Page 19 - NOT FOR SELL SIBUSISIWEFXupdate_Neat

RISK MANAGEMENT

There are Three Basic Questions that every Trader should Answer BEFORE Entering any Trade:

How much do I believe the market will move and where do I want to take my profit?

Limit Orders allow traders to exit the market at profit targets. If you are short (sold), the system will
only allow you to place a Limit Order below the current market price because this is the profit zone.
Similarly, if you long (bought), the system will only allow you to place a limit order above the current
market price. Limit orders help create a disciplined trading methodology and enables traders to walk
away from the computer without constantly monitoring the market.

How much am I willing to lose before I exit the position?

A Stop Loss order allows traders to set an exit point for a losing trade. If you are short on a currency
pair, the stop loss order should be placed above the current market price. If you are long on the
currency pair, the stop loss order should be place below the current market price. Stop loss orders
help traders control risk by capping losses. Stop Loss orders are counter-intuitive because you do not
want them to be hit; however, in the long-run you will always be happy that you placed them!

Where should I place my stop loss and take profit?

As a general rule of thumb traders should set Stop Loss orders closer to the opening price than take
profit. If this rule is followed, a trader needs to be right less than 50% of the time to be profitable.
For example, a trader that uses a 30 pip Stop Loss and 100 pip take profit needs only to be right 1/3
of the time to make a profit. Where the trader places the stop and limit will depend on how risk-
adverse he/she is. Stop Loss orders should not be so tight that normal market volatility knocks the
position out. Similarly, take profit should reflect realistic expectations of gains, given the market
trading activity, and the length of time one wants to hold a position.