Yes, the Forex market is not characterized by a gap up, gap down, therefore the STOP level can be more easily planned, as it is usually executed where we planned it.
One of the big advantages of the Forex market is the more balanced price movement. There is no gap, or it occurs in very extreme and rare cases.
But what do we call accurate, pre-defined risk management?
We call it this: If you determine in advance that the maximum loss of a position cannot exceed 1% of your total invested capital. This is a healthy level of risk. It is sufficiently conservative, but it contains sufficient potential for growth. There's no mystery in this. It is not that hard to determine this, but it can be hard to comply with it.
Think about it, when do people lose their money? Not when they follow the pre-defined, correctly specified rules. They lose everything when they are driven by two basic emotions: fear and greed that emerge during trading. This is the most difficult to work off. I did not incidentally start my Trading Psychology Blog column with the article which shows that 90% of successful trading is psychology and only 10% of it is technique. If you have been trading the markets for a couple of years, you can understand and feel the truth of this statement.
Risk management protects you from making wrong, emotional decisions. If you can maintain this one, you have bigger chance for a successful career on the stock market than 99% of the novice traders.
It is not too difficult - you can invest max. 1% of your total capital in one position. To give an example, if you have $100,000 with which you trade, you should risk up to $1,000 on one position.
There are two ways to do this. Here is an example of the first method: You open a position on the Forex market and invest the total $100,000, but you enter the stop level to close your position at $99,000. This is a simplified example, of course. As I mentioned, in case of Forex, the STOP is usually executed at a guaranteed level. If you want to play the same thing on the stock market, the paper in your 100.000 stock position may suddenly open with a gap down, and your market stop order is executed at a price of 90,000.That is, you lost 10% of your total capital at once. I would not call this Risk Management.
The other method is provided by the options market.
Anyway, what are the differences between the regular and the options market?
The answer is very simple. In the options market, you can determine the level of your maximum loss with the help of various strategies. Examples include but are not limited to the following:
- Long Call: you can lose the amount you paid for the Call
- Long Put: here you can lose the amount you paid for the Put
- Bull Call Spread: you can lose the amount you paid for the spread
- Bear Call Spread: The maximum loss is the amount of the margin requirement arising from the credit spread.
ou can find the detailed description of the strategies in the Options Strategies section. Here I would not detail all of them. What I would like to emphasize again is the risk that can be accurately determined in advance!
Do not forget - if you have not done already - determine the level of risk your account can tolerate and risk only this amount on one position! This is one of the most important directives that exists in the trading world!
Lessons learned:
- Invest a predetermined % of your capital in a position.
- he options market allows a planned, pre-defined determination of the risk level.
By Gery Nagy, optionsrules.com
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