Forex Risk Management Tools
Trade Risk Management – Rule of Three
Would you like to discover a risk management strategy that is fast and simple easy to apply to any trading plan, and has the potential to vastly improve results? Excellent!
I'm not talking about the placement of stop losses, which is what most people think of as "risk management." Rather, this is a simple tool to manage risk in its trading business.
effective trading requires focus and discipline. There are many external factors that can disrupt your focus, and destroy your discipline, such as:
– A connection reliable Internet
– Your graphics platform losing its signal
– A knock on the door
– The telephone
– A crying baby
– The hunger
– Notably too hot or cold
– Fatigue (hopefully from late night trading study, instead of alcohol and party-induced fatigue)
And as if that's not enough, there are many internal factors that can also disrupt your focus, and destroy your discipline, which leads to making decisions and actions based on emotion, rather than follow his trading plan documented. No doubt you have experienced some of these already. The internal factors include such things as:
– The hesitation in entering a turn triggers an entry price
– Duda-out when the price hits your stop loss
– Doubts about the entry after entering trade
– The fear of exiting your stop loss
– Worry about how you will explain another loss to their partner
– Any thoughts about an early out of this trade, only to compensate for past losses
There is much more, but hopefully you get the point.
A defect in the plans trade of many is the absence of a valid strategy for managing these risks. Therefore, we will fix this situation.
The problem is that traders have no guidelines as to:
– When the risk is justified us back our trade,
– When to make a commercial break and management the issue or
– When to ignore it and continue trading.
The way to do this is through a strategy of risk management very simple, performed by Shell, a global group of energy and petrochemical companies. Obviously not created for use in the trade – I just found that works really well in this environment. (Yes, I know what you're thinking – I'm a nerd risk management!)
What we have to do is first rate their current trade as members of a green, amber or red status. Think of a traffic light. GREEN indicates that all is well. This is the trade that you want the environment. RED STOP is a state requirement. AND AMBER is a warning that you need to be prepared to stop.
What I would like to keep in mind is RED document conditions within their trading plan. This could include things like:
– A reliable Internet connection
– Your graphics platform which is losing the signal (when they have no choice)
– Due to less fatigue than six hours of sleep the night before, or more than four consecutive nights with less than eight hours of sleep (this is for customizing their own needs)
These are the mandatory criteria STOP trading. Beside each of these risks is necessary to define actions to take. For example, how will you manage mapping platform down? If you are a long term trader, this may not cause too much stress and actually can be a place of AMBER RED – its stops can be in the market and is likely to have other options for graphics. However, if you are a day trader operating in small time frames, this is clearly a criterion RED. You can choose to manage this by contacting your agent by phone and closing all positions.
Therefore, for each risk is defined as RED simply a procedural document to handle the situation. And when one of these conditions comes as trade, we carry out our procedure, then cease operation until the condition is gone.
Now, everything else is not as serious as a red, but can still influence our trade, is an AMBER. The problem here is, as mentioned before, when justified stop, or when you simply must continue with our business?
The Rule of Three strategy risk management is limited to establishing that if you get three or more AMBER conditions then that is also an automatic shutdown. At that time, you may leave for the day and head to the golf course, or manage your amber to green and resume trade.
Therefore, if your baby is teething, and just does not stop mourn their partners despite attempts to comfort her, and you just suffered their second defeat in a row and is now hesitant entry trigger – which is three pieces of amber.
Curbing the trade!
Before continuing, be sure to control their risk of re-GREEN, or at least less than three pieces of amber. It may take a little break to review their two losses and confirm that the settings are valid, review of trade statistics to confirm that two consecutive defeats is normal, and carry out a short relaxation session and display. If you are braver than I am, you might also ask your partner to get the baby out of a unit (ask nicely though!)
If you are satisfied that you have achieved by now the situation back to less than three pieces of amber, or ideally completely back to green, then you're right to start trading again. Otherwise, take the day off. Sometimes a complete break "AMBER three 'of Negotiation is a skill.
While we all hope that our trade will occur within a totally green, life is simply not the case. Rule Three risk management strategy that provides a simple guide for when enough is enough – and have to leave either completely or reduce some of the internal or external risks. Try it and see if it helps in your business as much as it does in mine.
It's simple:
– GO GREEN is
– AMBER CAUTION and
– RED is STOP, but
– 3 pieces of amber are equivalent to a RED. Stop or manage trade pieces of amber to green.
Happy (Green Hope) negotiation,
Lance Beggs
© Copyright 2008. Lance Beggs. All rights reserved.
About the Author
Would you like to learn more about how I trade the forex and equity index markets? Check out the articles, videos and trading resources on my website right now at
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Forex Trading Strategy – Overlooked Aspect of Risk Management