The constant mantra in FOREX trading educational resources is about risk management.

Risk management is critical; there's no doubt about that.

But risk management is not the dog in trading. It's only the tail.

The dog is winning, not learning how not to lose, and so the thrust of this post is to simplify the risk management process to make a hard and fast rule that you simply stop out of your position when it goes 8 pips against you.

The following is a discussion on this from my short 50 page book FOREX Trading: A Scalper's View:

Risk then becomes a non-issue for the competent end view focused person, regardless of their pursuit. It's not that risk is ignored, it's just that risk simply becomes part of the overall process of winning. There is a wonderfully telling statement that Samuel L. Jackson says in the marvelous 1993 movie Searching For Bobby Fisher:

"Where'd you learn that? From your teacher? He didn't teach you how to win; he taught you how not to lose. That's nothing to be proud of. You got to risk losin'. You got to risk everything. You got to go to the edge of defeat. Never play the board. Always play the man."

Thus, in the scalper's mind, it's not about managing risk that is center stage in the mind, it's going for the other guy's throat. As Genghis Khan put it: "It is not sufficient that I succeed. Everyone else must fail." That's a pretty dramatic thing to say! More dramatic is that to believe it, to see it as the end view, can lead to astounding results.

The scalper must focus on winning, not on not losing. "...You got to risk everything. You got to go to the edge of defeat." Again, it's not that risk is ignored, it's just that risk simply becomes part of the overall process of winning. It's more that the scalper focuses on the winning part by having a clear view of the end goal.

The following is an abbreviated discussion of risk management from one of my trading courses: LCT Risk Reward Analysis.

Because you're not going to win every trade you put on, you have to balance those loses with a large enough reward to warrant taking any trades at all. This is why the standard "best practices" figure of looking for around 1.5 to 2 times risk as the reward target comes from.

Though this analysis is called Risk to Reward, the ratio is best expressed as the Reward to Risk. Instead of saying that you have a risk to reward of 0.5, it's much clearer to say that you have a reward to risk of 2 to 1, i.e. two times the reward for the risk taken.

After all, why bother to look for trade setups if there's no logical, and profitable target in the current price action structure.

It's a lot easier to analyze the viability of a trade in this manner than it is to rely on all the fancy mental gymnastics that most traders go through trying to find a trade setup, and then postulating forward whether there's a good profit target or not.

Let's just cut to the chase and first see if there's any point in even looking for a setup!

After identifying the risk, then go back and confirm if there is sufficient reward offered by the trade. Paul Tudor Jones, multi—billionaire speculator, had this to say about evaluating risk and reward:

"Where you want to be is always in control, never wishing, always trading, and always first and foremost protecting your ass. That's why most people lose money as individual investors or traders because they're not focusing on losing money. They need to focus on the money that they have at risk and how much capital is at risk in any single investment they have. If everyone spent 90 percent of their time on that, not 90 percent of the time on pie-in-the-sky ideas on how much money they're going to make. Then they will be incredibly successful investors."

If you're trading a longer time frame chart like the hourly, then both your reward and risk targets will obviously be more than 20 or 30 pips. In that case, the basic risk to reward guidelines are met, and – baring any other setup items on your trading plan checklist – taking a trade looks good. However, those same 20 or 30 pip risk and reward targets on a 1 minute time frame might not present such an appealing trade.

Risk Management Methodologies

• Stop Loss Placement
• Pips
• Dollar
• Percentage
• Technical Indicators
• Price Action
• Risk Management Ratios
• Risk To Reward Analysis
• Win to Loss Analysis

Keep your stop placement simple. If you're a long term trader then you'd use the structures that price action creates to identify how far price could go against you. You then determine how much of that risk you want to absorb based on how you view the potential profit of the trade.

If you're a short term trader, however — and particularly if you're like I am: scalping focused — then your stop should be based on a set number of pips.

In scalping, though the 'real' profit target may be 50 pips away, you're just running at it in short sprints, perhaps just 5 to 15 pips at a time.

Because of this, your stop might be just 8 pips — less than that, and there's just too much noise down on the short time frame charts, and the stop will just constantly get hit.

As to the Risk Management Ratios, I've already discussed Risk To Reward Analysis; keep that simple and don't use any set figure. This is a course on short term trading — scalping — and so your risk is always just 8 pips, for example. The reward takes care of itself, as long as the structure that price action is creating at the time supports enough profit that makes the trade even viable.

Well, though those 'unbelievable' results do occur for perhaps long periods, you'll still get hit with one of those long, very long, probabilistic losing streaks of 6, or possibly 10 in a row. That just throws all the win to loss theory joy out the 12th story building window....

And this is why you just can't get fixated on this win to loss ratio stuff. Win to loss results, even over the long run, are not stable enough to base any projections on until you hit one of those long losing streaks and see what it does to your ratio.

If it was as simple as the previous calculations suggested then everyone would be making 200% returns a year. What really needs to happen here is to alter the way that you think about your trading in general.

You simply cannot focus on win to loss, or reward to risk, or any of that. They all play a part in gauging your development, but they cannot be used for some statement of making 80% a year return on a regular basis.

The greatest money mangers in the world may get 25% a year. Of course, that's using compounding which can work deadly against you if you don't know what you're doing.

This is why all of my calculations are based on simple return on risk: If I have $3,000 in my account, but I'm only trading $1,000 of it, then my return is based on that $1,000 risk, not the whole bank. And, as I've said before, even if that $1,000 grows to $1,700, I'm still only trading the $1,000.

In the long run of trading, we have no control over how much we'll make. The only thing we can control is how much we lose. For my trading, when price gets 8 pips against me, I'm out. I don't trade unless there's a potential 20 pip run, of which I'll try to get 13 of those pips. However, if price starts to swing back against me after it has run out aways, I'll get out with 5 pips profit.

I'm counting on running most of my wins to just 5 pips, but can usually get a couple of 13 pip winners in there, and every now and then, I'll hit something stupid like a 40 pip run. When I blend it all out, it comes to about a net 1% per trade day win averaged over 13 out of 20 days available that I trade — because sometimes I just "sit on my hands."

And you know, sometimes I just blow it all because I don't take that 8 pip loss, and let that run way, way out to the point where I spend days trading my way back from that. Most of the time, I come back fine. But the few times that doesn't work out, the losses are beyond reason; they are so beyond reason that they're just silly....

If.... if.... if the bear wouldn't have stopped to shit in the woods the hunter wouldn't have seen him to shoot him... so if I would just take that 8 pip loss, my trading would be soooo much better. I hope you can learn from my mistakes and not your own on this because it's beyond humbling....