In this Wiki, we are going to break risk management down into 4 distinct sections that directly impact your business. We will then look at how you can improve each of these. We are also going to start thinking of risk management as being a collection of different defences to your trading business plan.
This Wiki is a part of our larger Wiki on Risk Management. It is also part of our Essential Forex Trading Guide. Be sure to check that out HERE.
The 4 Risk Management Defences
Limiting the amount of money that you can lose on a trade is obviously a great defence to have up but there are other defences that will protect you as well. When you have all of the defences up you have maximum protection and your business is as safe as it can possibly be. When you lower your defences your business becomes more exposed and you put it at a much higher risk of failure.
This is the mindset that you need to develop so that when you decide to not use a risk management defence you do it consciously fully understanding the risk that this now exposes you to.
The biggest reasons that traders lose everything are when they unknowingly lower their risk management defences or fail to build them up in the first place. A big part of this section is about making you aware of all of the defences available and how you can go about incorporating each one into your business plan.
Before we get into each of the 4 defences we first need to have a clear plan with which to set goals.
Developing your Trading Process
Think of developing your trading process as the big picture, for not only your trading but for your business as a whole. For a trading business, your goal may be to make money but if you leave it as vague as that how will you ever know if you have reached your goals? Why do you want the money, how much do you want, and what will you do after you’ve obtained that goal? All these things are important because they will help you structure your plan and then when you have a plan you can take steps to reach your goals.
Let’s look at an example of a plan and how you can use this template to create your own.
When the author of this Wiki first started trading his ultimate goal was to be free. Free from having to work for an income, free from having to be at a certain place at a specific time, free from worrying about whether or not he had enough money to buy or do something.
Material possessions didn't really concern him nearly as much as having freedom. He already had a nice car and house but his main focus was not on buying the next best thing or material item. When he started trading he didn’t have a family to look after or any large commitments other than general financial obligations.
He personally knew traders that live for the fastest cars or the biggest house and the most expensive clothes. For them the goal is pretty simple, to constantly work their way up to afford the latest and greatest things. He also knew other traders that have families and their biggest concern was making sure that they have a stable environment for their families to grow up in and have enough money to cover all the needs of the family.
The point is that it really doesn’t matter what your goals are as long as they are clear in your head and you have a path to reaching them.
The curious thing about goals is that when you attain them you always tend to create new ones. This is good because without goals there is not much direction or point to doing anything. It’s only when you have your goals clearly marked out that you can start taking steps to attain them. When you have clear goals reaching them is inevitable if you take just one tiny step toward it every day. Consistency is the key and with that, it’s almost impossible to fail.
The first thing you need to do is have a goal. If you really don’t know why you want to be a trader and build your business then you need to take some time out and seriously consider this before going any further. We can assure you that you will be going around in circles and never really have the feeling that you are making any progress at all. After all, progress is measured by how close we are to our overall goal!
Assuming you have a goal in mind we can then start to work towards your desires and as we have mentioned before there are 4 key areas that we should incorporate risk management into if we are going to succeed. The reason for this is that we build up those multiple risk management defences that protect us at every turn. Once you have a solid understanding of your risk management defences then you can better formulate how you are going to go about obtaining your goals.
Defence #1: Money Management
Money management is the first area of risk management and is perhaps the most famous and well-covered of all the defences.
Managing your money is critical in all areas of life, especially in trading.
The concept of money management is driven by the principle of never losing all of your money on any one single trade and always being in a position to be able to trade the next day. To do this you need to have enough money in your account. This means the very basis of money management is to ensure that you never lose or even risk more money than you can afford to lose.
Leverage:
The first port of call for money management is the concept of leverage. We have touched on leverage in previous sections but hopefully, you have done enough personal research to understand that leverage is simply a way of trading with more money than you actually have in your account.
Professional traders don’t just use leverage in the market on every single trade without a lot of pre-planning and thought. The use of leverage is a tightly controlled process and there are traders that make a lot of money by using leverage but it is guaranteed that these are not just mindless trades due to boredom. These leveraged trades are carefully planned and executed using leverage to maximize the gains while there are safeguards in place to limit the losses should the trade go wrong.
The fact is that the use of leverage directly influences your level of conviction and confidence in your trades.
If you are using too much leverage your main focus will not be on the main factors that make your trade a good idea but rather on how much money you are losing as the trade goes into drawdown. This of course makes you prone to bad decisions and mistakes in your trade management.
The more leverage you use, the harder it will be to maintain conviction and clear thought when trying to implement your trade management strategy.
The other problem with leverage is that in the event of a black swan event things like your trade management plan will not help you if the market drops 40% in a few minutes. In fact, it's times like this that are precisely why you need multiple risk management defences in place.
Imagine if the markets did drop 40% as they did in late 2014 after the SNB removed their price floor on the EURCHF pair. If you were leveraged even just 3 to 1 you would have lost your entire account and then some in just a few minutes. We can’t emphasize enough how vital it is to have all of your risk management defences up at any given time. Trading without leverage is one of those defences that will protect you.
Does this mean that we can never trade with leverage? Not at all! It’s completely fine to add leverage to your positions but only when you have planned your trade perfectly and have the knowledge that if some black swan event did happen against your trade then you are probably out of the game for good.
Applying leverage now and again is ok but when you do it on every single trade eventually you may get caught out on the wrong side of a market which can be rather difficult to recover from.
Generally, we advise you to trade unleveraged and have strict risk management procedures in place to ensure that you are never over-leveraged on your personal account and especially if you are managing client accounts.
Execute each trade as per your trade plan. Many professional traders will rank each trade they take based on the level of conviction they have in that position. Any trade less than 7 out of 10 in conviction is deemed low quality while anything over 8 out of 10 is high quality.
Build the habit of applying conviction ratings to your trading. The basic idea is that you gradually start to get a really clear understanding of which trades are better than others so that you can focus on the higher-probability ones. 85% of your trades will be in the 5 to 7 out of 10 range and it is recommended that you only apply leverage to trades that have a conviction rating above 8. This is a good general guide to how often you should be using leverage in your trading which will only be maybe 15% of the time.
Another key point to keep in mind on the topic of leverage is that it’s very important that you do not become inadvertently or accidentally leveraged. This can happen in a number of ways but the following example sums it up pretty well.
Imagine that you have taken a long trade on the EURNZD pair and then later decide that the NZDUSD looks good for a short trade. What you effectively have done is taken two short positions on the New Zealand dollar. You might as well have double leveraged on one of the individual trades because if something happens in the session to really move the NZD against your position this will cause your losses to be magnified.
With all that being said, it’s not enough to simply trade unleveraged on different pairs you have to be aware of how much exposure you have to individual currencies at any given time.
The best way to approach money management is to think “what is the absolute worst thing that could realistically happen while I am holding this trade”? Then prepare yourself for that exact eventuality so that if you are holding multiple trades in the same direction on the same currency then you can plan for how you will prevent this exposure from putting your account in danger. This plan could be as simple as recognizing what you have done and cutting some of your positions. The point is that you are always aware of and protected from the downside of using leverage.
You may be thinking that if you can’t use leverage then you won’t be able to make enough money to live or reach the goals you desire. This is true and not true at the same time. Allow us to explain.
A good trader with a track record of 6-12 months at a consistent level of performance can in theory be trading 100k worth of investor or company or client money fairly soon. If you can achieve a consistent 2% per month on a tiny account of $1,000 or so people will become very interested in your trading. You might have an uncle that believes in your ability and funds an account for you or you may take your verifiable track record to a company that funds traders and start working with them.
Once the trader has a solid track record on something like 100k and has shown that they can handle managing other people’s money they are then introduced to higher net worth clients and within six months from this can very easily have several million dollars under management. Investors are hungry for consistent high-yield strategies and it is not an unrealistic target to be managing 10+ million dollars/pounds within 2-3 years of your first profitable period. Many traders choose to go the prop trading route because of its low barrier to entry.
This does assume that you can maintain your level of profitability consistently. The revenues generated from this can be substantial and more than enough to propel the lowest earning individual with the smallest account to their goals making 7 figures per year or more.
You must not have such a short-term view about trading and remember that there are opportunities everywhere for traders that can make a consistent profit over time. Patience is one of the major issues with why retail traders fail to be successful over the long run. They demand too much from the market too quickly and fail to understand that you will become a better trader over time but only if you do the correct things consistently. Tradersneed to view the business of trading the same as any other business that starts off small and continues to grow over the years.
Trading without leverage is very important but this is only one of our risk management defences. In the next section, we will look at the concept of trade management and how this can add an extra layer of protection to your trading account and business as a whole.
Defence #2: Trade Management
Trade management is another large part of controlling risk. This is another quite popular concept that we will look at now.
This concept of trade management revolves around your ability to make sure that each trade you take is executed according to your plan and is not allowed to get out of control. There are several strategies that traders use to manage their trades and we will go over these next.
It’s also important to note that these are not necessarily the best techniques or that other techniques don’t work. It’s ultimately up to you to find out what works best for your personality but these methods are tried and tested and do offer a very good strategy and starting point for your trade management.
Stop Losses
The first item that we will look at is the concept of using a stop loss. There are many types of stop losses to choose from.
Price Based Stop Losses:
A stop loss is simply an order in the market that you set when you enter your trade to get you out of the trade in the event that the trade goes against your intended direction. This is very common and hard stops should be applied to all trades that you enter.
When we use the term "Hard Stop" all this means is that it’s a fixed order that will automatically get triggered if the price hits a certain level against your position. Even if you decide that you want to give the trade lots of room to breathe a hard stop should still be placed somewhere just as a backup plan in case something happens or changes dramatically overnight or when you are not looking at your position.
This leads us nicely into the placement of your stops.
There is no mechanical way to place stops and the size of your stop will depend on many variables in play at any given time. For example:
- What is the average range of the pair that you are trading?
- Are you day trading or position trading for a longer-term move?
- Have you entered from a value level of support or resistance or did you just jump into the market at the current price after a news event?
As a very general guide day trading stops can be anything from 25-50% of the average daily range of the pair that you are trading. For longer-term trades, you could place a stop from anything from 100-300% of the average daily range depending on how long you intend to hold and what type of volatility you anticipate in the meantime.
Most professional traders use these types of stops because it gets them out of the markets instantly if the stop loss price is reached. It also helps with the psychology of trading because if you are holding a position it can sometimes be hard to internalize new information, especially if that new information goes directly against the position that you are in. By being out of the market and cutting the loss you can then regain focus and prepare fully for the next trade.
The most common type of stop is something called a price based stop loss. This is when you place the stop at a price where you feel the market will not get to if you are correct in your analysis.
Time Based Stop Losses:
There are other types of stop losses such as time based stop losses. This means that you will leave your positions open because you have a strong conviction that in a certain time period, the price will eventually move in your direction. The problem with this kind of stop is that they do not protect you from sudden changes in the market environment.
If you really want to trade with a time based stop then trading in the options market is probably a better way to go. In terms of spot trading a fixed hard stop should always be applied and this is considered one of your primary risk management defences.
Trailing Stop Losses:
Following on from the concept of fixed stop loss is the idea of a trailing stop. All this means is that you place an initial stop of 50 pips, for example, and as the price moves in your favour, you adjust that stop loss so that it’s closer to your entry point. As the price continues to move in your favour you keep trailing your stop behind the price until you start locking in some profit as the trade progresses.
Imagine if your trade was 50 pips in profit you could now move your initial stop loss so that if something happened unexpectantly in the markets you do not go from being in profit to actually losing money on the trade.
In real market conditions trailing your stop loss too quickly or too tight can lead to you getting stopped out only to see the market then take off in your intended direction which can be very frustrating. You need to be clever about how you employ trailing stops and use very specific tactics to give your trade the best chance of profitability.
For example, one of the most effective methods is leaving your initial stop loss in place until the price reaches a place where it’s actually closer to your target than it is to your entry. This is a very good place to decide if a small loss or a full loss is acceptable. If the trade is only 30 pips in profit and you have a target of 100 pips then moving the stop to breakeven is probably premature. However, if it then reaches 60 pips in profit you can then take action to reduce your risk and trail your stop with the reasonable expectation that the price will hit your target before coming all the way back down to take out your stop. If it does come back down at least you didn’t take a full loss on something that was in the money quite a bit.
Another common mistake in this scenario is moving the stop straight to the initial entry point. price can be volatile and intraday trading can involve a lot of noise as the markets move their way in the direction that you have identified. A very good tactic would be to move your stop to just reduce your initial risk rather than trying to eliminate it completely. If you were risking 50 pips and the market moves in your favour you might be able to reduce your risk to 25 pips, or example, if that turns out to be an intelligent spot to place the stop. Doing this will eliminate some of the times that the market pulls back and catches you out with normal intraday noise.
These are just some small things that can make a big difference in the performance of your stops in a real live market.
Another key to effective stop loss placement and management is your entry. Where you enter the market will make a huge difference in how big your stops are and how effective the trailing of your stops will be. We call this concept "Risk Reduction".
Risk reduction is where you base your stop on your entry and then manage it accordingly. For example, imagine if you have a solid conviction that a certain pair is going to sell off during the coming session. On top of this, you have identified a good level of resistance that is in the selling zone for the day, has a confluence of factors lining up with it including some large bank sell orders, and is also not too far away from the current price. From a trading perspective, this confluence is a level 9 out of 10 on the conviction scale.
You have a firm technical level from which to trade with the market sentiment. This means that we would be anticipating the price to react directly from this level should the price come to it. This in turn means that we can use a more precise stop loss order because if the level fails we know that we got it wrong instantly or that something has changed with the overall sentiment. The fact that we are expecting an instant reaction is also a very good thing for our trailing stops because if we get the reaction we know that this is the moment we want to be reducing our risks and taking profits.
Let’s visualize an example of this happening:
Pretend that we are trading a pair short because of a really strong sentiment. We have highlighted a level that has a perfect confluence of factors from technical levels to fundamental bank orders and then the price starts to rally up to that level. Remember, the further the price has to travel the more likely a reaction is so bear this in mind if you are trying to decide between a few different levels.
The price now reaches our level and we check that the sentiment hasn’t changed before entering the trade. As expected the level provided an immediate influx of sellers and the price now starts to fall away from the level.
At this point, we know that our analysis has been correct and need to capitalize so that we don’t lose money on a good trade. For each pip or set of pips that the market moves in your direction, you can then start to move your stop and reduce your risk by the same amount. On trades like this, the stop can be around 25% of the average daily range of the pair making it fairly tight. The increment of risk reduction can be 1, 5, or 10 pips for the trailing stop but this really depends on the pair and how much it tends to move around. The point is that you are taking aggressive action to get that risk down as quickly as possible while the trade is playing out in your favour.
We will talk more about selecting entries and taking profits later but this is just an example to illustrate the following key point about trade management as a risk defence.
The only reason you can be this aggressive is because you have selected such a precise entry point. The more precise your entry points, the more aggressive you can be with your risk reduction and trailing of stops. This also makes this particular defence stronger.
Now, this does not mean that entries are the most important factor because they are not. It is perfectly acceptable to enter a trade if you are slightly unsure whether or not it will move against you in the short term as long as you have a solid conviction that it will meet your target in the longer term. You may decide that rather than trying to be too clever or risk missing the entire move completely that you just want to be in and ride it out. This is also perfectly valid but without that precise entry point, you will then need to have a totally different approach to both your initial and your trailing stops.
To illustrate this we can visualize a completely different trade setup and while this is equally valid requires a more flexible approach to your stops.
Imagine that you are buying a pair because you have a very strong conviction based on the underlying fundamentals and you can’t be sitting at your desk all day long waiting for the perfect entry point. In this scenario, it’s likely that by the time you check the price again in a day or two, you have missed the move. Instead of missing the move you decide to get in now and you protect yourself from any short-term noise which could occur in the meantime.
On this occasion, your stop would need to be much bigger to allow for this. The method you use for adjusting your stop would also need to be less precise. It would be better to leave the stop in the initial position longer and then when you decide to trail it you do so only when the price has reached a point where it is closer to your target than your entry. So rather than you using technical levels to base your management on you will use much more general things like overall prices you feel the pair will not get to instead.
This concept of risk reduction should always be carried out with the following mantra in mind:
- What is the best way to reduce my risk as quickly as possible without limiting my ability to make a profit?
Just because you can move your stop loss to break even when you are up 15 pips, doesn’t mean that you should move the stop at that point because most of the time you will get whipsawed out of your trades using stops that tight. When managing a trade this way it means that the good trades wind up yielding nothing but the bad trades always become losses full losses. This can only mean an overall loss over time on your account.
As you can see that not paying close enough attention to every one of these details can hamper your trading and increase the risk of you losing money overall. This all needs to be carefully considered and taken very seriously.
Firstly, you should always have a stop. Secondly, how you manage that stop depends largely on the type of trade you are taking.
Entries and Exits
As we have looked at already, it is not just stop losses that can be used to help lower your risk in the area of trade management. Entries and profit exits are also extremely important to keep your overall risks in check.
Your entry will determine how much drawdown you are likely to suffer and will also give you a clear picture of how you expect the trade to play out. If you trade from a really high probability level then you will expect an immediate reaction from that price and know much quicker if your analysis has been correct and if the trade is going to succeed.
If you jump into a longer-term trade based on a pullback of the fundamentals this makes it much harder because we don’t know how long the pullback will last, when the fundamentals will come back into play, and what you will do if some strong sentiment appears out of the blue. These are much trickier to deal with and the point of this section is to make you aware of the fact that they will alter the amount of risk your trade is exposed to.
Your exits are just as important as entries because if you are not taking your profits then it doesn’t matter how good your trade is. You will lose money in the long run.
When you are thinking about where to take your profits you can use technical areas where price has already produced a reaction from. For example, if you are long on a pair, unless you have a really strong conviction that the price is going to break the most recent extreme highs and keep going then you should consider taking profits just before those recent highs. Expecting more from the market without a really strong reason to believe it will keep moving beyond an extreme would be foolish and you may give back a large portion of your profits on that trade. The same is true in reverse if you are selling and targeting the lows.
The reason for this is that if the price has already traded from a level recently it’s likely that when it pulls back and approaches the same level again it’s reasonable to assume that traders will be attracted to that level again. Even if it only holds up the price temporarily, do you really want to be up 50 pips only to watch the price come all the way back to your entry level? From a purely psychological perspective, this is a bad idea for your mental health as a trader.
Along with your initial stop loss and any risk reduction strategy you may have, you should always have a clear target that gives you a high probability of banking some profit which over many trades will result in an overall profit. If you have no target then you have no way of banking profits in a consistent way and if you do not have that then it will be very hard to remain profitable and consistent over the long run.
You can bank 2 pips when you see it but are you going to win on enough of those trades to counter your losses to make it a profitable strategy overall? You can also decide to hold for the long term and ride out any short-term sentiment and bank a much larger gain than you were risking which is fine but it also poses the risk of the market turning against you and exposing you to any number of unforeseen events occurring to rob you of your pips . You can't predict unforeseen events that may move the markets.
Both taking profits too early and waiting to take profits too long can increase your risk of not making an overall profit. Having said that, risk and reward on one trade is not something that you should get overly concerned about because what matters is if you are profitable over a sustained amount of time and trades.
It is not impossible for traders to scalp the market using a risk/reward ratio of 1/1 or less and become very profitable traders. While other traders manage millions of dollars taking a longer-term view of the markets and going in with risk/reward ratios of 1/3 or greater. Therefore, it really doesn’t matter what you do, the key is that your overall trading plan and execution result in a net profit.
We genuinely prefer to have all the defences up and that means trading from good levels within clear parameters riding sentiment that is strong and that lasts the entire session. But if you are a longer-term trader you will not have all of these luxuries so you must make up for that by being stricter in other areas such as money management, using less leverage, or opening fewer positions at the same time. Remember, when you lower one risk management defence you must do it in a knowing way and not because you have been sloppy or careless in your trading. You must then make sure that the extra risk you are exposed to is offset as much as possible by the other defences.
Hedging
Sometimes traders will use a hedging strategy where if the market is going against them they will accumulate a total of three trades as price moves against them. If the market continues to go further against them they will hedge all the positions with one new order. These traders will then wait for the market to get back to where the last trade was put on and close the hedge position with the thought that the market will now move back in their favour.
If the market moves against them again they will re-hedge at the same levels as the previous hedge with the same plan as before. If this happens more than twice it is usually best to close the trade altogether because it is clear that the trader has missed something in their analysis.
Although this is a valid strategy to use it’s also sort of like refusing to admit you are wrong and taking a stop loss. Sometimes the best remedy for a bad position is to simply get rid of it and live to fight another day.
Hedging is a bit of a tricky subject. There are many ways to hedge in the Forex market. It is an advanced subject that should only be taken on by experienced trading professionals who have been through many market conditions and have the trading skills to guide them through a hedge trade.
Defence #3: Self-Management
Self-management is all about managing yourself as a trader and as a person so that you can operate to your maximum efficiency. This section relates heavily to Trading psychology and has a huge amount of overlap. The reason that we are talking about it now is to express and ingrain into your mind the importance of self-management and how if you neglect it then you are basically removing a key risk management defence that can protect your business from harmful losses.
Managing yourself from a trading perspective all starts from the moment you start learning and training to trade the markets. For example, if you are learning to be a brain surgeon would you try and get the information that you need from free forums, blogs, or websites like Wikipedia?
You probably could find all the information you need. Surely spread out over the entire internet there is all the information that is required to become a brain surgeon. However, there are 2 major problems with this.
- First is that you don’t know what you should be looking for in the first place making it impossible to filter the good information from the bad or outdated information.
- Secondly, the source of that information is completely unknown making it even harder to make those distinctions.
No one would try to find all of the knowledge to be a brain surgeon for free on the internet and the same should be your view when learning to trade.
Learning to trade some complicated technical system from some so-called “guru” is not even on the same planet as learning how to trade from an institutional trader that learned how to trade at a professional trading firm, following their guided institutional trading program, while being taught by successful traders and coaches. So your first step is to ensure that your learning continues from credible sources in a structured and proven manner which you can do by learning from all the very large Wikis we have put together. The authors of these Wikis all worked for professional firms before moving out on their own.
The next step is your ongoing research of the markets and this comes down to using the correct tools that will give you an information advantage. Finally, you will need to dedicate yourself to practicing religiously the concepts and skills you have learned so that over time your performance will improve.
This all sounds straightforward but most new traders, particularly retail traders, tend to go around in circles looking for the next best system or strategy that will do all of the work for them and make the process of trading easy. Well, trading is not easy! It is a skill just like any other and trading professionally is just like any other profession.
When you start out any new career you wouldn’t be given the opportunity to be the CEO of the company on day one. You would start at a much lower level and work your way up from there as your skills and knowledge of the industry expand and improve. The same is true of trading and being profitable. You simply don’t start off as a millionaire; you have to work your way up to that. You need quality training followed by relevant practice and experience which takes time and dedication to get to the highest levels.
The next key mistake that new and retail traders make is to stop their self-management. This is probably the biggest killer of new trading talent. In order to perform at the highest level you obviously need knowledge and experience which many traders have in abundance but the third key piece to this puzzle is a conscious awareness of your state and having some kind of structured process for reaching your best performance state.
This concept was covered quite well in the previous Wiki on Trading psychology. The main theme here is that you need to be trading in the zone in order to perform at your peak. You will never do this if you don’t take decisive steps to improve your Trading psychology and find your perfect state. This is not something that you learn and then everything is perfect from then on. Rather this is something that you carry on doing for your entire trading career. The simplest way to do this is to allocate some regular time with a professional trading coach who can work with you to help you develop the processes and mindset into regular unconscious habits. This one habit alone will put you light years ahead of almost every other trader anywhere.
The reason self-management is such a key defence is that if you are not focussed or if you are not trading in the right state then you are directly increasing your risk of losing money through bad decisions or thoughtless actions.
The overall theme of self-management is being self-aware at all times, knowing what you should be focussing on to improve your trading performance, and finally, implementing knowledge from credible sources in a focused manner. We suggest that you regularly review the Trading psychology and also incorporate personal coaching into your routines if you can find one.
Defence #4: Environment Management
Your environment will have an impact on your overall performance which in turn can increase your risk of losing money so it is worth spending some time taking a look at this section and the things you can do to improve your trading environment.
The first and most obvious is the location and layout of your trading office. If you are on a trading floor then you will have all the tools that you need at your disposal such as TVs that display financial news throughout the session and audio squawks also being broadcast for everyone to hear. A lot of professional traders prefer this type of environment because it keeps them in the loop of the action and tuned in fully as to what is going on, not to mention being surrounded by other professional traders.
The key to your environment is that it’s conducive to being able to focus on the market and tune into what is going on. This means that your desk is clear of clutter, your office is clean and tidy, and there are no obvious distractions that will make you lose focus. Make sure that the room you are in is a comfortable temperature and that the lighting is as substantial and as natural as possible.
This brings us to the trading desk. Generally, we recommend between 2 and 6 screens for your station because less than 2 makes it a little harder to stay on top of what is going on while more than 6 can encourage information overload which is just as unproductive.
A standard 3 screen setup will generally display a real-time news feed with an audio squawk and text headlines filtering through, a trading platform with all open positions and charts visible, a research screen where you can tune into the markets and catch up with things you may have missed without losing your view of what is going on and happening in the short term. The research screen will be where you look at things like articles, blogs, and analyst posts. If something happens it will be squawked and you will be right there to react as necessary.
Having an awareness of what is going on around you is also a form of risk management and if your environment is conducive to allowing you to tune in to the prevailing sentiment or volatility then you will also lower your chance of losing money. If you are correctly tuned in then you have a much higher percentage chance of actually taking the correct trade or avoiding any volatility that may be happening which reduces losses and increases your bottom line.
Having a trading desk setup that not only allows you to see this information clearly and quickly but also helps you stay focussed and concentrate is another risk management defence because its ripple effect will have a very real impact on your overall performance. If you are in a poorly lit room or an open part of your house, constantly being distracted, your chair is really uncomfortable, you are trying to operate on an old one screen laptop that keeps freezing up then you are lowering this defence and exposing your business to completely unnecessary risk.
Another advantage of working on a trading floor is the fact that you get to spend time with like-minded traders and get to sit in on the daily briefings and share in the analysis with your peers. On a physical trading floor, the goal is to always have the desks compact and close together so that traders can discuss the markets and get the benefit of the common view. Some online prop firms offer virtual trading floor as part of their service as well.
If you are not on a trading floor then it’s good to use the many instant messaging services such as Skype to build a contact list full of traders so that you can discuss things throughout the day. If you have a trade or are unsure of something having this group of traders as part of your environment will also help you stay on track. Even just an online network of traders is better than nothing at all.
As you can see, environment management can be fairly important. Although on its own, will not make the difference between you winning and losing, the impact instead will be on helping an already profitable performance or reducing the number of negative trades you suffer. But when you combine environment with everything else in these sections you will end up with a formidable risk management setup and if applied correctly will guarantee that your business will remain solvent and any losses are tightly controlled to keep you in the game your entire trading career.
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