Risk Free Trading

Submitted by Marco Palmero on 18 June, 2009 - 16:51

Risk Free Trading

You must be dreaming! Trading is inherently full of risks. There is no such thing as risk free trading. Or is there? If you start paper trading, or using a trading simulator you are effectively trading without risk. If you decide to go down that route remember to keep a trading journal to record your feelings and decisions. Trading on paper is not the same as trading with money on the line - even if you risk relatively small amounts of money. But this article is not about trading on paper, nor about commercial arbitrage (which is relatively risk free but retail traders have no access to such facility). So how does a retail trader trade the share market, forex market or any market risk free?

Risk Free Trading Strategy

Your strategy to trade the market risk free is simply this: Once in profit, move your stop loss to break even and let the market run its course. When you enter a trade you are invariably in a loss situation due to either brokerage commissions or a spread. Depending upon how much money you decide to risk per trade, you would place your initial stop loss at the maximum loss level you can tolerate. The most common rule is to risk 2% of your capital per trade. Once the trade moves in your direction, move the stop loss to break even.

Risk Free Strategy: Move your stop loss to break even

As to when you would move your stop loss to make the trade risk free, it is up to your trading system, the momentum of the market and your subjective determination of your trading situation. Move it too soon and you may find you would be stopped out easily out of the trade. Although you have lost nothing, you may lose the opportunity of a future move. On the other hand if you move it too late, the market may move against your position and you simply give up any profit.