Page 5 - Module 6 Costly mistakes

Module 6 – How to avoid costly trading mistakes

5. money management the complete picture

The starting point of each trade
Let’s start by pinning down some key facts around the entry point of your trade. Assume that you
enter a long trade (buy) at $100 with a stop at $90 and a Take Profit of $120. With maximum risk of
$10 and a potential profit of $20 gives the trade a Reward:Risk Ratio of 2:1.

Risk adjustments as price change

Price move into profit
When price moves into your favour, the distance between your Stop Loss and your entry increases,
and the distance to the Take Profit level
decreases. In real time this mean that your
Price moves up to $110, your stop is still at $90 and Take risk ratio becomes smaller.
Profit still at $120. The results equate a complete reversal
of your reward:risk parameters, which is now 1:2 A smaller Reward:Risk Ratio implicates
that the potential loss becomes greater. In
this example the trader now risks $20 - $10
of which are unrealized profits – to make an additional $10.

As the trade keeps moving in your favour the risk parameters become worse with every trade, as
you risk giving back unrealized profits and the additional amount you can make based on your Take
Profit level.

Treat unrealized profits as if they are already yours. Do not risk giving it all back just to make a little
bit more.

Price moves against you
Price falls to $95 with a Stop Loss still at $90 and Take
Profit at $120. The Reward:Risk Ratio is now 5:1. At the At this point you need to decide whether the
same time the price need to move much further - $25 long trade is still valid. The additional distance
instead of the initial $20. price must move is something most traders do
not consider, but it impacts the conditions of
the trade.

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