how to minimize risks
Cut Loss, Averaging Or Cut & Reverse
Identifying and managing risks are important element to a successful investment
Before deciding whether a position needs to be opened/closed, you need to know what the current trend is right now. Is it UPTREND, DOWNTREND, or SIDEWAYS (RANGE)? Once the trend has been established, you can then decide whether you want to open a BUY/SELL position and at what price based on the levels of Support and Resistance.
Few things that can be done, when price is going against your position:
You close out your open positions right now, at the current running price and realizing the losses. On the MT4 platform, double-click on the losing trade order. First make sure to choose INSTANT EXECUTION (1) then click on the yellow bar (as shown below (2)). After that position is closed, we can analyze the market again.
2 types of averaging:
1. Averaging profit
For example you have an open BUY 1.1255. When price goes up and initial position is making profit, you can add another BUY position, lets say for every 100 pips profit (1.1355, 1.1455, 1.1555 and so on). All open positions would be closed when price starts to move against you. This method is suitable for a trending market.
2. Averaging loss
This is the opposite of point 1 above. For example, you have an open BUY at 1.1255. When the price moves against you, in this case downward, you would open another BUY position at lower price, hoping to lower your average price. So when price comes back up, your position could be profitable sooner. This method is more suitable for a range-trading market. When a market is trending, the risks involved when using this method is very high because the ratios between the positions and capital available will not be healthy.
=>Buy @1.1255 1 lot
=>Price drops to 1.1155, BUY again @1.1155 1 lot
=>Price falls to 1.1000, BUY again @1.1000 1 lot
=>Current total order is 3 lot with average price of (1.1255+1.1155+1.1000)/3 => 1.1136
=>When price moves back above, lets say 1.1200, then all positions could be closed out
=>But when price fell again, then the losses incurred would be even bigger
Almost the same as “CUT LOSS”, but with cut & reverse we would close out the losing position and at the same time opening a new position which is the opposite of initial position. Example:
a. Initial position: BUY 1.1255
b. Price drops and keep dropping. Decided to do a cut & reverse
c. Cut loss the position just like in no.1 above
d. After the position was closed, double click on the market watch column and click on SELL to reverse (3)
e. Position is now SELL 1.1255 (4) and no longer BUY 1.1255
Please note that since cut & reverse must be done manually, there is a chance that prices for the reversal and cut loss to be slightly different.