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RISK MANAGEMENT

Risk Warning ⚠️
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Trading foreign exchange, indices and commodities, on margin, carries a high level of risk and
may not be suitable for all individuals. The high degree of leverage can work against you as
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well as for you. Before deciding to invest in foreign exchange or other markets you should
carefully consider your investment objectives, level of experience and risk appetite. The
possibility exists that you could sustain a loss of some, or all, of your initial investment.
Therefore you should not invest money that you cannot afford to lose. In some cases, it is
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possible to lose more than your initial investment as it is not always possible to exit a market
at the price you intend upon doing so. There are also risks associated with utilising an
Internet-based trade execution software application including, but not limited to, the failure of
hardware and software. You should be aware of all the risks associated with investing in
foreign exchange, indices and commodities and seek advice from an independent financial
advisor if you have any doubts
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ABOUT THIS GUIDE

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Everything in this guide was made according to our views as supreme traders zw prior to the
trades that we have taken and the overall experience in the markets. This is the first book of the
supreme traders with all information concerning Risk Management so as to help you before you
think of engaging into the trading industry.
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#sell your bed and buy your dreams

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Contact: tel 0252052971 email: chipazonline@gmail.com

Whatsapp : +263775419723
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Get in touch with the professionals and take your trading to higher levels.

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DEFINATION

Forex risk management refers to implementing a set of rules and measures to ensure any negative
impact of a forex trade is manageable. An effective strategy requires proper planning from start to
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finish, because it is not a good idea to start trading and then try to manage your risk as you go.
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Many traders who lose money trading forex fail to exercise sound risk management techniques,
although inexperience and a lack of market knowledge can also contribute to their losses if they
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are new to trading. Successful traders typically find that risk management is one of the most
important components of their trading plan.
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1.0 TRADING PLAN

A trading plan defines what is supposed to be done, why, when, and how. It covers your
trader personality, personal expectations, risk management rules, and trading system(s).
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When followed, a trading plan will help limit trading mistakes and minimize your losses.

After all, “If you fail to plan, then you’ve already planned to fail.”
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STUDY THE DIAGRAM ABOVE AND UNDERSTAND CLEARLY THE WHOLE CYCLE.
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@supremes
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1.1 WHY YOU NEED A TRADING PLAN.

You need a trading plan because it can help you make logical trading decisions and define the
parameters of your ideal trade. A good trading plan will help you to avoid making emotional
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decisions in the heat of the moment. The benefits of a trading plan include:

Easier trading: all the planning has been done upfront, so you can trade according to your pre-set
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parameters
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More objective decisions: you already know when you should take profit and cut losses, which
means you can take emotions out of your decision-making process
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Better trading discipline: by sticking to your plan with discipline, you could discover why certain
trades work and others don’t
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More room for improvement: defining your record-keeping procedure enables you to learn from
past trading mistakes and improve your judgment
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1.2 BUILDING A TRADING PLAN

Build a trading plan

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A trading plan can help make your FX trading easier by acting as your personal decision-making
tool. It can also help you maintain discipline in the volatile forex market. The purpose of this plan is
to answer important questions, such as what, when, why, and how much to trade.

It is extremely important for your forex trading plan to be personal to you. It's no good copying
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someone else's plan, because that person will very likely have different goals, attitudes and ideas.
They will also almost certainly have a different amount of time and money to dedicate to trading.

A trading diary is another tool you can use to keep record of everything that happens when you
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trade – from your entry and exit points, to your emotional state at the time.

●SET A RISK TO REWARD RATIO

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Risk-reward ratio is a formula used to measure the expected gains of a given investment against
the risk of loss. Risk-reward ratio is typically expressed as a figure for the assessed risk separated
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by a colon from the figure for the prospective reward.
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What is the Risk-reward ratio?

The risk/reward ratio, sometimes referred to as the R/R ratio, compares a trade's possible profit
against its potential loss.
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A stop-loss order defines risk as the entire potential loss. The entire amount that might be lost is
the risk. It's the distinction between the trade's entry point and the stop-loss order. The asset
category, investments and trading strategy, and economic variables impacting investment all
contribute to risk.
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The entire potential profit, as determined by a profit objective, is the reward. This is when a security
is bought and sold. The total amount you might profit from the deal is the reward.
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WHAT IS THE BEST RISK-REWARD RATIO ?

approximately 1:3
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In many cases, market strategists find the ideal risk/reward ratio for their investments to be
approximately 1:3, or three units of expected return for every one unit of additional risk. Investors
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can manage risk/reward more directly through the use of stop-loss orders and derivatives such as
put options.

SET A RISK-REWARD RATIO

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In every trade, the risk you take with your capital should be worthwhile. Ideally, you want your profit
to outweigh your losses – making money in the long run, even if you lose on individual trades. As
part of your forex trading plan, you should set your risk-reward ratio to quantify the worth of a
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trade.

To find the ratio, compare the amount of money you're risking on an FX trade to the potential gain.
For example, if the maximum potential loss (risk) on a trade is $200 and the maximum potential
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gain is $600, the risk-reward ratio is 1:3. So, if you place ten trades with this ratio and you were
successful on just three of those trades, you could have made $400, despite only being right 30%
of the time. @supreme zw +263775419723

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●SET STOP LOSS AND TAKE PROFITS

A stop loss (SL) is a price limit entered by a trader. When the price limit is reached the open
position will close to prevent further losses. A take profit (TP) works in a similar way - it
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automatically closes a position once a profit target is reached to lock in profits.
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Every trade requires an exit, at some point. Getting into a trade is the easy part, but where you get
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out determines your profit or loss. Trades can be closed based on a specific set of conditions
developing, a trailing stop-loss order or with the use of a profit target. A profit target is a pre-
determined price level where you will close the trade.
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Now we need to go deeper into this concepts. It seems any seems any process but this is part that
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takes 80% RISK MANAGEMENT.

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●Why Trade With a Profit Target?

Establishing where to get out before a trade even takes place allows a risk/reward ratio to be
calculated on the trade. Just as important as the profit target is the stop- loss. The stop-loss
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determines the potential loss on a trade, while the profit target determines the potential profit.
Ideally, the reward potential should outweigh the risk.
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While we can never know which trades will be winners and which will be losers before we take
them, over many trades we are more likely to see an overall profit if our winning trades are bigger
than our losing trades. If day trading forex and our winning trades average 11 pips while our losing
trades average 6 pips, we only need to win about 40% of our trades in order to a produce an
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overall profit.

By trading with a profit target, it is possible to assess whether a trade is worth taking. If the profit
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potential doesn't outweigh the risk, avoid taking the trade. In this way, establishing a profit target
actually helps to filter out poor trades.

●Pros and Cons of Profit Targets

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There several benefits to trading with a profit target, some of which were briefly addressed
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above, but there are also some drawbacks to using them.
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The positive aspects of using profit targets include:

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By placing a stop-loss and a profit target, the risk/reward of the trade is known before the trade is
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even placed. You will make X or lose Y, and based on that information you can decide whether
you want to take the trade.

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Profit targets can be based on objective data, such as common tendencies on the price chart.
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Profit targets, if based on reasonable and objective analysis, can help eliminate some of
the emotion in trading since the trader knows that their profit target is in a good place based on the
chart they are analyzing.
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If the profit target is reached, the trader capitalized on a move they forecasted and will have a
reasonable profit on the trade. Assuming the trader was happy with the risk/reward of the trade
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prior to taking it, they should be happy with the result regardless of whether they win or lose. In
either case, they took the trade because there was more upside potential than downside risk.
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●There are some potentially negative aspects of using profit targets as well.

Placing profit targets requires skill; they should not be randomly placed based on hope (too far
away) or fear (too close). This is addressed in the next section.
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Profit targets may not be reached. The price may move toward the profit target but then reverse
course, hitting the stop-loss instead. As mentioned, placing profit targets requires skill. If profit
targets are routinely placed too far away, then you likely won't win many trades. If they are placed
too close, you won't be compensated for the risk you are taking.
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Profit targets may be greatly exceeded. When a profit target is placed, further profit (beyond the
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profit target price) is forfeited. If you buy a stock at $6.50 and place a profit target at $6.60, you
give up all profit above $6.60. Remember though, you can always get back in and take another
trade if the price continues to move in the direction you expect.
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Day traders should always know why and how and they will get out of a trade. Whether a trader
uses a profit target to do that is a personal choice.
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Where to Place a Profit Target

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Placing a profit target is like a balancing act—you want to extract as much profit potential as
possible based on the tendencies of the market you are trading, but you can't get too greedy
otherwise the price is unlikely to reach your target. So you don't want it too close, or too far.
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Fixed Reward:Risk Profit Targets

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One of the simplest tactics for establishing a profit target is to use a fixed reward:risk ratio. Based
on your entry point, it will require your stop-loss level. This stop-loss will determine how much you
are risking on the trade. The profit target is set at a multiple of this, for example, 2:1.
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If you enter a short trade at $17.15 and determine that your stop-loss should be placed at $17.25,
you are risking $0.10 per share. If you opt to use a 2:1 reward:risk, then your profit target would be
placed $0.20 from your entry, at $16.95.
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If you buy a forex pair at 1.2516 and place a stop-loss at 1.2510, you are risking 6 pips on the
trade. If using a 2.5:1 reward to risk, your profit target should be placed 15 pips from your entry
point (6 pips x 2.5), at 1.2531.
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Fixed targets assure you are making more on winners than you lose on losers, but fixed targets
don't factor in the current price environment or tendencies within the price action. This makes fixed
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targets somewhat random. However, if you have a good entry method, and your stop-loss is well
placed, then it is a viable method.
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Typical reward:risk ratios are between 1.5:1 and 3:1 when day trading. Experiment (in a demo
account) with the market you are trading to see if a 1.5:1 reward to risk or a 2:1 reward to risk ratio
works better for your particular entry strategy.
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Measured Move Profit Targets
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Chart patterns, when they occur, can be used to estimate how far the price could move once the
price moves out of the pattern. For example, if a stock forms an intraday range between $59.25
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and $59.50, that is a $0.25 range. If the price moves above $59.50 or below $59.25, another move
of $0.25 could reasonably be expected (up to $59.75 or down to $59).

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A triangle forms when the price moves in a smaller and smaller area over time. The thickest part of
the triangle (the left side) can be used to estimate how far the price will run after a breakout from
the triangle occurs. Triangles are covered extensively in Triangle Chart Patterns and Day Trading
Strategies.
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If the price moves aggressively higher, say jumping $1 in price, and then stalls, moving in a narrow
range for a few minutes of say $0.06, when the price breaks out of that consolidation it could well
move about $1 again (either higher or lower). This is referred to as a Trade Flag Pattern.
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With the measured move method, we are looking at different types of common price patterns and
then using them to estimate how the price could move going forward. Measured moves are just
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estimates. The price may not move as far as expected, or it could move much further.

Measured moves provide a way to estimate a risk/reward ratio. Based on the measured move you
can place a profit target, and you will also place a stop-loss based on your risk management
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method. The profit potential should outweigh the risk. If the expected profit doesn't compensate
you for the risk you are taking, skip the trade.

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Market Tendency and Price Action Analysis Profit Targets
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Market tendency and price analysis require the most research and work. The benefit is consistent
performance if the trader can properly identify the market tendencies.
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All intraday price moves can be measured and quantified. Prices have certain tendencies; these
tendencies will vary based on the market being traded. A tendency doesn't mean the price always
moves in that particular way, just that more often than not it does.
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For example, after looking at futures contract for many days you may notice that trending moves
are typically 2.5 to 3 points, and those moves are typically followed by 1.0 to 1.75 point corrections.
After the price has pulled back 1.0 to 1.75 points, it then trends another 2.5 to 3 points. Depending
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on the entry point, you can use this tendency to place a profit target. If going long in an uptrend like
this, your target should be less than 2.5 points above the pullback low. Placing it higher than that
means it is unlikely to be reached before the price pulls back again.
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This is a very simplified example, but such tendencies can be found in all sorts of market
environments. Place your profit target based on the tendencies that you find.
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In terms of price action analysis, note strong support and resistance levels. Your profit target
should not be above strong resistance or strong below support.
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For example, if there is resistance at $5.25 but one of the aforementioned methods tells you to buy
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and place a profit target at $5.30, you may wish to skip that trade or revise your target to $5.24 (if
the trade is still worthwhile). If you are long, you are better off getting out just below resistance.
You can always get back into another trade if the price keeps moving above resistance. Same with

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support. If your target based on the aforementioned methods is well below support, consider
skipping that trade.

Alternatively, get out near support (if the reward:risk is still favorable); you can always get back in if
the price continues to move below support.
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Final Word on Profit Targets

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There are multiple ways profits targets can be established. When you use a profit target you are
estimating how far the price will move and assuring that your profit potential outweighs your risk.
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Fixed reward:risk ratios are an easy way to place profit targets, but are a bit random in that the
target may not be in alignment with price tendencies or other analysis (support and resistance,
etc). The upshot is that it is an easy method to implement and you always know your winning
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trades will be bigger than your losing trades. Adjust the fixed reward:risk ratio as you gain
experience. If you notice that the price typically moves past your 2:1 fixed target, then bump it up
to 2.2:1 or 2.5:1, for example.
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Measuring moves is a valuable skill to have, as it gives you an estimate of how far prices could
move based on patterns you are seeing now.
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Researching market tendencies can be tedious work, cataloging loads of price moves over many
days (weeks and months), but it can provide tremendous insight into how a particular asset moves.
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These tendencies won't repeat every day in the exact same way but will provide general guidance
on where to place profit targets.
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When starting out, the fixed reward:risk method works well. Use a 1.5 or 2:1 reward to risk, and
see it how it works out. If the price isn't hitting your target, reduce the target slightly (on all your
trades). If the price is running well past your targets, then increase the target slightly (on all your

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trades). As you become more experienced, fine-tune your profit targets based on the other
methods provided, if needed.
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#supreme zw

●MANAGING YOUR EMOTIONS IN TRADE

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Manage your emotions

Volatility in the FX market can also wreak havoc on your emotions – and if there's one key
component that affects the success of every trade you make, it’s you. Emotions such as fear,
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greed, temptation, doubt and anxiety could either entice you to trade or cloud your judgement.
Either way, if your feelings get in the way of your decision-making, it could harm the outcome of
your trades.
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How do emotions affect trade?

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It is vital to control your emotions, rather than let them interfere with your trading decisions. It has
often been said that fear and greed are the true motives behind market behaviour, but other
emotions, such as anger and disappointment are also powerful emotions that influence our
decisions.
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THE 3 MOST COMMON EMOTIONS TRADERS EXPERIENCE

Some of the most common emotions traders experience include fear, nervousness, conviction,
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excitement, greed and overconfidence.
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Fear/Nervousness

A common cause of fear is trading too big. Trading with improper size magnifies volatility
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unnecessarily and causes you to makemistakes you normally wouldn’t make if you weren’t under
the stress of risking larger losses than normal.

Another culprit for fear (or nervousness) is you are in the ‘wrong’ trade, meaning one that doesn’t
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fit your trading plan.

Conviction/Excitement

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Conviction and excitement are key emotions you’ll want to feed off, and you should feel these in
every trade you enter. Conviction is the final piece of any good trade, and if you don’t have a level
of excitement or conviction then there is a good chance you are not in the ‘right’ trade for you.

By ‘right’ we mean the correct trade according to your trading plan. Good trades can be losers just
as bad trades can be winners. The idea is to keep yourself winning and losing on only good trades.
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Making sure you have conviction on a trade will help ensure this.

Greed/Overconfidence

If you find yourself only wanting to take trades that you deem as possible big winners, you could be
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getting greedy. Your greed may have been the result of doing well, but if you aren’t careful you
may slip and end up in a drawdown.

Always check that you are using proper trade mechanics (i.e. sticking to stops, targets, good
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risk/management, good trade set-ups). Sloppy trading as a result of overconfidence can end a
strong run.
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#sell your bed and buy your dreams

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