Ask yourself…
1- Can the risks to your business be identified, what forms do they take and are they clearly understood - particularly if you have a portfolio of activities?
2 - Do you grade the risks faced by your business in a structured way?
3 - Do you know the maximum potential liability of each exposure?
4 - Are decisions made on the basis of reliable and timely information?
5 - Are the risks large in relation to the turnover of your business and what impact could they have on your profits and balance sheet?
6 - Over what time periods do the risks exist?
7 - Are the exposures one-off or are they recurring?
8 - Do you know enough about the ways in which you exposures can be reduced or hedged and what it would cost including the potential loss of any upside profit?
9 - Have trading and risk-management functions or decisions been adequately separated?
Where to place stops
We stop out of a trade when we no longer want to hold onto that particular position. The question that arises is: WHY do we want to get out of that trade?
There can be 2 reasons for stopping out of a trade. EITHER the market tells us that our intrinsic View or Directional Assessments itself was wrong. OR we stop out of a trade (even if we still believe in our basic Bullish or Bearish reading) because we think we can establish another position at a better level than the previous one.
The effort should be to choose a meaningful SL which is neither too close to the entry to get activated soon after entry (only to have the market go back in the original direction thereafter), nor so far away from the entry that we have no time or space left for follow up action.
The difficult part about the paragraph above is that it requires us to have a Trading Plan or Strategy and to choose our Entry much more carefully than we tend to do, in accordance with that plan.
Follow through action required we come back to the reasons for wanting to stop out. In the first case, when our directional reading has been proved wrong, we should look to enter into a trade in the opposite direction - a case of Stop-and-Reverse (SAR). It needs to be pointed out here that it is NOT necessary to SAR at the same instance and level all the time. If you are an intra-week (or longer) trader, you can enter into a reverse trade after stopping out of the original trade, allowing yourself time to reformulate your strategy
© Forex Trading Academy.
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