RISK MANAGEMENT DETAILS TO CONSIDER

Hello how are you!!. This week, we decided to give you a number of details that you should consider if you are looking for good risk management.

Usually people can find training or "consejitos" by the network you are going to say anyway ... "never risk more than 1-2% per transaction." Mean that it will be quiet. It seems that if systematically on each transaction 1% risk, the benefits are "alone". You and I know that this fat lie ... and that is as far from reality.

Really what this statement is intended to make you see, and this is useful if you should have quite limited and preset the maximum risk you take when you enter the market. There is a clear policy of risk management. What happens is that, as always, the thing is not so simple, and should take into account a lot more than simply choose and say ... "there will come 1% in this business."

The reality is that we should look in more detail, and you always have to look beyond what we risk an operation.

I will list a number of details you have to prefix if you want to take a correct and professional management risk:

1- GROUP SUPERVISION: learn to take into account the correlation between different financial instruments when you enter the market. What we mean by that? This simple but vital.

No instrument or currency in this case behaves like a island. In other words, all currencies are linked and interconnected in one way or another. The reality is that there are many factors to consider in risk management, but really it is of vital importance, and the general ease with which traders, in particular fans, tend not to take consideration.

The correlation between the currencies in some cases can be very high. What does that mean? If a currency in a given period is higher, and has a high degree of correlation with each other, both will end up.

The correlation is measured by a number from -1 to +1. 0 indicates that these two currencies are absolutely uncorrelated, ie they move completely independently. If the number is high and close to 1 positive movement very similar and in the same direction. We say that the pair are directly correlated. If the number is high in absolute value close to -1, but in this case we will say that currencies move very similarly in the opposite direction. In other words, if the other goes down. We say they have inverse correlation.

For indeed, it may happen that the two currencies are highly correlated directly into higher time (4 hours, days ...) but in the short-term correlation is much lower or even important. So it is interesting that we consider the correlation but given the time of your trading because perhaps no correlation in the newspapers, but daytrading or scalping and in this period there is no significant correlation between two or three currencies that you want to run. But you should know.

Ok ... and what it has to do with the management of risk ??.

Very simple. For example, the work of the EURUSD in 15 minutes, it gives you input your methodology and decide to risk 1% of your account. After seeing with great enthusiasm that the system will again provide feedback on the cable GBPUSD decide to risk 1% also in this new operation while the other is open.

If you have not checked the degree of correlation for low delay between the EURUSD and GBPUSD you can do mangarrán because, without knowing (the worst is ignorance) makes you risk 2%. Why? and because there is a correlation between them from 0.94 to say something, if it goes against you the other also most likely it will not thereby lose 1% to 2%, but were Planning. The ideal would be to check the correlation prior to the second cable and if it is high not shoot like crazy.

If you system usually gives you more inputs by both pairs, which tend to have a strong correlation, you must consider the risk to each pair must be reduced so that the sum of total risk Maximum correlated pairs 1 -2% of your account balance (or risk your base yourself). So if you are a good risk management that refers to correlations.

2 STOP STOP OR PORTFOLIO: Even working simultaneously with non-correlated assets, sometimes when things tend to "twist" you realize that everything starts going against you. You do not understand very well how you plant, but with some positions without eating or drinking all started to go against despite not having a priori a correlation between them. Unfortunately, this happens more often than I would like.

In these situations, you must have a stop or stop predefined portfolio portfolio. It represents the overall high risk of your open trades can reach a maximum. If I have 5 open positions, each of which takes a risk of 1% of my portfolio stop is 1 * 5 = 5% of the account balance. In other words, if everything goes wrong lose 5% of the balance.

The idea of ​​this concept is that I define in advance what my maximum total portfolio risk. If my maximum total risk of the portfolio is 10%, the combined risk my open positions should not exceed 10% of the balance.

To define what is my optimal portfolio stop I have to take into consideration the quality of my trading system. If you have a bit poor trading system and set a high stop portfolio 30%, it is clear that're playing with fire. Rather, it seems pretty clear that this will sooner or later run. However, if your system is excellent trading might not be so crazy to have a top stop portfolio.

In general, most systems should not have a stop over 15% of the portfolio. If you also do not risk your main benefits but the figure should be much lower.

3 QUALITY OF YOUR ACTIONS CURVE: Ultimately what really defines what you can in your trading risk is the equity curve. The shape and softness or no equity curve defines the leverage and thus the risk you can take.

A growth curve with significant capital withdrawals becomes much more dangerous risks assumed.

However a smooth growth curve will assume greater influence and can no longer risk per trade.

4 POSITION SIZE ACCORDING TO THE TYPE OF BUSINESS: Sometimes, depending on the type of business that you develop, you may take short-term jobs and long-term at a time and in the same financial instrument or related financial instruments.

In short-term or intraday for example, you could be risking 0.3-0.5% of the capital, while in swing trades may risk 1-2% of the capital.

In any case, you should consider the combined risk that these staking adding short-term risk positions with long-term ones. Every detail counts when making adequate risk management.

5-daytrading POSITIONS: If your approach to trading is intraday, for example, you must establish special techniques in defining your risk management.

In daytrading, it is very easy to lose large amounts of money very quickly if they are not clearly established the maximum daily losses. It is on the other side very easy to fall into the overtrading.

To cope with a daytrading with adequate risk management, you must set the following parameters:

-Maximum Number of positions that can take in a day

-Maximum Number of positions that can keep open at a time.

-Loss Daily maximum force you to stop your trading.

There are many ways to distribute the maximum daily loss and not everyone has that define the same way. What is important is that whatever your business model is perfectly preset so that nothing is left to chance.

With these points, we gave brushstrokes that if you look, you will notice that your risk management is much more efficient and professional