Many people will tell you that risk management is essential, and I AGREE; however, the common method of training people how to manage risk is using a standard risk amount like 1% or 2% per trade.
Here are five reasons why I don’t think that makes any sense.
- Traders are streaky.
Every trader knows that sometimes you are in the zone and sometimes you aren’t. With standard forex risk management, you do not get rewarded for being in the zone, and you punish yourself more than you need to when you aren’t in the zone.
- Different Scenarios means Different Rules
If you place a stop on the previous high or low of a 4 hour candle, your stop loss could be 25 pips or 100 pips. Why would you trade with much bigger size just because your stop happens to be lower? Why not just take advantage of the fact that you can risk less on that trade and still have the chance to hit a nice profit?
- Sometimes you need to add to a trade.
Many successful traders like to add to losing or winning trades. If your strategy includes any kind of scaling in or out, you can forget the standard risk per position methodology because you’ll spend more time trying to figure when and if you can add to a position according to your risk rules than you will trading.
- Open Trades?
If your rules are standard risk per position, what happens if you have several set-ups? Do you just not take some of them, or do you expose yourself to 10 percent or more risk on open positions?
The idea of standard risk strips away common sense and discretion. If you have some trades open, depending on whether they are winning or losing or whatever, you can make an executive decision on whether or not to take an additional trade and how big that trade should be.
- Confidence Level
Winner’s Edge Trading, as seen on: