It’s easy for beginners to get confused after they enter into the markets. The ultimate reason is that they don’t have a set of rules to manage their trading strategies.
Here are a few key points for you, which can help you better manage your opening positions.
Limitation on Leverage Use
Many beginners are too aggressive in the sense that they put too much bet in the game. If the market reverses, or the brokers raise margin requirements in the event of a big move, or even just before the holidays, investors’ positions may become vulnerable to the “margin call” or even “margin out”.
For example, if investor A puts $3,000 into a trading account, he can open 1 lot of gold on a margin of $1,000. Let’s say long position, there is only about $2,000 left for “defense”. The MT4 platform will show a 300% “margin level”, whereas in general, brokers’ margin policies may need investors to keep the “margin level” at 100% or above before the holidays. If gold price drops by more than $20 before the end of the weekend, which is quite common (especially some economic data released), investor A could be exposed to margin call or even forced liquidation.
Investing is not gambling. good capital management can extend the life of investment. Set a leverage ratio, typically 10 to 20 percent of your capital, to avoid excessive position holding. In the case of $3,000, the used margin should not exceed $600. That way, you don’t have to worry too much about “over trading”.
Set take profit and stop loss
Many traders may leave the market nervously if the market reverses a bit and later feel regret “for missing the chance”. More often than not, investors are reluctant to admit the mistake when loss occurs, which could lead to huge loss.
It is unrealistic to dream of taking profits at the very top or to think that an unfavorable market trend will end one day. Therefore, it is important to plan before placing the orders, even though the 24-hour forex market allows investors to enter and exit at any time.
Stop loss settings vary depending on your risk tolerance. It is recommended that you lose no more than 5% to 10% of your account capital per trade.
There are two ways to take profit. The first is a fixed take-profit setting, where the price level can be adjusted according to different methods, such as expected profit, trading signals, etc.
The second is a trailing stop. For the positions with certain profit, investors can track the market closely using a trailing stop to ensure that when the market suddenly reverses, your profit can be protected.
Undoubtedly, understanding how to set up a stop loss and take profit is knowledge in itself, which requires traders to practice for a long time.
Set a “profit/loss” ratio (reward/risk ratio)
The profit/loss ratio refers to the ratio of pre-set targeted profit and targeted loss before entering the market, which is very important for beginners. Proper profit/loss ratio make it easy for novices to assess whether a trade is reasonable or not, and may reduce the risk of the trading strategy, and make the investment journey more sustainable.
For example, if an investor is going to long gold at 1900(USD/oz) with a take profit target of 1910 and a stop loss target of 1895. The expected gain is $10, the expected loss is $5, and the profit/loss ratio is 2:1. A greater expected gain than loss simply means the trade is worth investing in. On the contrary, trading strategies are difficult to sustain in the long term when the profit/loss ratio is 1:2 or even 1:3.
Finally, investors should note that an objective result can only be obtained when the profit/loss ratio is aligned with the support and resistance levels derived from fundamental and technical analysis. Otherwise, too much wishful thinking will make the profit/loss ratio meaningless, neither reducing risk, nor increasing profits.
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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.