5000. Not possible. How would you feel about having most of that money back?

So what happens to these people? Well they don’t actually have a business plan at all. What they have is a get rich quick mentality, and obviously we know where that ends up. Typically what would happen is someone would sustain a pretty substantial drop in their account, but instead of trying to figure out the problem, it was not uncommon to see the client “double up” the next time to make it back. Well, one of the fundamental truths of trading is that the market is always right—always. You will NEVER “teach the market a damned good lesson”—it’s the other way around.

But here’s the irony; by keeping your risk very small, you can still realize exponential returns on your capital! And by controlling your risk properly, you will be able to handle a string of consecutive losses and not have it devastate your account. And you will have a string of losses, you can count on it. The question is, will you be able to handle it, both financially and emotionally?

When I do a coaching session with clients, I always make them a 100% guarantee. If you ignore the fundamentals of good risk management, you will, for sure, lose your account. You may get lucky for a while, but it won’t last. That’s a 100% guarantee. Hey, everybody likes a guarantee, right? How do you like that one?

The other glaring problem that people have is in their stop management, including initial stop placement and stop movement. There are all sorts of goof-ups that happen in this area. Some traders have their stops too tight and others way to far away. And so they try a different stop placement almost every time they trade! How random! Or maybe they have a bad habit of jamming their stop up to break even far too quickly for fear of losing any money, only to get stopped out for no gain, and then to see price take off just the way they knew it would—without them! Ouch.

And of course there’s the other group that cannot stand the thought of being wrong (again), so they start moving their stop further away as price gets close to it, to give the market “a little more room”. Double ouch.

So here’s the challenge to you. Commit to managing your money in a consistent and professional manner. Why would you not? Prepare yourself so that when you go into a trade, nothing bad can happen. It’s a mind set that is so very powerful, because by having that extreme confidence that no matter what happens, you will be fine, then you can go into a trade without worry or fear. You can approach trading with a financial and emotional detachment from the outcome of the trade. And that is a very powerful place to be trading from.

Thanks traders. I truly hope that in these last 3 articles I’ve been able to effectively articulate the vital importance of consistency in your approach, execution, and trade management.

Until next time, keep your risk under control at all times, and…be consistent!!

Vic Noble
Forexmentor Personal Coach
http://www.forexmentor.com/coaching/

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