As the Brexit Referendum looms, it seems an apt moment to write something about Risk and Risk Management.
The UK Brexit Referendum is clearly a High Risk news event and probably far to close to call at the moment, whatever your view. Other High Risk news events include General Elections, the monthly Non-Farm Payroll (normally the first Friday of every month) and also other events such as the minutes from the Federal Open Market Committee and BOE Minutes and Interest Rate Decisons by Central Banks various.
As a trader you need to be aware of such High Risk events and conduct your trading accordingly. The last thing you need to do is expose your trading account to too much risk in the run up to such often highly volatile events. Better to scale back or not trade than to essentially toss a coin and become in effect a gambler.
There are many ways you can control your risk when trading:
- You can limit the amount you risk on any trade to 1% of your trading account, this will be governed by how much trading capital you have, your position(s) size(s) and your Stop Loss size.
- You can limit the number of open trades you have at any one time to no more than 3,4 or 5 that are yet to be moved to Break Even or better. (Remember that Overtrading will KILL your account!)
- If there is a good Technial set up leading into a High Risk news event then you couild always reduce your position size and maybe risk 0.5%.
- If you are already in a trade then you could move to Break Even if not already there.
- You could trail a stop loss – although easier said than done when trying squeeze the most out of a trade.
- You could close any open trades and wait and see what happens afterwards.
- You could decide to do nothing and sit on your hands and wait, often No Trade is the best trade leading into such events.
- You do the previous option and wait until the dust has settled, sometimes hours or even a few days after such a News event and often you will get a better technical and lower risk entry.
The old adage of ‘If in doubt, Stay OUT!’ applies and better to preserve your Trading Capital for another less risky day especially when there is a high chance of the market gapping up or down, although as the results will dribble out, I suspect that might not be the case in this instance.
As a trader it is your Duty to preserve your Trading Capital and trade Low Risk and Higher Probability setups.
With the above in mind I urge you to get your trades Risk Management in order today/tomorrow, whatever the Brexit outcome so that you are not caught out by essentially what appears to be a Gamble either way in the Referendum outcome and to incorporate the above into your trading if you don’t already do so.