| If you monitor the average amount of losses and | | | | standard account, and the ratio may be increased if |
| profits that robot achieves on back test, you will get a | | | | you trade Forex Minis which are one-tenth of the size, |
| good idea of how well it is performing. For example, if | | | | or Forex Micros which are one-hundredth. Note that |
| you have a profitable system but the average losses | | | | not all brokers deal with these smaller sizes. It is |
| are much larger than the average gains, the robot is | | | | essential that you understand just what consequences |
| depending on only a few signals to make all its profit. If | | | | the price movements can have on your money. |
| you have a large number of losses but the average is | | | | For instance a standard contract or "lot" is for 100,000 |
| low, then the robot is performing well to cut its losses | | | | units of currency (not necessarily dollars). With the |
| quickly. | | | | leverage of 100 to 1, this means you must put up 1000 |
| Usually it is considered that the greater the risk, the | | | | units to enter a trade of a standard contract. The |
| greater the potential reward, but this is not a hard and | | | | number on the right end of the price, the fourth decimal |
| fast rule, and you want your trading robot to work on | | | | place, is called a Pip, which is a Percent In Point, or a |
| the winning side of this indication. In fact, the MetaStock | | | | percent of a percent. With 100,000 units, each Pip is |
| system tester will calculate a reward/risk ratio for you. | | | | worth 10 units of currency, say US$10 if for example |
| This varies from terrible, at -100, to excellent at +100. | | | | you are trading the USDCAD (US Dollar/Canadian |
| Risk management is critical in making a profit in any | | | | dollar). |
| sort of trading, and has several facets, not all of which | | | | Some Forex robots I have used allow you to set the |
| you are in control of when you use a Forex robot. | | | | maximum stop loss level, which is how much the price |
| Given that any system has times when there will be | | | | can go against you before the trade must be closed |
| losses, a basic element of risk management is that | | | | out and you accept your loss. A well-known robot |
| you do not risk losing more than you can afford to. | | | | supplier recommends you use 300 for this figure in |
| The losses that you will actually see are impossible to | | | | their robot. |
| know, otherwise the system would be able to predict | | | | You may well choose to agree with their number, and |
| and eliminate them, but you must rely on historical | | | | in the absence of any experience with the robot, this |
| evidence to get a feeling for this. | | | | may be the best choice you can make. You must |
| Some robots give you a chance to set the size of lot | | | | think carefully about the consequences to avoid having |
| you will trade, giving you some manual control of the | | | | any surprises. |
| process. Robots will also calculate lot sizes for you, | | | | On the one hand, you do not want a stop loss level |
| based on their programmed settings. Research what | | | | which is so low that the robot will exit fluctuating |
| your robot will do, and if its approach appears too risky | | | | trades frequently. For instance, the robot I am currently |
| for your temperament, then scale back the amount of | | | | testing is showing -136 on one open trade at this |
| money that you put into its account at any one time. | | | | moment. Now, I don't know if the price will recover and |
| Once you have made a profit, you may want to | | | | the trade become a winning trade, if it will continue |
| protect some of it by withdrawing it from the account, | | | | losing until it meets the stop loss, or if the robot will |
| even though that lessens the amounts that the robot | | | | decide to cut the losses before it reaches that point. |
| can use to make more profits. | | | | Perhaps there is an equal chance of each outcome. If |
| In talking about the way to choose a Forex robot, | | | | the stop loss had been set at 100, then for certain this |
| another aspect of risk management was mentioned. | | | | trade would have lost, in this case $1000. But allowing |
| This is the amount of drawdown that you might | | | | the loss to run further gives the chance that it might |
| expect with typical trading. This is something you will | | | | recover and not lose anything. |
| have researched in your robot's selection, and is critical | | | | On the other hand, you must consider that there is a |
| to your long-term trading future. There will be times | | | | slight chance the robot will continue losing until the stop |
| when successive losers impact your account, and you | | | | loss is met. If you use the 300 number, then this |
| must be confident that these will not cut short your | | | | corresponds to $3000 loss on a single lot traded, which |
| trading career. | | | | cost $1000 to enter the trade. |
| Risk management is very important in Forex trading. | | | | What if you set the limit to 500 or 1000? The chance |
| This is for the simple reason that Forex allows you to | | | | of the price going down to the limit becomes more |
| leverage your initial investment to a great extent. This | | | | remote, but the amount you lose gets larger. The |
| is an advantage if you are in a winning situation, but if | | | | number you use is necessarily a compromise. All you |
| you trade and suffer big losses, your broker can even | | | | must realize is the consequences of a catastrophic |
| ask you for more money than you initially deposited. | | | | market event on your account. |
| You will usually be able to trade at least 100 to 1 on a | | | | |