Managing Risk

Managing Risk and Rules of Trading DAX n’ DOW

Preparation Before Trading

 

  • Make a note of any forthcoming Economic Events representing  High or Medium importance.
Reason – Economic Events of High or Medium importance can affect the markets either positively or negatively
 
  • Set timer on phone for all todays forthcoming important Economic Events – High Priority especially

Reason – Setting the timer on phone will act as a reminder and provides a warning to refrain from trading during these possibly volatile times that may include temporary trend reversals

  • Determine the trend by viewing Daily, 4 Hourly and Hourly candles.
Reason – Always BUY when the market is trending UP and SELL when the market is trending DOWN
 
  • Always trade with the overall trend and not against the overall trend

Reason – Trades are more likely to correct themselves and move into profit, when trading with the trend and not against the trend

 

  • Only trade when STRONG Correlation between DAX n’ DOW
Reason – There is normally a strong correlation between DAX n’ DOW and if there is not, then avoid trading
 
  • Place Horizontal lines on 1 Hour Chart to show Support and Resistance Levels
Reason – Clearly marking previous Resistance and Support Levels will help to identify best trades
 
  • Only consider a trade when there is a similar window for Profit on both DAX n’ DOW
Reason – If there is not a similar window for profit, on both DAX n’ DOW then avoid trading
 
  • Only consider a trade with a minimum of x 2 Five Minute Candles in the same trending direction 
Reason – A minimum of x 2 Five Minute Candles in the trending direction will help to confirm the trend and probability of profit
 
  • Only consider a trade when there is a high level of momentum, avoiding squeezes and times of low trading volumes
Reason – High trading volumes produce high levels of momentum. These allow for a quick entry and a quick exit with much lower risk levels.
 
  • Use RSI (Relative Strength Index) and identify probability of average trading range between 30 and 70
Reason – The RSI will help to identify the average trading range and when trades are within the average trading range, this is the safest zone with less risk.
 
  • Analyse the market for 30 minutes before placing first trade
Reason – Study all the market factors to make a clear and accurate judgement of possible trading opportunity
 
  • Track all trades using MyFXBook to monitor overall performance

Reason – MyFXbook will provide total analysis of your trading results and performance. It will help to keep you accountable and on track towards your overall goals.

Total trades and Trade frequency

 

  • Finish trading when total daily income goal achieved

Reason – Overtrading beyond your daily income goal, leads to overtrading and greed. This increases level of risk and increases likelihood of losses.

  • 3 Trading Sessions – First 4 hours, Middle 4 Hours, Last 4 Hours

Reason – Each trading session is likely to be different. A rising market in morning, could be followed by a falling market in afternoon, followed by a rising market in evening.

  • Set timer on phone to mark start of all 3 trading sessions

Reason – Important to treat each trading session differently. Until the trading session has been established, do NOT assume a continuing trend. Trends often reverse in the next trading session.

  • Only trade more than one trading session, if you are behind with your daily income goal and maybe recovering previous losses 

Reason – Trading beyond your daily income goal is adding un-necessary risk, especially when the daily income goal has been achieved.

  • Always maintain daily trading discipline and trading strategy

Reason – The rules of trading and managing risk, have been created to provide a trading strategy that increases the probability of profit, whilst reducing possibility of loss and protecting account balance.

Placing Trades

 

  • Prepare to place first DAX trade, no sooner than 90 minutes after opening of Frankfurt market

Reason – The initial opening values of a market are relative to the overnight movements of other markets. For example, DAX opens relative to Asian market trading and trading of DOW.

After 90 minutes, the new market will have established a genuine trading pattern and trend.

 

  • All trades are 1 lot per €1000

Reason – Trading with 1 lot per €1000 will limit any potential losses to manageable levels.

 

  • Trade mostly DAX as lower risk and lower margin requirement

Reason – DAX is typically less volatile than DOW. The DAX also requires less margin to open a trade. This means the peaks and troughs are more manageable on the average account.

 

  • Only have 1 trade open at anytime

Reason – Daily and Monthly income goals can be achieved with just one open trade at anytime and just one open trade at anytime lowers the risk level.

 

  • Place x 2 Pending Orders with a 2 point gap between

Reason – Planning X 2 Pending Orders with just a 2 point gap between, means your trades should open and close reasonably quickly.

 

  • Use Pending Orders for Only 7 points TP (Take Profit)

Reason – Just x 2 Pending Orders that close in profit, with 1 lot per €1000, will produce about 1.4% capital growth on your account balance.

 

  • When using SL (Stop Loss) Set 100 points SL

Reason – Using Stop Loss is always optional, however, it will protect your account from total loss and unlimited losses.

 

  • After closing X 2 Pending Orders, Do NOT open any further trades until next trading Session.

Reason – On a trending market, the market is likely to move at least 100 points or more. The law of probability states that the odds are more than likely, that when following the trend and catching moments of high trading volumes and high momentum, that it is more than likely, that just 2 trades can be opened and closed before a trend reversal occurs, or a new mini trend or major trend develops.

 

  • Normally a maximum of 6 closed trades per trading day

Reason – Based on the set criteria of this trading method, the following can be achieved –

1 winning trade = 7 points, approx €7 per lot, approx 0.7% capital growth

 

2 winning trades = 14 points gain, approx €7 per lot, approx 1.4% capital growth

 

3 winning trades = 21 points gain, approx €7 per lot, approx 2.1% capital growth

 

4 winning trades = 28 points gain, approx €7 per lot, approx 2.8% capital growth

 

5 winning trades = 35 points, approx €7 per lot, approx 3.5% capital growth

 

6 winning trades = 42 points, approx €7 per lot, approx 4.2% capital growth

Losing Trades


  • Stop trading for the day whenever Stop Loss closes a trade

Reason – Losing trades always affect the emotional state negatively, so always best to take a 24 hour break, before trading next time.

  • Aim to recover trading loss, by dividing the trading loss, by remaining number of trading days in month and increasing daily income goal accordingly to recover 
Reason – Recovering just 100 points on a losing trade, means you need to increase your daily points gain, in order to recover and in order to stay on track with your income goal.
 
Example – If there are 10 more trading days, simply divide 100 by 10 = 10
 

Therefore, for the remainder of month, aim to increase daily points gain by an additional 10 points.

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