As a Forex trader starter, how can I do a highly efficient market and risk analysis before trading?… This is a good question because most retail traders give insufficient consideration to risk management.
Assuming you have identified an edge so that you have a trading strategy with a positive expectancy, you need to consider the variability of your trade performance to choose a position size.
A Simplified Process To Follow
Even if you have positive trade expectancy, too high a position size will result in you wiping out your account during the inevitable account drawdowns. The optimal position size to manage risk is often far lower than what most new traders realize.
So step by step, here is a simplified process to follow:
- Trade using only a demo account until you establish at least 3 profitable months out of 4.
- Define your drawdown tolerance. This is the most you are willing to lose from your trading account before you give up and quit trading, or go back to the drawing board.
- Use an online risk calculator (a risk of drawdown or risk of ruin calculator) to determine your risk per trade, using your demo account trading performance, and your drawdown tolerance as inputs.
- With the stop losses that you used in your demo trading to reach your positive trade performance, and the risk/trade that you selected using the online risk tool, calculate your position size to use in your trading when you open a live trading account.
Forex is a simple tool. When you have developed your own trading strategies; apply them. Know your exit and entry point. There are two ways traders look for entry and exit: fundamental and technical analysis. With these you know when to exit and when to enter.
Remember : trading goes with experience in the field, not just a day or month learning but years of constant practice.
Good luck in your trading, and don’t underestimate the long term risks. Most people fail at forex trading, and those that succeed usually blow up their first account because they don’t understand the risks.