How To Reduce Risk On a Trade?

There are 4 ways to reduce your risk on a trade: Moving the stop loss to break even, reducing the stop loss slightly, liquidating part of the trade or closing the trade out completely.
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Reduce Trade Risk

A question coming in from Fahar, asking us what exactly we mean when we say to reduce some risk on a trade, what do we mean and exactly how should we go about it?

When we take the USDCAD in today’s session as an example, I’ve just marked out three hypothetical areas. So the first one in blue would be a hypothetical entry price, the red one would be a hypothetical stop loss. And then a take profit coming in, in green.

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Now, when we say look to reduce some risk at a specific price zone, it can basically mean one of four things.

Firstly, you can reduce your risk by moving your stop loss closer to your break even point. So, let’s say you had a wider stop coming in at that level. If we say as price comes closer to this overall zone, to the down cycle loop to reduce some risk, and firstly that can mean simply just to reduce your stop loss on that trade in case the price does spike back, that you take a smaller loss on that trade.

Secondly, to reduce risk can also mean that you simply take off part of your position. So if you have a position running, if you reach into a certain zone, look to reduce some of the risk by actually taking some partial profits on that trade.

Thirdly, it can also mean that you move your stop. You can reduce your risk by moving your stop to break even itself. Making sure that you are risk-free on the trade and basically making sure that you book some gains on the trade.

And then fourth, it can also just simply mean that you close the trade out completely as you reach into that zone.

Now normally, if we are referring to a day trade, if we reach a very significant support or resistance level, and that’ll mean that we want to reduce some risk. Mostly, that’ll mean that we want to take full profit when we reach a specific target in terms of support or resistance.

At other times you might want to keep that trade running for the rest of the session or into a next session for a particular reason if you think the safe limit is strong enough. In that case, reducing risk might not mean taking off the trade completely, it might just simply mean, as we said, reducing risk by either reducing your stop loss or maybe moving it to break even.

But that is the four basic ways that you can look to reduce risk and what we mean when we say look to reduce risk as you head into a specific support or resistance zone on the charts.

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