Currency Trading – How to make a consistent profit|Winners limit their losses
Mar
20
Filed Under (Money Management) by admin
If you’ve read much on the subject of money management, you’ve had certain things ground into your head. The most basic and most quoted is “never risk more than 2% of your account per trade.” Most infer from this that they should risk 2% per trade.
Wrong!
If you want to leave money on the table, this is a good strategy. Otherwise, it’s terrible. Let me give you an example so you can see for yourself.
Let’s say you have a $100,000 USD account. You risk 2%. You lose. Now you have $98,000. Do not take 2% of that and use it as your risk per trade. You should still risk $2000 per trade even though it’s greater than 2% of your current account balance. Why? Because let’s say you win on this trade. If you’d only risked 2%, now you’d have $101,136 (you won 1.6 more than you risked for the sake of this example. It’s the same no matter what numbers you use). However, if you’d risked $2000 to gain $3200, you’d have $101,200. By varying your risk per trade, you’re leaving money on the table.
But that’s only $64!
And that’s just a little example. If you continuously adjusted your risk on a percentage basis, that money would add up fast. And it will really hurt on a long losing streak.
Remember that if you lose half of your account balance, you’ll have to double your money to get back to even. If you continuous step up your winners by a percentage, it will take even longer.
Of course, you can’t keep the same trade size forever. After all, it would become dangerous or meaningless after a lot of winning or losing. So when do you adjust, and how do you do it?
See you in part 2 . . .
By: Nathan Pennington
Wrong!
If you want to leave money on the table, this is a good strategy. Otherwise, it’s terrible. Let me give you an example so you can see for yourself.
Let’s say you have a $100,000 USD account. You risk 2%. You lose. Now you have $98,000. Do not take 2% of that and use it as your risk per trade. You should still risk $2000 per trade even though it’s greater than 2% of your current account balance. Why? Because let’s say you win on this trade. If you’d only risked 2%, now you’d have $101,136 (you won 1.6 more than you risked for the sake of this example. It’s the same no matter what numbers you use). However, if you’d risked $2000 to gain $3200, you’d have $101,200. By varying your risk per trade, you’re leaving money on the table.
But that’s only $64!
And that’s just a little example. If you continuously adjusted your risk on a percentage basis, that money would add up fast. And it will really hurt on a long losing streak.
Remember that if you lose half of your account balance, you’ll have to double your money to get back to even. If you continuous step up your winners by a percentage, it will take even longer.
Of course, you can’t keep the same trade size forever. After all, it would become dangerous or meaningless after a lot of winning or losing. So when do you adjust, and how do you do it?
See you in part 2 . . .
By: Nathan Pennington
Mar
19
Forex trading is risky and most traders simply can’t deal with the high risk that it presents. If you do then you can enter the elite minority of winners. Let’s look at some tips to manage risk…
Here they are in no particular order of importance there all important and will help you with your Forex trading Money Management!
Leverage
Today you can 400:1 leverage or more and most trader’s use as much as they can and get blown out the water. For a novice trader 10 – 20: 1 is plenty. Don’t over leverage or you will lose.
Every Trade Puts Your Money at Risk
There is no such thing as one trading opportunity being better than another they all put your money at risk and the fact is the more sure fire a trade looks the more likely it is to lose money. It’s generally the most uncomfortable trades that are the best. Always expect the worst and things can only get better.
Never Place Stops in Random volatility
Day traders and scalpers do this and lose. You may think you have low risk by having a tight stop but if its to close and your 100% guaranteed to get stopped out and that means a lose of your account equity to zero.
Risk has got nothing to do with your stop minus your target – that’s an opinion! Risk is related to probability and it’s a fact if you place stops outside of random volatility you have better odds of success.
In Forex trading you need to take calculated risks to make money. If you think you can trade with low risk and no drawdown, go and put your money on deposit – Forex trading is a big boy’s game.
Have the Courage to Accept Big Gains
It may sound odd, as we all want big gains but most people don’t have the courage to accept them. Why?
Because as soon as an open profit starts to get big, the trader wants to lock it in, before it gets away and puts his stop to close to lock it in and he does lock in a profit a minor one! He gets stopped out by normal volatility and then sees the trend continue and make thousands of dollars and he’s not in!
Have the courage to accept big gains and hold your stop back behind normal volatility and accept drawdown and open profit and keep your eyes on the bigger price at the end of the move. Sure, you give a bit back but you get more of the trend, if you don’t jack your stop up to close. Forex trading is about making money not perfection!
Putting it all Together.
You have to take risks – but you don’t want to lose too much or get too far behind. It’s a delicate balance and Forex money management needs to be taken seriously, its not an after thought, it’s the basic foundation of long term currency trading success, so make it part of your essential Forex education.
By: Kelly Price
Here they are in no particular order of importance there all important and will help you with your Forex trading Money Management!
Leverage
Today you can 400:1 leverage or more and most trader’s use as much as they can and get blown out the water. For a novice trader 10 – 20: 1 is plenty. Don’t over leverage or you will lose.
Every Trade Puts Your Money at Risk
There is no such thing as one trading opportunity being better than another they all put your money at risk and the fact is the more sure fire a trade looks the more likely it is to lose money. It’s generally the most uncomfortable trades that are the best. Always expect the worst and things can only get better.
Never Place Stops in Random volatility
Day traders and scalpers do this and lose. You may think you have low risk by having a tight stop but if its to close and your 100% guaranteed to get stopped out and that means a lose of your account equity to zero.
Risk has got nothing to do with your stop minus your target – that’s an opinion! Risk is related to probability and it’s a fact if you place stops outside of random volatility you have better odds of success.
In Forex trading you need to take calculated risks to make money. If you think you can trade with low risk and no drawdown, go and put your money on deposit – Forex trading is a big boy’s game.
Have the Courage to Accept Big Gains
It may sound odd, as we all want big gains but most people don’t have the courage to accept them. Why?
Because as soon as an open profit starts to get big, the trader wants to lock it in, before it gets away and puts his stop to close to lock it in and he does lock in a profit a minor one! He gets stopped out by normal volatility and then sees the trend continue and make thousands of dollars and he’s not in!
Have the courage to accept big gains and hold your stop back behind normal volatility and accept drawdown and open profit and keep your eyes on the bigger price at the end of the move. Sure, you give a bit back but you get more of the trend, if you don’t jack your stop up to close. Forex trading is about making money not perfection!
Putting it all Together.
You have to take risks – but you don’t want to lose too much or get too far behind. It’s a delicate balance and Forex money management needs to be taken seriously, its not an after thought, it’s the basic foundation of long term currency trading success, so make it part of your essential Forex education.
By: Kelly Price
Feb
06
Filed Under (Money Management) by admin
Here we are going to look at some live examples and show you some techniques to enter and set stops to target low risk high reward trades.
Last week we showed you this in the B Pound and our view was right and we made a great profit.
Now let’s look at another live example.
1. Never Buy Dips without confirmation
One of the biggest mistakes novice traders make is to buy into dips or sell into resistance.
Most traders will buy into support even if prices are going down and then they hope support holds.
This is a great way to lose your money “hope” should not be part of any traders vocabulary.
2. Getting The odds on your side
Never ever trade unless price action or momentum supports your view.
If you want to buy into support or sell into resistance wait for it to hold and trade when the momentum turns – You then have the odds on your side.
It will also stop you trying to predict where price action may go.
We did just that shorting the B Pound US Dollar.
We waited for resistance to hold and then used the stochastic indicator (read up on it’s a great momentum indicator) to enter.
As soon as the stochastic indicated waning price momentum by crossing with bearish divergence we went short.
Put the stop behind the resistance and targeted the bottom of the range and thankfully it went well.
This trade had tight stop, price momentum on our side and clear target.
Why confirmation is so important
It stops you imposing your view on the market and will keep you out of losing trades.
A good example was last week we wanted to go short the Yen.
Pull the chart up at a chart service futuresource.com (is a good one)
Here we will use the futures IMM contract but cash is same logic.
We wanted to sell last week but prices rose but we didn’t jump in we need confirmation.
So we waited for stochastics to cross with bearish divergence.
It never came.
Prices broke through resistance and are going up.
The fact we waited for confirmation stopped us imposing our view on the market and saved us a loss.
Outlook for Yen
We are still interested in the short side of the yen and would look for the next level of resistance.
There is heavy resistance at the 8800 level on weekly and daily charts.
We would expect the rally to fail into this area and will look for confirmation from a stochastic crossover with bearish divergence.
This will if we can get it give us clear stop point and with price momentum on our side a target of the lows.
Even if were wrong this trade if the set up comes to fruition will give us low risk and high reward.
Money management is all about keeping risk low and profit potential high.
If you learn to wait for confirmation rather than jumping to soon you will have the odds on your side.
By: Sacha Tarkovsky
Last week we showed you this in the B Pound and our view was right and we made a great profit.
Now let’s look at another live example.
1. Never Buy Dips without confirmation
One of the biggest mistakes novice traders make is to buy into dips or sell into resistance.
Most traders will buy into support even if prices are going down and then they hope support holds.
This is a great way to lose your money “hope” should not be part of any traders vocabulary.
2. Getting The odds on your side
Never ever trade unless price action or momentum supports your view.
If you want to buy into support or sell into resistance wait for it to hold and trade when the momentum turns – You then have the odds on your side.
It will also stop you trying to predict where price action may go.
We did just that shorting the B Pound US Dollar.
We waited for resistance to hold and then used the stochastic indicator (read up on it’s a great momentum indicator) to enter.
As soon as the stochastic indicated waning price momentum by crossing with bearish divergence we went short.
Put the stop behind the resistance and targeted the bottom of the range and thankfully it went well.
This trade had tight stop, price momentum on our side and clear target.
Why confirmation is so important
It stops you imposing your view on the market and will keep you out of losing trades.
A good example was last week we wanted to go short the Yen.
Pull the chart up at a chart service futuresource.com (is a good one)
Here we will use the futures IMM contract but cash is same logic.
We wanted to sell last week but prices rose but we didn’t jump in we need confirmation.
So we waited for stochastics to cross with bearish divergence.
It never came.
Prices broke through resistance and are going up.
The fact we waited for confirmation stopped us imposing our view on the market and saved us a loss.
Outlook for Yen
We are still interested in the short side of the yen and would look for the next level of resistance.
There is heavy resistance at the 8800 level on weekly and daily charts.
We would expect the rally to fail into this area and will look for confirmation from a stochastic crossover with bearish divergence.
This will if we can get it give us clear stop point and with price momentum on our side a target of the lows.
Even if were wrong this trade if the set up comes to fruition will give us low risk and high reward.
Money management is all about keeping risk low and profit potential high.
If you learn to wait for confirmation rather than jumping to soon you will have the odds on your side.
By: Sacha Tarkovsky
Feb
04
Filed Under (Money Management) by admin
Money management is a bit like sex, we all do it but we don’t talk about it much yet, if you don’t employ proper money management you won’t win. Let’s look at some basics to do with money management.
Money management is the difference between making stellar gains or wiping your account out. Here are some important points to keep in mind when adding it to your forex trading strategy.
Risk & Reward
Risk goes with reward this is common knowledge yet, many traders try to restrict risk so much they actually create it and ensure they lose.
For example day traders think their taking small risks as their stops are close but their 100% guaranteed to lose over time because all short term volatility is random.
The risk looks small but the odds are stacked against them.
Another example of trying to restrict risk to much is trailing a stop to close and getting stopped out by normal volatility and sees the trader get stopped out to soon.
These traders need to make a study of standard deviation of price part of their forex education.
Betting to Win
Just like the successful card player you need to load up your bets on high odd hands and fold losers quickly. When you have a high odds trade denoted by your forex trading system up your bet size.
You here many traders bang on about risking 2% per trade but this is ridiculous for most traders.
For example on $10,000 account that’s $200! How close would your stop have to be?
To close and guarantee your stopped out by volatility.
If you want to win bet 10 – 20% on your high odds trades.
Stop placement
In forex trading most traders like to trade with stops behind support and resistance and you will notice on many occasions how many times a price spikes through the stop in the day and then closes below it.
If you can always use a “stop close” this will prevent from daily volatility hitting your stop in the day session or if you cant keep an eye on the market use “at or in the money options”
Trailing a stop
If you are long term trend following you need to give the market plenty of room to breathe and keep your stop back. Don’t jack it up after a day or so like most traders do – leave it alone. When you have good profits move it behind key support say at 40 day moving average penetrated on a close basis which works well.
If you want to follow long term trends, you are going to have to accept that you will give a lot back at the turning point – but if you get 60% of the major trends you will do well.
Targets
I find stop trailing hard and like to work with a target and get out when its hit.
If the move carries on so what? I am happy, as I got what I want.
In shorter term swing trading, targets are essential as these smaller profits can disappear quickly.
Finally Remember This:
How you deal with risk, will be the difference between you losing or winning at forex trading. Try and restrict risk to much and you will guarantee you lose, but take meaningful risks at the RIGHT time, with courage and conviction and you could enjoy fantastic currency trading success.
Remember the old gamblers saying:
“There’s a time to hold them, a time to fold them and a time to get out of town fast”
Its very applicable to forex trading and money management!
By: Monica Hendrix
Money management is the difference between making stellar gains or wiping your account out. Here are some important points to keep in mind when adding it to your forex trading strategy.
Risk & Reward
Risk goes with reward this is common knowledge yet, many traders try to restrict risk so much they actually create it and ensure they lose.
For example day traders think their taking small risks as their stops are close but their 100% guaranteed to lose over time because all short term volatility is random.
The risk looks small but the odds are stacked against them.
Another example of trying to restrict risk to much is trailing a stop to close and getting stopped out by normal volatility and sees the trader get stopped out to soon.
These traders need to make a study of standard deviation of price part of their forex education.
Betting to Win
Just like the successful card player you need to load up your bets on high odd hands and fold losers quickly. When you have a high odds trade denoted by your forex trading system up your bet size.
You here many traders bang on about risking 2% per trade but this is ridiculous for most traders.
For example on $10,000 account that’s $200! How close would your stop have to be?
To close and guarantee your stopped out by volatility.
If you want to win bet 10 – 20% on your high odds trades.
Stop placement
In forex trading most traders like to trade with stops behind support and resistance and you will notice on many occasions how many times a price spikes through the stop in the day and then closes below it.
If you can always use a “stop close” this will prevent from daily volatility hitting your stop in the day session or if you cant keep an eye on the market use “at or in the money options”
Trailing a stop
If you are long term trend following you need to give the market plenty of room to breathe and keep your stop back. Don’t jack it up after a day or so like most traders do – leave it alone. When you have good profits move it behind key support say at 40 day moving average penetrated on a close basis which works well.
If you want to follow long term trends, you are going to have to accept that you will give a lot back at the turning point – but if you get 60% of the major trends you will do well.
Targets
I find stop trailing hard and like to work with a target and get out when its hit.
If the move carries on so what? I am happy, as I got what I want.
In shorter term swing trading, targets are essential as these smaller profits can disappear quickly.
Finally Remember This:
How you deal with risk, will be the difference between you losing or winning at forex trading. Try and restrict risk to much and you will guarantee you lose, but take meaningful risks at the RIGHT time, with courage and conviction and you could enjoy fantastic currency trading success.
Remember the old gamblers saying:
“There’s a time to hold them, a time to fold them and a time to get out of town fast”
Its very applicable to forex trading and money management!
By: Monica Hendrix
Jan
21
Filed Under (Money Management) by admin
If you are trading on the forex market or are considering doing so, you are already aware of the great profit potential that exists in forex. While the profits can be wonderful, they only exist because of the great risks also involved with forex trades. There are many systems that can be used which have demonstrated good results in back testing or previous live trading, but the reality is that no system is 100% and the market can move in any direction unexpectedly at any time. Therefore, it is essential to use proper money management techniques for long term growth potential to avoid large losses which may cause you to lose all or most of your investment capital.
These tips should help you to minimize losses while maximizing profits. Almost all forex traders will tell you that money management is the primary key to success in forex.
1. Always use a stop loss. Some traders may feel that they are sure of a trade based on several indicators pointing to a trend, and that they don’t want to use a stop loss to allow the trend to develop fully. While it may be true that eventually the price of any currency pair will reach a certain profit target, the fact remains that it may make a major move in the opposite direction first, which may lead to a margin call by your broker or other losses which cannot be sustained.
2. Determine the weekly or monthly profit level goals you would like to achieve based on the projected results for the system you are using. Take into account the success rate (percentage of winning trades) and average number of trading opportunities your system is likely to present. It is recommended to be conservative in your goals to allow some room for weeks or months when the results do not fully meet the projections.
3. Determine the risk you are willing to take or need to take to achieve the profit goals you set. Keep in mind both the percentage amounts of your total balance that you will risk in each trade and also the maximum you are willing to risk at any one time combining all of your open positions. Figure your stop loss according to your system, some systems will recommend a stop equal to or less than your profit target, others may recommend a a larger stop to allow some cushion before the price hits your profit target. Then, determine the number of lots you will trade so that if your trade is a losing trade, the amount of money lost will equal the percentage of your balance you are willing to risk on that trade.
4. Once you have these limits in place, execute your trades with these stops and targets every time. Stick to your plan, don’t get greedy when things are going well and don’t fear when some of the trades don’t go your way. Stick to your resolve and have faith in your system. All traders experience losses, you will be no different, but if you stick to a predetermined risk plan as a percentage for each trade, you will always live to trade another day.
Putting these tips into action will put you on the path to the discipline needed for success in forex. Believe in yourself and the rewards can be great for you, not only financially but personally as well.
By: Joe Phelps
These tips should help you to minimize losses while maximizing profits. Almost all forex traders will tell you that money management is the primary key to success in forex.
1. Always use a stop loss. Some traders may feel that they are sure of a trade based on several indicators pointing to a trend, and that they don’t want to use a stop loss to allow the trend to develop fully. While it may be true that eventually the price of any currency pair will reach a certain profit target, the fact remains that it may make a major move in the opposite direction first, which may lead to a margin call by your broker or other losses which cannot be sustained.
2. Determine the weekly or monthly profit level goals you would like to achieve based on the projected results for the system you are using. Take into account the success rate (percentage of winning trades) and average number of trading opportunities your system is likely to present. It is recommended to be conservative in your goals to allow some room for weeks or months when the results do not fully meet the projections.
3. Determine the risk you are willing to take or need to take to achieve the profit goals you set. Keep in mind both the percentage amounts of your total balance that you will risk in each trade and also the maximum you are willing to risk at any one time combining all of your open positions. Figure your stop loss according to your system, some systems will recommend a stop equal to or less than your profit target, others may recommend a a larger stop to allow some cushion before the price hits your profit target. Then, determine the number of lots you will trade so that if your trade is a losing trade, the amount of money lost will equal the percentage of your balance you are willing to risk on that trade.
4. Once you have these limits in place, execute your trades with these stops and targets every time. Stick to your plan, don’t get greedy when things are going well and don’t fear when some of the trades don’t go your way. Stick to your resolve and have faith in your system. All traders experience losses, you will be no different, but if you stick to a predetermined risk plan as a percentage for each trade, you will always live to trade another day.
Putting these tips into action will put you on the path to the discipline needed for success in forex. Believe in yourself and the rewards can be great for you, not only financially but personally as well.
By: Joe Phelps
Dec
31
Filed Under (Money Management) by admin
In this article, I will be focusing on the importance of Money Management in Forex trading. Successful Forex traders have a larger edge and better money management than unsuccessful Forex traders.
After observing hundreds of amateur Forex traders, I began to discover that their failures can be explained almost exclusively by their poor money management practices.
When trading, the importance of Money Management is underestimated by a lot of Forex traders. It is of much more importance than entry and exit decisions (=timing decisions) will ever be. Very few indicators are better than a coin toss, and if they are, the edge is eaten up by slippage and commission.
Money Management in Forex trading is also called asset allocation, position sizing, portfolio heat, portfolio allocation, cash flow management, trade management, capital management and position management, size management, bet size selection, lot size selection, or even risk control, equity control, and damage control.
Money Management is managing the position size while Risk Management is about managing losses and open profits (unrealized trading returns). Actually I don’t like the term ‘Money Management’ in Forex trading as it also has a very general meaning (it’s also used to describe the “process” of saving, those “learn valuable skills” pages talking about piggy banks and how to teach kids about pay checks).
But ‘Money Management’ tells a Forex trader that he should concentrate his research on how to optimize capital usage and to view his/her portfolio as a whole.
Actually there are (at least) 2 steps to implement proper Money Management:
1) Position sizing is the determination of what (fixed or non-fixed) fraction of a portfolio’s total (or again fixed or non-fixed fraction) equity to risk on each trade expressed in Dollar-, Euro-, Yen-, or Swiss Franc-denominated currency values.
2) Position sizing, on the other hand, is the calculation of how many contracts I should hold in my position once a trade entry is signaled, which basically is a function of the Big Point Value (the number of dollars that a 1-point price move represents) and a rounding algorithm as the number of contracts/stocks can’t be traded in fractions and must be cut down to a whole integer.
Let me show you a clearer picture of money management. Suppose you and I bet $0.20 on a coin flip: Heads, you win, Tails, you lose. Suppose you have $10 of risk capital and I have $1. Even though I have less money, I have little to fear, because it would take a string of 5 losses to wipe me out, unless two brokers get between us and drain our capital by commissions and slippage.
The odds will dramatically change if you and I raise our bet to $0.50. If I have only $1, then I can only afford to lose 2 times. If you have $10, you can afford to lose 20 times.
Many amateur Forex traders take wild risks with a poor money management system. When they lose on their trade, they increases their lot size or position, hope that they can recover their losses made previously and make some profits. This action has caused their capital to be more exposed to risks. This lesson won’t automatically build wealth, but will bring a wealth of experience and knowledge, which will prove invaluable to you if both understood and applied properly. It will steer the course for your success in the global financial marketplace.
If you are too lazy to dig deep to both find and understand this lesson, I would advise to either refrain from trading.
By: Sebastian Sim
After observing hundreds of amateur Forex traders, I began to discover that their failures can be explained almost exclusively by their poor money management practices.
When trading, the importance of Money Management is underestimated by a lot of Forex traders. It is of much more importance than entry and exit decisions (=timing decisions) will ever be. Very few indicators are better than a coin toss, and if they are, the edge is eaten up by slippage and commission.
Money Management in Forex trading is also called asset allocation, position sizing, portfolio heat, portfolio allocation, cash flow management, trade management, capital management and position management, size management, bet size selection, lot size selection, or even risk control, equity control, and damage control.
Money Management is managing the position size while Risk Management is about managing losses and open profits (unrealized trading returns). Actually I don’t like the term ‘Money Management’ in Forex trading as it also has a very general meaning (it’s also used to describe the “process” of saving, those “learn valuable skills” pages talking about piggy banks and how to teach kids about pay checks).
But ‘Money Management’ tells a Forex trader that he should concentrate his research on how to optimize capital usage and to view his/her portfolio as a whole.
Actually there are (at least) 2 steps to implement proper Money Management:
1) Position sizing is the determination of what (fixed or non-fixed) fraction of a portfolio’s total (or again fixed or non-fixed fraction) equity to risk on each trade expressed in Dollar-, Euro-, Yen-, or Swiss Franc-denominated currency values.
2) Position sizing, on the other hand, is the calculation of how many contracts I should hold in my position once a trade entry is signaled, which basically is a function of the Big Point Value (the number of dollars that a 1-point price move represents) and a rounding algorithm as the number of contracts/stocks can’t be traded in fractions and must be cut down to a whole integer.
Let me show you a clearer picture of money management. Suppose you and I bet $0.20 on a coin flip: Heads, you win, Tails, you lose. Suppose you have $10 of risk capital and I have $1. Even though I have less money, I have little to fear, because it would take a string of 5 losses to wipe me out, unless two brokers get between us and drain our capital by commissions and slippage.
The odds will dramatically change if you and I raise our bet to $0.50. If I have only $1, then I can only afford to lose 2 times. If you have $10, you can afford to lose 20 times.
Many amateur Forex traders take wild risks with a poor money management system. When they lose on their trade, they increases their lot size or position, hope that they can recover their losses made previously and make some profits. This action has caused their capital to be more exposed to risks. This lesson won’t automatically build wealth, but will bring a wealth of experience and knowledge, which will prove invaluable to you if both understood and applied properly. It will steer the course for your success in the global financial marketplace.
If you are too lazy to dig deep to both find and understand this lesson, I would advise to either refrain from trading.
By: Sebastian Sim
Dec
08
Filed Under (Money Management) by admin
Many Forex traders start trading live too soon. They don’t have any understanding and learning of good money management rules. As a Forex trader, you need to develop a few good money management rules. Practice them on your demo account before starting live trading. By developing your own money management rules you are comfortable with, means how much of your money you are willing to risk on one single trade. You also need to determine how many contracts per trade your risk tolerance allows?
The important question is how you can improve your investment results by making small changes to your trading strategies. Proper money management can be the difference between becoming a successful Forex trader in the long run or an unsuccessful one who decimates his/her account in a few weeks.
Have you ever played poker or watched it being played online or on TV! If you have, then you will never see good poker players play all their cards on a single bet. Good poker players know that by risking only a small amount of their money on a single bet, they can win or lose but will still play the next hand. If they put everything on the table on a single bet, they will have to be 100% sure of winning, an impossible thing. You can never be 100% sure. Life is the game of probabilities.
You must know this that currency trading is far more complicated as compared to playing poker. You will be dealing with hundreds and hundreds of variables that can affect the markets. What to talk of only 52 cards. You must understand and implement good money management rules in order to succeed at Forex trading in the long run.
You can fall into many pitfalls while trading. As a trader you should constantly guard against two emotions. Greed and fear! In case you are on a winning streak, you will become greedy. You would want to risk more to make one big win and you would want to strike it rich in one or two big trades. This will make you risk more and more of your money on a single big trade.
When you lose a trade, you become afraid to risk enough of your money on the next trade. Fear takes over and impairs your decision making, making you lose confidence in your judgment and decision making. Let’s see how fear and greed can play havoc with your trading.
Let’s assume you have a run of successful trades. You become overconfident. You are not satisfied by risking only 2% of your equity on a single trade. You want to risk more on the trade because the more you have in a trade, the more you will make if you are right. You increase your risk to 5%. You win. You increase it further to 10%. You again win. Now, you finally decide to put 25% of your equity at risk on the next trade. Misfortune strikes, your successful run comes to an end. You lose.
Assume you had a $100,000 trading account. You had foolishly risked 25% or $25,000 on one trade that you desperately wanted to win. Losing $25,000 means you have only $75,000 in your account left. How much you need to make to get back the original balance of $100,000. You need to make $25,000 again to go back to the original balance. It means you will have to make 25,000/75,000= 33%. So you risked 25% but now you need to make 33% to get back your original amount.
Many investors once they lose a trade become desperate and try to risk more to recover their original loss. They end up losing more and more and very soon those investors destroy their accounts. Most of them are out of trading forever soon. There are other traders who try to reduce risk even more on making a losing trade; eventually they lose any opportunity for meaningful growth in their accounts.
By: Ahmad A Hassam
The important question is how you can improve your investment results by making small changes to your trading strategies. Proper money management can be the difference between becoming a successful Forex trader in the long run or an unsuccessful one who decimates his/her account in a few weeks.
Have you ever played poker or watched it being played online or on TV! If you have, then you will never see good poker players play all their cards on a single bet. Good poker players know that by risking only a small amount of their money on a single bet, they can win or lose but will still play the next hand. If they put everything on the table on a single bet, they will have to be 100% sure of winning, an impossible thing. You can never be 100% sure. Life is the game of probabilities.
You must know this that currency trading is far more complicated as compared to playing poker. You will be dealing with hundreds and hundreds of variables that can affect the markets. What to talk of only 52 cards. You must understand and implement good money management rules in order to succeed at Forex trading in the long run.
You can fall into many pitfalls while trading. As a trader you should constantly guard against two emotions. Greed and fear! In case you are on a winning streak, you will become greedy. You would want to risk more to make one big win and you would want to strike it rich in one or two big trades. This will make you risk more and more of your money on a single big trade.
When you lose a trade, you become afraid to risk enough of your money on the next trade. Fear takes over and impairs your decision making, making you lose confidence in your judgment and decision making. Let’s see how fear and greed can play havoc with your trading.
Let’s assume you have a run of successful trades. You become overconfident. You are not satisfied by risking only 2% of your equity on a single trade. You want to risk more on the trade because the more you have in a trade, the more you will make if you are right. You increase your risk to 5%. You win. You increase it further to 10%. You again win. Now, you finally decide to put 25% of your equity at risk on the next trade. Misfortune strikes, your successful run comes to an end. You lose.
Assume you had a $100,000 trading account. You had foolishly risked 25% or $25,000 on one trade that you desperately wanted to win. Losing $25,000 means you have only $75,000 in your account left. How much you need to make to get back the original balance of $100,000. You need to make $25,000 again to go back to the original balance. It means you will have to make 25,000/75,000= 33%. So you risked 25% but now you need to make 33% to get back your original amount.
Many investors once they lose a trade become desperate and try to risk more to recover their original loss. They end up losing more and more and very soon those investors destroy their accounts. Most of them are out of trading forever soon. There are other traders who try to reduce risk even more on making a losing trade; eventually they lose any opportunity for meaningful growth in their accounts.
By: Ahmad A Hassam
Nov
14
In any investment, the aim is to make more money. No one invest to lose money in currency trading. Sadly, not knowing proper money management can lose you money. Proper money management in currency trading can determine whether you earn profits or lose money.
Currency trading can be a lucrative business for people who practice proper management. Unfortunately, many people get into foreign exchange trading not knowing the basic of money management. They are often lured with testimonies of other investors that forex can make them instantly rich. All to often that people eyes are only in the amount of money they can profit. They neglect to formulate a strategy in protecting their capital.
The better you are in protecting your capital the higher are your chance in succeeding in the forex trading. Your aim is to stay longer in the game to recover money that you lose. The longer you stay in the game, the higher are your chances to take advantage of profit yielding opportunities.
You can easily loose a large portion of your money in a single trade. Protect yourself from this situation by knowing proper management. Makes sure that you can absorb loses and still be able to participate in the forex trading. With proper money management, you can be assured that currency trading is not a onetime deal but a sound investment vehicle.
A proper money management provides you with a realistic view of the dame. It understands that not all your decisions will be profitable in the end.
By: Timothy Stevens
Currency trading can be a lucrative business for people who practice proper management. Unfortunately, many people get into foreign exchange trading not knowing the basic of money management. They are often lured with testimonies of other investors that forex can make them instantly rich. All to often that people eyes are only in the amount of money they can profit. They neglect to formulate a strategy in protecting their capital.
The better you are in protecting your capital the higher are your chance in succeeding in the forex trading. Your aim is to stay longer in the game to recover money that you lose. The longer you stay in the game, the higher are your chances to take advantage of profit yielding opportunities.
You can easily loose a large portion of your money in a single trade. Protect yourself from this situation by knowing proper management. Makes sure that you can absorb loses and still be able to participate in the forex trading. With proper money management, you can be assured that currency trading is not a onetime deal but a sound investment vehicle.
A proper money management provides you with a realistic view of the dame. It understands that not all your decisions will be profitable in the end.
By: Timothy Stevens
Nov
10
Filed Under (Money Management) by admin
If you consider Forex money management a boring distraction from the real fun of Forex trading, you’ve missed the whole point. Before you can make any real and consistent gains in the Forex, you must come to understand that money management is just as important as the trading part. One of the most essential ingredients of successful Forex trading is the unfailing use of money management techniques to minimize losses and protect your gains.
Before you even begin laying out money and making trades, you’ll want to decide on a set of Forex money management guidelines. Placing bets without any kind of safety net is irresponsible toward yourself and your family.
Successful traders recommend that you start small and gain a gut-level grasp of the markets before moving on to bigger bets. Hoping for a big score right at the beginning is the mark of a casino gambler, not an investor.
The best advice:
Keep your risk, right from the beginning, at about one percent or less of your total equity on any one trade. Keeping your risk low, in the one percent range, protects you if disaster strikes and you have a string of losses. You could actually survive 20 consecutive bad trades and still have 80 percent of your equity remaining. Taking tiny little one percent baby steps may seem boring, but it certainly beats being wiped out by a run of adverse trades. It will ensure that you’re still around to invest next week, next month and next year. It also helps you safely build confidence, judgment and experience.
Many new Forex traders ask how much they should put into their trading account. The surest and wisest advice is never, ever bet your rent or grocery money. In other words, only use money you can afford to lose. Yes, I know that in your special case there aren’t going to be any losses, and you’re in a big hurry to make it big. But long experience says it’s not going to happen that way for you either. If you were to lose everything you invest, would you and your family still eat okay? Would you still be in your home, or would you have to move into your brother-in-law’s basement? Just think about this, okay?
It’s important for you to know about the four stops. These are standard (and very wise) ways to prevent losses from ravaging your finances as you begin trading the Forex markets. You or your broker can use one or more of these four stops to protect your money.
1. Equity Stop
This stop lets you decide beforehand how much you’re prepared to risk on a single trade, and you won’t risk anything beyond that percentage. A beginner may set the equity stop to one or two percent. Once you’ve gained considerable experience, you might eventually raise this to five percent, but never forget that at the 5% level, ten consecutive bad trades (not impossible) could wipe out half of your account.
Downside: This stop makes no allowance for positive fluctuations. The protection is strong, but if you never vary from it, you may miss out on some of the more profitable trades. When you’re a newbie, the safety net it provides while you’re learning is more important than any gains you might miss while you’e learning.
2. Chart Stop
The trading charts that technical analysis provides can be accurate indicators of market movements. Technically minded traders who live, eat and breathe mathematics and probabilities often love chart stops. But the smart ones don’t get reckless. They also include equity stops in their calculations.
Downside: Generating charts and analyzing them can take significant time for newbies. This is time in which the market has moved on, leaving all that beautifully charted data a little (or a lot) outdated.
3. Volatility Stop
Related to the chart stop but more complex, this one assigns risk values according to volatility rather than price action. Until you’re experienced in Forex trading, it’s best to leave this difficult technique to your broker. It’s based on subtle and sophisticated evaluations of high versus low volatility of currency pairs and assigns greater or lesser risk to each market situation.
Downside: Demands steady, unflinching nerves and a great deal of experience.
4. Margin Stop
With the Margin Stop you’re deciding beforehand that you’ll get out of any trade before you’re out of money. If you have $2,000 in your account, setting your margin to $500 means you’ll trade with the top $1,500 but if your losses ever reach that amount, you’ll close your position and preserve that last $500.
Downside: It’s hard to find a downside to the Margin Stop. You keep control of your account, even when using an account manager.
Forex money management is essential when trading in the currency markets. And these stops are important backup measures to be used in tandem with your own patience, caution and growing judgment to minimize losses while maximizing your gains.
By: Max Conner
Before you even begin laying out money and making trades, you’ll want to decide on a set of Forex money management guidelines. Placing bets without any kind of safety net is irresponsible toward yourself and your family.
Successful traders recommend that you start small and gain a gut-level grasp of the markets before moving on to bigger bets. Hoping for a big score right at the beginning is the mark of a casino gambler, not an investor.
The best advice:
Keep your risk, right from the beginning, at about one percent or less of your total equity on any one trade. Keeping your risk low, in the one percent range, protects you if disaster strikes and you have a string of losses. You could actually survive 20 consecutive bad trades and still have 80 percent of your equity remaining. Taking tiny little one percent baby steps may seem boring, but it certainly beats being wiped out by a run of adverse trades. It will ensure that you’re still around to invest next week, next month and next year. It also helps you safely build confidence, judgment and experience.
Many new Forex traders ask how much they should put into their trading account. The surest and wisest advice is never, ever bet your rent or grocery money. In other words, only use money you can afford to lose. Yes, I know that in your special case there aren’t going to be any losses, and you’re in a big hurry to make it big. But long experience says it’s not going to happen that way for you either. If you were to lose everything you invest, would you and your family still eat okay? Would you still be in your home, or would you have to move into your brother-in-law’s basement? Just think about this, okay?
It’s important for you to know about the four stops. These are standard (and very wise) ways to prevent losses from ravaging your finances as you begin trading the Forex markets. You or your broker can use one or more of these four stops to protect your money.
1. Equity Stop
This stop lets you decide beforehand how much you’re prepared to risk on a single trade, and you won’t risk anything beyond that percentage. A beginner may set the equity stop to one or two percent. Once you’ve gained considerable experience, you might eventually raise this to five percent, but never forget that at the 5% level, ten consecutive bad trades (not impossible) could wipe out half of your account.
Downside: This stop makes no allowance for positive fluctuations. The protection is strong, but if you never vary from it, you may miss out on some of the more profitable trades. When you’re a newbie, the safety net it provides while you’re learning is more important than any gains you might miss while you’e learning.
2. Chart Stop
The trading charts that technical analysis provides can be accurate indicators of market movements. Technically minded traders who live, eat and breathe mathematics and probabilities often love chart stops. But the smart ones don’t get reckless. They also include equity stops in their calculations.
Downside: Generating charts and analyzing them can take significant time for newbies. This is time in which the market has moved on, leaving all that beautifully charted data a little (or a lot) outdated.
3. Volatility Stop
Related to the chart stop but more complex, this one assigns risk values according to volatility rather than price action. Until you’re experienced in Forex trading, it’s best to leave this difficult technique to your broker. It’s based on subtle and sophisticated evaluations of high versus low volatility of currency pairs and assigns greater or lesser risk to each market situation.
Downside: Demands steady, unflinching nerves and a great deal of experience.
4. Margin Stop
With the Margin Stop you’re deciding beforehand that you’ll get out of any trade before you’re out of money. If you have $2,000 in your account, setting your margin to $500 means you’ll trade with the top $1,500 but if your losses ever reach that amount, you’ll close your position and preserve that last $500.
Downside: It’s hard to find a downside to the Margin Stop. You keep control of your account, even when using an account manager.
Forex money management is essential when trading in the currency markets. And these stops are important backup measures to be used in tandem with your own patience, caution and growing judgment to minimize losses while maximizing your gains.
By: Max Conner
Oct
24
Filed Under (Money Management) by admin
Many traders have forex trading systems that can pick the direction of the currency correctly but they continually get stopped out by volatility and cannot stay with the trend. Here are some money management tips to help you stay with the trend and enjoy currency trading success…
A typical scenario which occurs for most traders is they enter a trend with their currency trading signal the price retraces, takes out their stop and then the trend immediately goes back the way they thought, piling up thousands of dollars and their not in!
If this has happened to you, you’re not alone. Most traders have this problem and volatility is the cause.
Of course prices don’t trend in a straight line otherwise currency trading would be easy – they constantly retrace against major trends. Quite simply, you need to employ money management rules to keep you in the major trend and not get stopped out so here are some tips.
1. Don’t Trade the Market Noise
If you want to avoid getting caught by random volatility avoid short term trading strategies such as forex scalping or day trading. All volatility in a day is random. So if you place stops using daily support and resistance you are wasting your time.
Forget day trading and look at long term trend following.
2. Be Selective
You don’t get paid for how often you trade you get paid for being right with your trading signal and getting your market timing right. The big high odds trades don’t come around every day and you need to be patient to wait for them. I know traders who trade less than a dozen times a year, who make triple digit gains and you, can to.
You will also find many of the best trading moves come from breakouts and you need to look for these.
3. Use Breakouts.
Most major trends start from breaks of highs and lows and pick valid ones (check our other articles for more information on breakouts) When a break occurs your stop is obvious below the breakout point. If the breakout continues do not trail your stop to close! This is the major error of most traders in any form of trend and we will discuss this next.
4. Moving Stops
Most traders fail to win because they trail stops too soon. They want to restrict risk so much they create it by bringing their stop within normal volatility and getting bumped out the trade.
Make sure you leave your stop until the trend is well underway and trail outside of random volatility.
A good way of doing this is using the 40 day Moving average as a stop. Sure you miss a bit of the trend when it turns – but you can’t predict that anyway, so there is no point in trying. If you caught 50% of every major trend you would be very rich.
5. Deciding Risk per Trade
Today you can get leverage of 200:1 or more but for a small trader to use all of this is madness.
Sure your gain will be huge – but your stop has to be so close, you are guaranteed to get stopped out. De-leverage and use 10 or 20:1 and risk more per trade.
In forex trading you have to take a risk and you need to be outside of daily volatility with your stop, or you’re going to lose. Risking more to your stop means your chances of winning are higher, if you hit high odds trades and that’s what you need to do.
Volatility can destroy your account quickly, if your forex money management doesn’t handle it.
The above tips will work. In the next series of these articles we will look at how to measure volatility and look at standard deviation of price, which is essential forex education for any trader and a great tool to help time trading signals – the Bollinger Band.
Many traders think forex money management takes care of itself, it doesn’t and you need to get protection for your trades and deal with volatility to win.
By: Kelly Price
A typical scenario which occurs for most traders is they enter a trend with their currency trading signal the price retraces, takes out their stop and then the trend immediately goes back the way they thought, piling up thousands of dollars and their not in!
If this has happened to you, you’re not alone. Most traders have this problem and volatility is the cause.
Of course prices don’t trend in a straight line otherwise currency trading would be easy – they constantly retrace against major trends. Quite simply, you need to employ money management rules to keep you in the major trend and not get stopped out so here are some tips.
1. Don’t Trade the Market Noise
If you want to avoid getting caught by random volatility avoid short term trading strategies such as forex scalping or day trading. All volatility in a day is random. So if you place stops using daily support and resistance you are wasting your time.
Forget day trading and look at long term trend following.
2. Be Selective
You don’t get paid for how often you trade you get paid for being right with your trading signal and getting your market timing right. The big high odds trades don’t come around every day and you need to be patient to wait for them. I know traders who trade less than a dozen times a year, who make triple digit gains and you, can to.
You will also find many of the best trading moves come from breakouts and you need to look for these.
3. Use Breakouts.
Most major trends start from breaks of highs and lows and pick valid ones (check our other articles for more information on breakouts) When a break occurs your stop is obvious below the breakout point. If the breakout continues do not trail your stop to close! This is the major error of most traders in any form of trend and we will discuss this next.
4. Moving Stops
Most traders fail to win because they trail stops too soon. They want to restrict risk so much they create it by bringing their stop within normal volatility and getting bumped out the trade.
Make sure you leave your stop until the trend is well underway and trail outside of random volatility.
A good way of doing this is using the 40 day Moving average as a stop. Sure you miss a bit of the trend when it turns – but you can’t predict that anyway, so there is no point in trying. If you caught 50% of every major trend you would be very rich.
5. Deciding Risk per Trade
Today you can get leverage of 200:1 or more but for a small trader to use all of this is madness.
Sure your gain will be huge – but your stop has to be so close, you are guaranteed to get stopped out. De-leverage and use 10 or 20:1 and risk more per trade.
In forex trading you have to take a risk and you need to be outside of daily volatility with your stop, or you’re going to lose. Risking more to your stop means your chances of winning are higher, if you hit high odds trades and that’s what you need to do.
Volatility can destroy your account quickly, if your forex money management doesn’t handle it.
The above tips will work. In the next series of these articles we will look at how to measure volatility and look at standard deviation of price, which is essential forex education for any trader and a great tool to help time trading signals – the Bollinger Band.
Many traders think forex money management takes care of itself, it doesn’t and you need to get protection for your trades and deal with volatility to win.
By: Kelly Price
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