Many traders, especially beginners, suffer from loss of accounts. This is not due to the lack of skill or market knowledge. However, they lack proper risk management planning. Without it, the trader loses major sums of money for complete account loss.
MetaTrader 4 (MT4) and MetaTrader 5 (MT5) are the two most widely used trading platforms. They provide traders with extensive tools and automated systems, including Expert Advisors (EAs), that can be utilized to improve risk management. Unfortunately, most traders fail to implement such features, especially the risk management ones.
In this tutorial, we’ll break down how to demystify the art of risk management, where to place stop-loss and take-profit levels, and introduce you to a free Risk Manager EA for MT4 and MT5. These applications can mechanize a risk management strategy in order to safeguard your account balance while maximizing your potential profit.
What is Risk Management?
Risk management is identifying the potential losses you might face in the trading process and then controlling them. Without a risk management plan, your trades, technically, become bets. A risk management plan does not simply constrain potential losses; it makes sure that you have enough capital for you to stay within the market long enough to win. There are two highly significant concepts associated with risk management: stop-loss and take-profit orders.
Stop-Loss:
A stop-loss order will close the trade automatically when the market hits a preset price; it does so as a measure of controlling the amount of possible loss. It is also one excellent tool in avoiding having one bad trade ‘wash out’ your account balance.
Take-Profit
This is an order type that will close your trade once a specified profit level has been hit. You lock in a profit without having to constantly monitor the marketplace.
Live Examples of Risk Management
Now, let’s go through an example on how to apply a stop-loss and a take-profit using MT4 on a live chart.
Setting Stop-Loss and Take-Profit on MT4
- Open Trade: After analyzing you feel that the price of the EUR/USD has reached levels where you can open a trade. Click right on the chart and open a “New Order.”
- Set Volume: Under this section, you input the volume of your trade, which is in fact the amount of the market you want to buy or sell.
- Stop-Loss Level: You set a stop-loss just above the most recent high price to avoid sudden and extreme adverse movements of the price.
- Take-Profit Level: On the other hand, you set the take-profit level below a robust support, therefore, getting out on a profit from that trade.
- Confirm Order: After putting the above levels, you click on either “Sell” or “Buy” according to the direction of your entry. Your platform then automatically takes care of the risk.
The Role of Risk-Reward Ratio
Risk management is not merely placing stop-loss and take-profit orders but also ensuring that your potential profit outweighs your risk. This is called the risk-reward ratio. In case your stop-loss is at 20 pips while your take-profit is at 60 pips, it makes your risk-reward ratio 1:3, which means you are risking $1 to make $3.
Why Longevity in Trading Matters
One of the essential takeaways from traders is that the longer one stays in the market, the more chances one has in terms of making it. One is usually wiped out before one is even given a chance to learn from the mistakes they make mainly because of poor risk management. Good risk management ensures increasing chances of surviving losses and realizing future profits.
Power of Free Expert Advisors (EAs)
Using the EA greatly reduces the risk management process. It is an automated system with fully automated trading, using stop-loss and take-profit limits.
We offer a free Risk Manager EA you can download and install onto your MT4 or MT5 trading platform on our website www.howtradelite.com. It ensures you don’t get emotional about your trades because it will always calculate and apply the stop-loss and take-profit for you based on the account balance and amount of risk you want to take.
How to Install and Setup Risk Manager EA on MT4/MT5
- Download the EA: Go to the HowToTrade website and click on the tools section. There, download the Risk Manager EA appropriate for the platform you’ll be using, either MT4 or MT5.
- Install the EA: Extract the files on the zip folder downloaded above. Open your MT4/MT5, then go to File > Open Data Folder > MQL4 (or MQL5), then copy the EA file from the folder downloaded above and then paste into the Experts folder.
- Activate the EA: From here, once complete and in the appropriate folder, you would just simply reboot your trading platform. Now you should find your Risk Manager EA listed under the “Expert Advisors” tab. Drag and drop it onto your chart, but do make sure that “Allow Automated Trading” is ticked.
- Setup Risk Parameters: Determine your values for risk, such as how much of your account balance you are willing to put on the line on each trade. Mainstream advice suggests you should not risk more than 1-2% on each trade.
Remaining disciplined with risk management
Many of the failures among traders have been resultant to failure in following their own disciplines concerning risk management. Automation of the process with the help of software like the Risk Manager EA would keep you constant. However, the risk parameters must be reasonable. Here are some key tips that will enable discipline:
- A Fixed Percentage: Risk a small fixed percentage of your account balance at all times, say 1-2%.
- Avoid Emotional Trading: You must avoid changes in stop-loss and take-profit levels due to emotions. Let the EA do that for you.
- Review and Adjust: Sometimes review your trades and change them if necessary. But never change the plan in a live trade.
Conclusion
It is there that lies risk management as the core of a good long-term trader. Placing stop-loss and take-profit orders, ensuring an optimal ratio of risk-reward, and applying automated tools such as the free Risk Manager EA will bring you closer to real profitable and sustainable trading. After all, trading is much more a long game, and only correct risk management can help keep one in the game long enough to win it.
Now, with live examples and easy-to-use tools like the Risk Manager EA, you can enter this trading world fearlessly with a plan!
