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How To Perform Risk Management in the EA?

12/2/2021 10:00:00 PM
  1. Without Risk Management Wait For Losses
  2. 10 Steps To Perform Competent Risk Management in the EA
  3. How to Avoid Losses: The Risk Management Guide
  4. In Conclusion. What Should I Do?

Without Risk Management Wait For Losses

You may ask: "What is risk management for?" 

Risk management is a crucial part of an EA. It provides deposit protection, helps in overcoming abnormal market conditions, and reduces risks/losses. 

This is a programmed algorithm in which you identify:

  • Risk per trade/series
  • Risk per day
  • Risk per week
  • Risk per month
  • Maximum drawdown

You should not choose risk management aspects randomly. That is why it is significant to consider and calculate everything to the last detail. 

How to do it? Let's learn, buddy! 

10 Steps To Perform Competent Risk Management in the EA

Composing a risk management system is similar to the construction of a building. What a flaky comparison!

You should complete all the significant stages step by step. First of all, you lay the foundation. Then you erect the walls. In the end, you mount the roof. In this case, you will get a reliable building. There is no other way. The same is for managing risks. 

To go through all risk management stages, you have to:

Step 1. Develop a trading system algorithm for EA creation. The trading system is the foundation. It ensures the entire building's strength. So, the Expert Advisor’s profitability depends on the system’s stability. 

Step 2. Create a money management algorithm for the EA. Money management is the wall. The wall's reliability depends on the strength of the foundation. At the same time, the walls must be solid and functional. That is why you need to provide your EA with the ability to switch between different money management approaches. 

Step 3. Generate a risk management system algorithm. A roof protects us from bad weather as risk management provides deposit protection. List the risks per deal, day, week, month, and the maximum drawdown. All are mighty fine!

Step 4. Order the development of EAs based on algorithms of the trading system, money management, and risk management.

The 4xDev company can create high-quality Expert Advisors according to your specifications.

Step 5. Backtest the EA with selected parameters of the trading system, money management, and risk management. Forex Tester software will serve you in this matter.

Forex Tester Software Is Testing a New EAForex Tester Software Is Testing a New EA

Step 6. Select optimal trading parameters. The proper trading system should be profitable with the mini lot. The equity line shape has to increase gradually. Calculate the Sharpe ratio, profit factor, average beneficial and losing trades, mathematical pip expectations, etc. Thanks to these findings you can check the trading system’s stability. 

Step 7. Test various money management methods. Then you can choose the best approaches to be used in live trading. Select the practices with the most stable equity line shape. 

Step 8. Perform risk management. After defining aspects of the trading system and money management, find the best risk management parameters. Risk management focuses on the drawdown minimizing and profit saving. Run backtesting to determine optimal risks per deal, day, week, month, and the maximum drawdown. 

Step 9. Install the EA on your demo account for testing it in the real market.

Step 10. Open a live account if the robot provides beneficial and stable trading on a demo account. 

Do not rush! Haste makes waste. Check and test everything thoroughly. Precaution and meaningfulness will preserve your deposit from jeopardizing and give you valuable experience

How to Avoid Losses: The Risk Management Guide 

To improve the EA functioning, you should:

Keep an eye on the beneficial and losing trade ratio. In a stable trading system, the average profitable trade is higher one and a half times than the average loss-making one. If the average beneficial trade is higher, the EA finds market entry points correctly. In this way, your potential profits are higher than your potential risks. 

Use the stop-loss level. You will lose a deposit if you trade without Stop Losses. Trade with the stop-loss level in pips or dollars per deal/series. 

Consider volatility. Markets have been changing, so their head aspect is volatility and price fluctuations.

An Oil Chart on the Daily TimeframeAn Oil Chart on the Daily Timeframe

There is an ADR indicator representing volatility changes during several months (they occur 2-3 times). 

You have to adapt the risk management algorithm to market volatility. If you set Stop Loss outside the daily tool volatility, it will not work. There will be colossal losses if the volatility has increased. However, the stop-loss level will remain unchanged. It saves your capital from winding up.

Use a portfolio. Trade with different assets in different markets. Diversification:

  • Stabilizes the equity line shape.
  • Reduces drawdowns and losses.
  • Helps you survive changing market conditions.

You can run several EAs with various instruments on one account and get a trading strategies portfolio. The more tools are in your portfolio, the more stable trading. 

Avoid deep drawdowns. The deeper the drawdown, the more difficult it is to get out of it. It is due to the unstable profit growth at the drawdown.

For example, there is a 50% drawdown on balance. To get out of it, a trader needs to make a 100% profit. If the drawdown is 10%, a trader should make an 11% profit to go to zero. It is a piece of cake, isn't it? 

In Conclusion. What Should I Do? 

Do not neglect risk management if you want to be a successful trader. Your first priority is to preserve capital, not to make a huge profit. Do not lose and start earning!

Note! 

  • Risk management in the EA is the algorithm. It regulates risk per deal (day/week/month) and the maximum drawdown.
  • Risk management should only be generated after testing. Gradual backtesting and current testing will save your deposit. 
  • After trading system testing and money management testing, you can perform risk management.
  • Portfolio diversification minimizes risks. 

Trade applying risk management and building up beneficial trading. Order an EA equipped with proper risk management and created by the 4xDev company.

request

Do you doubt the reliability of the indicator? Want to check if there is no redrawing? Need an expert programmer to develop a custom Forex indicator? We will do it for you! Just fill in a form and get a free estimate of the price and time needed to develop the desired tool.

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