This article was sent to us by Alejandro from Mexico. Alejandro is a talented and very intelligent young trader, who is determined to become a successful trader. He writes about risk management, which is a crucial part of trading. He is also a programmer and he was kind enough to share his indicators with ALL our traders.
Introduction to risk management
Risk management is a part of trading that many traders struggle with. Along my trading career I have seen many traders fail due to a lack of risk management.
Risk management for me is more than having a defined risk per trade. Its knowing when your strategy is not longer working or when you have passed certain limits in your trading.
For that reason I recommend any trader to have the following risk limits:
- Max Risk per trade (can be % or $ based)
- Max loss per Day (point to stop trading for the day, go back to your journal and practice)
- Max loss per Week (point to stop trading for the week, recover your mindset and plan for the next week)
- Max loss per Month (point to stop trading for the month, go back to your basics, practice and go back to demo for the rest of the month to prepare for a new month)
- Max absolute Loss ( this is a major re-evaluation point in which you go back to your education and work again to develop your skills. At this point something may be not working with your strategy, your own mindset or skills and needs a longer break to evaluate and start again “from 0”)
Most successful traders have rules about trading around major news events. Some will take them as opportunities to take a quick trade with the increased volatility while others will have rules of not placing any new trades or even closing out all their trades during those times.
Many of us will have calendars that notify us about this events and we prepare in advance for those and close out. But there are also times in which you may have a trade open and go to sleep forgetting that there will be a major news announcement during your night, in those cases we can have losing trades due to the event market volatility even if our trade idea was correct.
Also talking in respect to the FTMO evaluation process, having a trade open during this times would disqualify us as funded traders which can be a great pain for a trader that has been working diligently to become funded. [About news trading restriction: Please read here.]
Many of us know our risk limits and how many trades or lots we can have open based on our trading plan. The hard part is that in the heat of the moment traders can lose track of those numbers and may have their accounts over exposed or in some cases forget to place a SL only to realize their errors too late.
We are all humans and will have mistakes once in a while. The most effective way for a disciplined trader to avoid this mistakes or correct them in time is to have a notification or alerts system that remind him/her about those factors or make them aware of the errors they make.
My solution using Trading EA
Taking into account my own needs as hybrid trader (algo and discretionary) I created a EA tool to help keep track of this things.
I made this EA [shared in the article] to help me and other traders keep within their risk management parameters and avoid losing evaluation challenges or funded accounts due to a errors in risk management.
The tools I created are all the same concept but with different purposes. They all will track exposure in terms of risk % for an account, as well as loss % and amount of lots open.
The Risk Management Checker for Model EA will track all the trades and strategies in the account to calculate the numbers and send you a notification if any of the risk parameters you enabled have been passed. (for now I use the MT4 built in notification system to get the notifications to my phone)
The Risk Management Checker for Magic EA will track only the trades opened by the magic numbers you specify in its settings. This can be used to separate strategies or algos in your account if you want to have individual monitoring for each one of them.
The Risk Management Checker for Account EA will track the full account similar to the “Model” EA but also adds some functionality that can be really useful for FTMO traders.
- In this EA you can specify if you want the EA to make sure you have no trades open during weekends by setting a time period for the start of weekends (all time and date settings are based on the broker MT4 time)
- You can also specify the time and date of the major events you want the EA to notify and/or close trades for as well as how much time before and after the event time you want this to stay active.
In the screenshot above we have the Account Risk Manager Checker EA configured with the FTMO rules (as an example)
With this settings the EA will let the trader know whenever there is:
- an open trade or pending order with a Risk higher than 1% of the account.
- The account loss is equal or more than 5,000 on a single day (from midnight broker time)
- Will send a notification at 2,500 loss to remind you to take a small break
- The account loss is equal or more than 8,000 on a single calendar week
- Will send a notification at 4,000 loss to remind you to take a small break
- The account loss is equal or more than 10,000 on a single calendar year
- Will send a notification at 5,000 loss to remind you to take a small break
- Will make attempt to close any open trades or orders every friday at 22:45 hours (broker time) and notify you about the market closing soon so you don't place any new trades.
- The EA will keep attempting to close any new trades/orders opened after the closing period starts until the market closes.
- Attempt to close any trades 10 minutes before and after any event that you place in the 10 spaces for events it has. If it finds any trade open during that time the EA will attempt to close it and notify you that there is an event in progress and you should stop trading until 10 minutes after the event.
An example for notifications about an order without SL and another one about the Exposure % Limit being exceeded.
While in the example I used here I put the daily loss limit that FTMO has for the 100K Challenge I would recommend that you have a more conservative daily loss limit in your own trading.
I recommend that every trader check their trading plan in order to determine what are the settings that work best for your trading strategies.
I also recommend to run this on a VPS, I run this on a VPS along my algo strategies to help monitor my accounts. That way the only thing I need to get the notifications is to have data or internet on my phone and it all works.
Here is an example of how I have set up 5 Risk Management Checker for Magic EAs in my algo portfolio along with a Model Risk Management Checker EA.
Each one of the five “magic” ones are monitoring a specific algorithmic strategy in my swing trading portfolio to make sure they keep within “normal” statistical parameters and the “Model” one is checking the whole account to make sure that my portfolio keeps within my desired risk parameters.
Many times traders make mistakes that can cost them an evaluation account or losses in their trading accounts. Even the most disciplined traders can make some of this mistakes and that is why we need to use technology to help us.
For most disciplined traders a simple reminder can be more than enough to prevent them violating their trading plan or to correct a mistake in a timely manner.
Additionally having the assurance that your trades will be closed out before weekends and/or major news events in accordance to your trading plan adds an extra layer of protection in your trading as well as 1 thing less to worry about during our trading.
I hope this tool and the points mentioned help you manage your risks better and stay following your trading plans.