Trader education: Risking a little to make more than a little

The useful part

One of the most important lessons in trading is that you do not have to risk a lot to make a lot. In fact, the better trading opportunities often come when traders can define their risk against a nearby technical level. If that level holds, the price has room to move in the anticipated direction.

How it works

• A trader could buy near the moving average and use a break below it as the signal that the trade idea is not working.
• Technical levels help define risk Technical tools such as moving averages, Fibonacci retracements, swing highs, swing lows and trendlines identify areas where buyers or sellers should enter the market.
• For example, assume a currency pair is trending higher and correcting toward its rising 100-hour moving average.
• If buyers are going to remain in control, that moving average should attract buying interest.
• What it does provide is a logical level against which risk can be measured and limited.

What to take from it

If the answer is clear and relatively close to the entry price, the risk may be manageable. If there is no nearby level that would prove the idea wrong, the trade may require too much risk. The reward should be larger than the risk Suppose a trader buys against technical support and risks 20 pips.

Example or evidence

• The goal is to keep those losses controlled while leaving room for winning trades to develop.
• They give traders a reason to enter, but just as importantly, they provide a reason to exit.

Details worth keeping

If it breaks, the trader can get out with a relatively small loss. The moving average does not guarantee that the price will bounce. At what price would my trading idea be wrong?