Updated from its original posting on 2011-11-25
In forex trading, it is very easy to get lost in the game. You get on your trading platform, try to get some pips, and in the process you usually forget the most basic risk management practices. Here are five ones that are usually overlooked.
1. Check you orders… then double-check your orders!
Electronic trading has made it very easy for traders to execute trades. However, because of the ease and simplicity of electronic online trading, the chances of erroneous commands also rise significantly. Having a well-thought-out trading plan would be useless if you do not correctly input your orders.
In May 2010, the financial market experienced a huge crash due to a “fat fingers” event. A trader in a large trading firm mistakenly sold $16 billion worth of future contracts instead of just $16 million.
Other traders who saw the order thought that something big was about to happen, so they sold too. This resulted to a collective intraday drop of $1 trillion in the U.S. equity market. Needless to say, the trading firm, as well as those holding on to stocks, lost a lot of money.
Double, triple, even quadruple-checking your order is very important in avoiding costly and unnecessary blunders. Make reviewing your commands part of your routine. It will just take a couple of seconds of your time!
2. Always have a trading plan.
You’d think that all traders would have a trading plan by now. I have talked about having a trade plan many times in my previous blog posts. Unfortunately, a lot of traders still trade impulsively.
There are traders who trade completely on emotion and irrationally get into trades without thinking it through. At the very least, you should have a plan on where to enter or exit your positions. By doing so, you limit disastrous emotional reactions to adverse price movements.
3. Take profit on your winning trades.
Another commonly overlooked risk management practice is taking some of your profits off the table while the price action is still in your favor.
I know it’s tempting to ride a trend with a full position all the way to your profit target, but taking off a part of your position limits your exposure to potential volatility. After all, the saying “The trend is your friend… until it ends” didn’t come from nothing, did it?
Let’s take the STA strategy or any other scaling technique for example. Let’s say your trading plan calls for adding to your original position and moving your stop loss after a certain number of pips. If you take some off of your position midway, you may at least end up with a small win even if that trend suddenly reverses on you.
4. Take a step back from trading.
Do you feel like you’re in a trading rut? Are your fundamental and technical biases off more often that you’d like to admit? If you said “yes” to these questions, then you probably just need to take a little time off from trading.
What’s good about staying away from the markets completely is that you’re not emotionally invested in any position. This usually allows you to reset and see market themes and chart patterns from a renewed point of view. And sometimes, a break will help you realize what you did wrong in your last couple of trades.
So take a step back, try to resist the lure of pip-making for a while, and you’ll most likely come back with a refreshed mind and a new and improved trading plan.
5. Withdraw money from your account.
While turning a couple of thousand bucks to a multi-gazillion trading account is a big confidence booster in trading, it’s still advisable to withdraw some of your money regularly. For one, additional capital usually exposes you to impulsive decisions like trading with larger positions or overtrading.
Unless your trading goal calls for increasing your position sizes or your number of trades, withdrawing some of your money is one of your best bets at limiting risk. Besides, haven’t I told you often enough that being a consistently profitable requires your focus on the process and not on profits?
Take some of your moolah from time to time; take a vacation with your partner or your friends; buy something fancy for yourself, and enjoy the hard-earned fruits of your labor.