The Importance of Risk Management

This week was another sub-par week in the trading for me. I learned a lot from the ones I lost this week, and I really believe that next week is going to be my best week of trading ever. I made 7 trades this week and was only profitable on 2 of them, but because I kept my risk low in relation to my profit goal, I ended only being down a few pips overall. Considering that I was 2/7, I’m pretty pleased with a small loss on my account. Check out my trading journal to see all seven trades. On this post, I am only going to show you my biggest winner– the only reason I didn’t get killed this week–and my biggest mistake–the one that kept me out of profit for the week.

On this trade, I had a suspicion that it was on it’s way up. It consolidated for about half a day and when I got an hourly candle good enough for me to have confidence that it was making its move, I went long. I set my limit at about 80 pips which it easily hit in the next few hours, and actually a couple hours after I closed out, it spiked about 60 pips higher. The great thing about this trade was that my stop was set at about 18 pips below my entry, so my risk was less than 25% of my target profit. It was because of that ratio that I was able to lose more trades than I won and still have an okay week.

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This trade was a mistake. I really believed the EUR was going to rise against the USD, and rightly so, but I was trying to stick to my risk/reward ratio too much and put my stop at only about 15 pips. As you can see the pair consolidated a bit and took out my stop before rising about 100 pips; if I had made my stop a bit more reasonable I would easily hit my target on this trade and been profitable for the week.

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This week was all about learning the importance of risk management, and the balance you need to have as a trader. You can’t be too crazy and have your stops hugging every entry or you’ll be taken out of almost every trade, and you can’t be too lenient or your losses will be huge. It’s a fine balance that I will have to work on perfecting, but I believe I have learned a lot this week and will have a great week coming up. Thanks so much for following and please share any successes or mistakes you’ve made this week, or of course, any comments you have on the post. Please follow me on twitter to see what trades I am looking at daily!

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Winners Edge Trading was founded in 2009 and is working to create the most current and useful Forex information and training available on the internet.

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