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Best Practices & Risk Management

Having the best fundamental analysis in the world means nothing without proper execution and risk management. This guide covers the professional habits and risk control principles that will help you preserve capital and grow your account consistently.

The Foundation: Risk Management​

Rule #1: Never Risk More Than You Can Afford to Lose​

This isn't just a platitude—it's the difference between trading and gambling.

Per-Trade Risk:

  • Conservative: 0.5% - 1% of account per trade
  • Moderate: 1% - 2% of account per trade
  • Aggressive: 2% - 3% of account per trade (experienced traders only)

Example: $100,000 account

  • Conservative (1%): Risk $1,000 per trade
  • Moderate (2%): Risk $2,000 per trade
  • Never exceed 3% ($3,000) under any circumstances

Why This Matters:

  • With 1% risk, you can survive 10 consecutive losses and still have 90% of your account
  • With 10% risk, you're broke after 10 losses
  • Markets can remain irrational—you need staying power

Rule #2: Position Sizing Based on Stop Loss​

Many traders pick arbitrary position sizes. Professional traders work backward from their risk limit.

The Formula:

Position Size = (Account Risk Amount) / (Stop Loss Distance in Pips × Pip Value)

Example:

  • Account: $100,000
  • Risk per trade: 1% = $1,000
  • Planned stop loss: 80 pips
  • Pip value: $10 per pip (1 standard lot for most pairs)
Position Size = $1,000 / (80 pips × $10) = 1.25 standard lots

Never choose position size first. Always start with your risk tolerance and stop loss placement.

Rule #3: Maximum Concurrent Risk​

Having proper per-trade risk is good, but you also need to limit total exposure:

  • Maximum concurrent risk: 3-6% of account across all open positions
  • If you risk 1% per trade, don't hold more than 3-6 positions simultaneously
  • If positions are highly correlated (e.g., all Risk-On pairs), reduce concurrent exposure further

Example of Hidden Risk:

Position 1: Long AUD/JPY (1% risk)
Position 2: Long NZD/JPY (1% risk)
Position 3: Long CAD/JPY (1% risk)

Actual risk if Risk-Off event occurs: ~3% in highly correlated positions

This is why Market Sentiment monitoring is critical—it helps you understand correlated risk.

The Three-Timeframe Approach​

Fundamental analysis tells you what to trade. Technical analysis tells you when.

Recommended Approach:

Higher Timeframe (Weekly): Fundamental Direction

Medium Timeframe (Daily): Trend Context

  • Is price in an uptrend, downtrend, or range?
  • Are you trading with or against the technical trend?
  • Where are major support/resistance levels?
  • Confirm fundamental bias aligns with price action

Lower Timeframe (4H): Entry Timing

  • Wait for pullbacks in trending markets
  • Look for breakouts from consolidation
  • Use reversal patterns at key levels
  • Fine-tune entry and stop loss placement

Example:

  • Weekly: Fundamentals are bullish for AUD/JPY (Strong cross-pair score, positive intrinsic divergence)
  • Daily: Price in uptrend, recently pulled back to support zone at key moving average
  • 4H: Bullish reversal candlestick pattern forms at support with decreasing bearish momentum
  • Action: Enter long with stop below support

Advanced Risk Management Techniques​

1. Scaling Into Positions​

Instead of entering your full position size at once:

Initial Entry: 30-50% of planned size

  • Test the waters
  • Confirm your analysis
  • Reduce psychological pressure

Add to Winners: Scale up if trade moves favorably

  • Add another 25-30% at first profit target
  • Final portion if trade continues
  • Ensure total position doesn't exceed risk limits

Never Average Down on Losers

  • If stopped out, accept it
  • Re-analyze and wait for new setup
  • Averaging down turns small losses into large losses

2. Trailing Stop Strategies​

Once your trade is profitable, protect those gains:

Fixed Trailing Stop:

  • Move stop to breakeven once trade is 1R in profit
  • Trail stop by fixed amount (e.g., 50% of initial stop distance)

Structure-Based Trailing:

  • Trail stop below swing lows (for longs) or above swing highs (for shorts)
  • More flexible, allows trade to breathe
  • Better for capturing extended moves

Time-Based Exits:

  • If fundamentals change (e.g., Market Sentiment reverses), consider exiting
  • Weekly News Sentiment review may signal changes
  • High-impact events on Economic Calendar may warrant protective action

3. Partial Profit Taking​

Don't feel pressured to exit entire position at once:

Example Strategy:

  • First Target (1.5R): Take 50% off, move stop to breakeven
  • Second Target (2.5R): Take 25% off, trail stop on remainder
  • Final Target (4R+): Let remainder run with trailing stop

Benefits:

  • Locks in guaranteed profit
  • Reduces psychological pressure
  • Allows for big winners while protecting capital

Common Trading Mistakes & How to Avoid Them​

Mistake 1: Overtrading​

Symptoms:

  • Taking trades with weak confluence (3/7 or 4/7 setups)
  • Forcing trades without strong fundamental alignment
  • Trading pairs you don't have strong conviction on

Solutions:

  • Set minimum criteria (5/7 confluence minimum)
  • Only trade when multiple fundamental indicators align
  • Remember: Not trading is a position
  • Focus on quality, not quantity

Mistake 2: Ignoring Correlation Risk​

Symptoms:

  • Holding multiple similar positions (e.g., all JPY crosses)
  • Assuming diversification when positions are actually correlated
  • Being blindsided by sentiment shifts

Solutions:

  • Always check Market Sentiment before adding correlated positions
  • Limit exposure to single currencies (no more than 3 pairs with same base/quote)
  • Consider correlation when calculating concurrent risk

Mistake 3: Moving Stop Losses​

Symptoms:

  • Moving stop loss wider to avoid being stopped out
  • Turning predetermined stop loss into "mental" stop loss
  • Stop loss has been hit multiple times, but you keep adjusting it

Solutions:

  • Set stop loss based on market structure and fundamental invalidation points
  • If you're consistently being stopped out, reassess your stop placement strategy
  • Moving stop loss to avoid loss undermines your risk management
  • Only move stops in your favor (trailing stops on winning positions)

Mistake 4: Ignoring Fundamentals Mid-Trade​

Symptoms:

Solutions:

  • Weekly review of all open positions vs. current fundamental conditions
  • Set alerts for major news on currencies you're trading
  • If Market Sentiment reverses significantly (e.g., +70 to -50), reassess all open positions
  • Be willing to exit with small loss if fundamentals invalidate your thesis