Tag: money management

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Forex Basic Strategies

Trading the Forex Market Without Using the Stop-Loss Order

A stop loss is an order placed by a trader on any underlying asset, the order remains until the price action reaches that specific point, then it automatically executes a buy or sell order in the market. Trading the markets without a stop loss is dangerous. However, by placing the stop loss, traders can easily […]

A stop loss is an order placed by a trader on any underlying asset, the order remains until the price action reaches that specific point, then it automatically executes a buy or sell order in the market. Trading the markets without a stop loss is dangerous. However, by placing the stop loss, traders can easily […]

A stop loss is an order placed by a trader on any underlying asset, the order remains until the price action reaches that specific point, then it automatically executes a buy or sell order in the market. Trading the markets without a stop loss is dangerous. However, by placing the stop loss, traders can easily eliminate the emotions from their trading decisions. In your trading carrier, you will often hear about the traders who never use the stop-loss orders, and they continually make money in the market. They rely on the no-stop loss forex trading strategy, and some of the traders succeed, and some don’t. The traders who win consistently in the markets are emotionally intelligent; also, they spent an endless amount of hours on demo trading to master the strategy well. Another most critical skill they learn is Accurate Thinking, and they don’t see things the way they are, they see things the way things are.

Not Using The Stop Loss Have Some Advantages In The Market

In dead markets hours when none of the trading sessions is active, at that time, most of the forex brokers wider their spreads so that they can avoid the scalpers to move the market. In that time, if your strategy gives you the trading opportunity, a widening spread can easily trigger your stop loss. During the opening hours or the high political news events, markets are quite volatile, which sometimes prints unexpected spikes in the market that ends up closing your positions and markets happily moving in the directions you predicted.

No Stop-Loss Trading Strategy

Keep in mind that trading without the stop loss is only applicable for intraday trading only, and it is advisable that use this strategy only on the lower timeframes because markets are random and it’s risky to let your positions to run overnight in the market. Like a gambler, you need to keep watching your trades until your trades hit the take profit. If you are beginner traders, then we don’t recommend you to use this strategy to trade in the live market, first of all, spend two to three months on the demo account to master this strategy and then give it a try on live markets.

Trading The Markets With The Moving Average

From beginners to advanced to chartists to market movers, everyone uses the moving average once in their lifetime. Even chartists and professional traders use this indicator in their everyday market analysis. Moving average defines the current market trend, spot trend reversals; also, it indicates the buy and sell signals. When the indicator is above the price action, it means that the trend is down, and then the indicator goes below the price action, which shows that the trend is up. Many traders and chartists use some other form of technical analysis in conjunction with the moving average to identify the trading signals. You can pair it with other indicators; also, you can use the higher period average with the lower period average to find the best entries. This strategy only works in the trending market, and we suggest you avoid using it in the dead, volatile, and consolidation phases.

Buying Rules

  1. In an uptrend, go long when the 7 MA crosses the 14 MA to the upside.
  2. Exit your position when the red candle closes below the 14period MA.
  3. No need to place the stop loss.

As you can see in the below image of the USDCAD 15 minute forex chart, the markets were overall in an uptrend. Our strategy gives the first trading opportunity around the 27th of February, and exits were also the same day. Our early trade gives us 30+ pips profit. After our position exiting the market provides us with a trading opportunity in the US session, we took this example from the recent market conditions, so our second trade in still running. By now, our second trade is up by 100+ pips. By following the flow of the market, you can easily make money, without placing the stop loss. You can see in the below image that the market is not even dead and volatile; the markets were moving in a relaxed and calm manner, find these kinds of markets to spotlighting the outstanding trading opportunities.

Selling Rules

  1. In a downtrend, go short when the 7 MA crosses the 14 MA to the downside.
  2. Exit your position when the green candle closes above the 14period MA.
  3. No need to place the stop loss.

The below NZDCHF forex pair indicates the selling opportunities by using the Doube moving average. The markets were in a strong downtrend, and it gives us the first trading opportunity on the 25th of February around the London session. After our entry price action dropped immediately and printed the brand new lower low. The very next day market gives the second selling opportunity in the London session. On the same day, the opening of the New York session indicates us to close both buying positions when a green candle closes above the 24 periods MA. Both trades help us to milk 80+ pips in just two working trading days.

The below image represents the 3rd and 4th trading opportunities in the NZDCHF forex pair. We activate the 3rd trade in the New York session on the 27th of February, and the last trade was taken in the Asian session on the 28th of February. Both of these trades are running successfully, and we are in profits of nearly 200 pips. Now, all we need is to wait for the green candle to close above the 14 periods MA so that we can book profits. You can use this way to exit your position, or you can use the significant support resistance areas to book the profits. The MA lines also act as a dynamic support resistance to the price action, and the more, the higher the period we choose, the stronger the S/R will be. So when the price action crosses the 14 periods MA, it indicates our trading party loses its power, { buyers in buying side, sellers in selling side } so it’s the best time to close our position.

Conclusion

We believe that by now, you can understand that it is possible to trade the market without using the stop loss. All you need to do is to put in the extra work required to find one of the best trading opportunities to make some consistent money. In short, Activate your trades only in active trading hours, no trade in dead or volatile market conditions also avoid choppy or ranging market conditions. Find out the super smooth trend in any instrument and wait for the price action to meet the rules of strategy to take trades.

Keep Milking The Markets, Peace.

Categories
Forex Forex Money Management Forex Risk Management

How Much Money Should I Risk On Forex Trading?

Novice traders are often surprised to learn that when it comes to being profitable in the long run, controlling risk is as fundamental as making good trades.  Position size, Risk, and money management are no less fundamental than entry strategies and trade exit strategies and must be considered scientifically and completely. If you succeed, then […]

Novice traders are often surprised to learn that when it comes to being profitable in the long run, controlling risk is as fundamental as making good trades.  Position size, Risk, and money management are no less fundamental than entry strategies and trade exit strategies and must be considered scientifically and completely. If you succeed, then […]

Novice traders are often surprised to learn that when it comes to being profitable in the long run, controlling risk is as fundamental as making good trades.  Position size, Risk, and money management are no less fundamental than entry strategies and trade exit strategies and must be considered scientifically and completely. If you succeed, then as long as you can maintain a trading margin (which is not so complicated, there are several well-documented trading margins), you will have a solid model to make a lot of money. You don’t need to choose spectacular trading operations to make large amounts of money, you just have to keep doing the right thing constantly, and let the magic of managing money be composed of snowballs growing from your bottom line. To get it right, start by asking the right questions.

How much money should I put into my trading account?

You have hired an account with a broker, and are ready to start trading. Just deposit some cash. How much should you put? You should be honest with yourself, and consider how much money you have that is available for wealth creation. It should not include assets such as a house or car in that calculation, or pensions: the correct question would be, how much free cash can you get in your hands, without debt, and use it to try to increase your profits? When you have this figure, you should be thinking of placing between 10% –  15% of it in something risky, like Forex Trading. You may think this is a small amount, but it really isn’t – please read on and I’ll explain why.

The risk or “Barbell”

Imagine that there are two traders, trader A, and trader B. Both have USD 10,000 in liquidity, which is all the cash that each of them can get to invest in creating wealth. After opening brokerage accounts, Trader A invests its $10,000, while Trader B invests 10% of the same amount, $1,000, while the remaining $9,000 is invested in United States-guaranteed Treasury bonds that pay a low interest rate.

Consider your respective positions. Trader A will be at a psychological disadvantage, as the account represents all the money he has, so the losses will probably be painful for him. You also need to worry about the broker, lest he files for bankruptcy and be unable to repay any of his funds back unless the broker is backed by a government deposit insurance program and obviously as we always recommend, will have to be a regulated broker.

Even then, its capital could be held back for over a year before he could get any insurance. Because of his fears, even though he knows that the best risk per trade for his trading strategy is 2% of his share account per trade (explain the issue of how to calculate later), he decides to risk less than this. He decides to risk only one-tenth of the total amount, so he will risk 0.2% of his capital on each operation.

Trader B feels much more relaxed than Trader A. She has $9,000 parked with lots of security in US Treasury bonds and has $1,000 in her new brokerage account. Even if he loses the entire account, in the end, he would have lost only 10% of his investment wealth, which would not be fatal and could be recovered. It is the collections over 20% that are challenging to recover. Trader B is psychologically more prepared for risk than Trader A. She has calculated that the ideal risk by trading for your trading strategy is 2% of the capital of your account per trade, just like Trader A, but unlike Trader A, She’s gonna risk that amount in full.

Both Trader A and Trader B will start by risking the same amount per cash transaction, $20.

Trader B, with the account under $1,000 and the $9,000 in US Treasury bonds, ends up with a total profit of $811, of which $117 is interest received at the end of the year on US Treasury bonds. Trader A, with the largest account of $10,000, ends up with a total profit of $627. Although they initially start with the same risk, if they diversify risk capital between a very conservative fixed income and a more risky investment, it pays Trader B a significant profit and gives her the peace of mind to aggressively play the risk as it should be.

How much money should I risk?

This is not a difficult question to answer if you know the average or average benefit you can objectively expect to make in each transaction and are only interested in maximizing your total long-term benefit: use a fixed fractional money management system based on the Kelly Criteria (a formula to will be explained in more detail in the next paragraph). A fixed fractional system has the risk that the same percentage amount of the value of your account in each trade, as shown in the above example of Traders A and B using 0.2% and 2%.

Fixed fractional money management has two major advantages over other strategies. First, you risk less during losing streaks, and more during winning streaks, when the effect of composition really helps to build the account. Second, it is virtually impossible to lose your entire account, as you are always risking X% of the remaining, and never everything.

The last question is, how is the size of the risk fraction calculated? The Kelly Criterion is a formula that was developed to show the maximum amount that could be risked in a trade and would maximize the long-term benefit. If you know your approximate odds for each operation, you can easily calculate the optimal amount using a Kelly Cries calculator. In the best Forex strategies, the amount advised by Kelly’s formula is typically between 2% and 4% of the capital account.

A warning: the use of the total amount suggested by Kelly is bound to result in large reductions after losing the veins. Some veteran traders, such as the prominent Ed Thorp, have suggested using half the amount suggested by a Kelly Criteria calculator. This generates 75% of the long-term benefit, but only 50% of the reduction, produced by the full Kelly criteria.

Monetary management: Part of “Holy Grail”

It’s no exaggeration to say that the main reason why traders still fail, even when they’re following the trend and getting their inputs and exits mostly right, is because they are not following the money and risk management techniques set out here in this article, as part of a global trading plan. Forget the trade result you take today and worry about the overall results of the next 200, 500, or 1000 trades you will take in your place. If you are able to make a profit of only 20% of your average risk by trade, which is feasible using a trend-tracking volatility-breaking strategy, it is totally possible to turn a few hundred into a million within a few years.

Categories
Forex Education

Here’s How to Lose Money With Forex

We all, or at least most of us came into the forex trading world in order to make money, it’s a fantastic thing being able to make a bit of extra cash on the side or to even trade as a new full-time job, but for every trade that wins, there is a losing trade […]

We all, or at least most of us came into the forex trading world in order to make money, it’s a fantastic thing being able to make a bit of extra cash on the side or to even trade as a new full-time job, but for every trade that wins, there is a losing trade […]

We all, or at least most of us came into the forex trading world in order to make money, it’s a fantastic thing being able to make a bit of extra cash on the side or to even trade as a new full-time job, but for every trade that wins, there is a losing trade on the other side, someone who has taken your offer and the markets have moved against them, these are the losers. Many actually find it quite hard to win and so there are ultimately far more losers than there are winners. Today we are going to be looking at different ways that people lose money when it comes to trading. Maybe you are guilty of doing a few of these things yourself, if you have, that is not a problem, you would have learned something from it and will avoid doing that again in the future, so let’s look at some of the most common ways that people lose money when it comes to forex and trading.

Gambling

Let’s be honest, anyone that likes a bit of risk also probably likes to gamble, gambling can give us that buzz that very few other things can, it also gives us the opportunity to make money, potentially a lot of money without putting in any of the efforts that you would normally have to. The problem with gambling is that it is random, couple that with the fact that the markets are in no way a 50/50 chance, every trade that you put on is a huge risk, and those that have tried it, the markets move in such a way that if you are gambling, you will need to be right at least 75% of the time if you want to be profitable, the odds alone mean that it is far more likely that you will lose money than make it. If you are thinking about trading via gambling, then we would suggest going back to sports bookmakers instead, you have a much better chance of being profitable there.

Thinking You Know the Markets

This is something that a lot of people feel once they have had a few winning trades in a  row, they know how the markets love and so when they place a trade they are sure that they will be successful and will be profitable. If you are in this position then you will have a very rude awakening, no one knows the markets and no one can successfully predict it all the time. It is a mistake that a lot of people fall into and unfortunately it is always a very expensive one. You cannot predict the markets, even with all the analysis in the world, the markets will still sometimes go against what is expected, this is why trading can be so exciting and also so dangerous at the same time. As soon as you start thinking that you know best, you are in a very bad place and need to member that you need to follow the markets, they certainly won’t be following you.

Greed

Greed is a very powerful emotion, wars have been started over the emotion of greed, murder, stealing, and trading badly. All of these things are associated with greed at some point, we of course are thinking about trading badly rather than the murder… we hope. Greed will make you want more, and it will often make you want more very quickly, when we trade we trade with a trading plan, a plan that details our entry, exits, risk management, and more, but when greed takes over we often throw that out the window and instead trade recklessly. Often using trade sizes that are too large for our trading account, placing too many trades at once in the hope to make a bit of extra money, or simply ignoring the plans that we have in place. Whatever it is that you do, it is not a good idea. If you ever feel that greed is starting to take over, you need to take a step back and get some fresh air in order to clear your mind and to get rid of those feelings. You Are here to make consistent profits, not to make a bit and then try to make more, only to end up losing it all.

Indecision

While many people look at the opposite, they see people who trade too much as an issue or that place trades afar too quickly as a problem, it can also be the other way around. Those that are not able to make you cannot decide whether to put on a trade, either through uncertainty, worry, anxiety, or the fear of the risk, then you are not in a great place to be a trader. You need to accept that you will be putting on trades and those trades will come with risks, but they are calculated risks. If you take a long time to put on trades, you may have a good trade septum but by the time you put the actual trade on, the opportunity may have passed and you have now actually put on a bad trade. When The opportunity is there it is important that you take it, otherwise, you will be putting yourself at some additional risks of losing some of your capital.

Chasing Losses

One of the worst things you can do with anything that is financial is to try and chase losses, you need to be able to accept them, they are a part of trading and a part of it that you will experience over and over again. What many people, unfortunately, do though, is that they try to chase those losses, what this means is that if you placed a $10 trade which lost, you would then most likely place a $20 trade in order to make back the money that you lose plus a little bit extra profits. The problem is that if this one loses you are $30 down, and so you need to place another trade larger than both of those combined to try the same, as this goes on the trade sizes continue to grow and so does the risk, as you will most likely not be following your trading plans anymore. This leads to a spiral that ultimately leads to very large losses or even the total loss of an account. If You make a loss, accept it, move on, and certainly do not try and change it to make it back.

Not Learning Your System

It is very easy to get a new strategy or trading plan, there are loads of them posted all over the internet, this makes it very easy and accessible but does come with some issues. If you are using someone else’s plan, then do you really understand it It may work initially but as the market conditions begin to change, you will encounter some issues, those issues will mean that you need to adapt your strategy, but if you do not fully understand it, then you won’t be able to adapt it properly, meaning that it will no longer be as effective and could lead you down the road of some losses. If You are going to use a strategy, be sure that you learn everything that there is about it and how it actually works.

Those are some of the things that many traders do that loses them money, there are of course other things and even if you are the perfect trader, you will still experience losses, that is just the nature of the forex markets, you cannot control them, so don’t try to, accept your trades, use the proper risk management and you will be on a good track for profits.

Categories
Forex Money Management

How Much Should You Be Spending on Forex Trading?

There’s a lot to figure out once you make the decision to become a forex trader. What broker to use, when and how to trade, and managing risk is just the tip of the iceberg. One question that many beginners actually find themselves struggling with involves figuring out how much money to initially deposit into […]

There’s a lot to figure out once you make the decision to become a forex trader. What broker to use, when and how to trade, and managing risk is just the tip of the iceberg. One question that many beginners actually find themselves struggling with involves figuring out how much money to initially deposit into […]

There’s a lot to figure out once you make the decision to become a forex trader. What broker to use, when and how to trade, and managing risk is just the tip of the iceberg. One question that many beginners actually find themselves struggling with involves figuring out how much money to initially deposit into their trading account and how much they should risk on each trade from there. 

Making an Initial Deposit

There are a few advantages to making both smaller and larger initial deposits. Fortunately, most forex brokers offer different account types that can appeal to traders that are looking to deposit different ranges of money, so you shouldn’t feel pressured to deposit hundreds of dollars if you don’t want to. 

Small Deposits 

Most brokers do offer cheaper account types for beginners, so this is definitely an option if you aren’t comfortable depositing a larger amount of money at first. Plus, you can always go back and deposit more money later on. Here are the perks to making a smaller first deposit of around $10 – $100:

  • You can open a micro/mini/cent account, which allows for smaller lot sizes to be traded, making them good starter accounts.
  • You can test the broker’s deposit methods and conditions without putting a lot of money on the line.
  • If you aren’t comfortable making a bigger deposit, this will allow you to become more familiar with the broker’s conditions so that you can deposit more later on.
  • This is a good way to get started trading with minimal risk and makes opening a trading account more of a realistic option for more timid beginners. 

While a smaller deposit might be a better option for beginners, there are also a few disadvantages to consider:

  • Account types that accept smaller deposits typically come with higher spreads and fees, so you’ll wind up bringing home less of your profits. 
  • Some brokers don’t allow mini/micro/cent account holders to partake in promotional opportunities and you might miss out on other perks.
  • Your small deposit won’t be enough to trade with for a long period of time, meaning that you’ll need to top up your account more often if you run out of funds. 

Large Deposits

Perhaps you’re leaning in the opposite direction and considering that you should make a larger deposit of a few hundred or thousand dollars. As long as you’ve done your research and chosen a trustworthy broker, then this can be a great decision that offers several benefits:

  • Making a larger initial deposit will open the door to better account types that offer tighter spreads and lower commission charges through most brokers.
  • Some brokers offer special perks on these better account types, like fee-free withdrawals, larger bonuses, and more. 
  • Your deposit should provide you with enough money to trade for quite a while without needing to turn around and deposit more money quickly. 

A Quick Tip

There’s one important thing to remember as a trader: you should never deposit more money than you can personally afford. Larger deposits may come with more benefits, however, there’s no reason to put yourself into debt when it’s possible to open a trading account with less than $100 through several online brokers. There is no guarantee you will get that money back, so don’t pull out of money that is meant to be spent on groceries, bills, or other necessities. Having the discipline and financial wisdom to only risk what you can afford is one of many qualities that are necessary if you want to be a successful trader. 

Conclusion: How Much to Risk?

You probably have an idea of whether you’re looking to invest a small or large amount of money at this point, but there’s still another question left to answer: How much will you risk on each trade? This is really more of a personal decision, but there are a few things you should know before you decide:

  • Some of the most common beginner mistakes involve risking too much on each trade, trading with too high of a leverage, and failing to take precautions to minimize risk.
  • The more you risk, the faster you could drain your account, especially in the beginning.
  • Experts actually recommend risking around 1% of your total account balance on each trade. If you have $100 in your trading account, this means you’d only risk $1 per trade. 

Perhaps you wanted to risk a larger amount of money so that you could profit more quickly. One professional tip states that you should calculate the risk you should take based on your confidence in each individual trade. For example, you could stick with the 1% account balance rule on trades that you’re only fairly confident about, but risk slightly more on trades that you feel much more confident about. This will allow you to make slightly larger profits while remaining careful. Of course, this is only a suggestion, so you may want to look for other tips online if you’re looking to do things differently.

At the end of the day, only you can decide how much to deposit and risk based on your personal financial situation. However, there is one rule you should always follow: never invest or risk more money than you’re willing to lose.

Categories
Forex Money Management

Three Vitally Important Money-Management Tips

It simply isn’t possible to become a successful Forex trading without implementing a solid money management plan. Fund management and market analysis are indeed the keys to successful trading. Here, we provide you with three vitally important tips for managing your funds while trading FX. Tip #1: Figure Out If you Have a Spending Problem […]

It simply isn’t possible to become a successful Forex trading without implementing a solid money management plan. Fund management and market analysis are indeed the keys to successful trading. Here, we provide you with three vitally important tips for managing your funds while trading FX. Tip #1: Figure Out If you Have a Spending Problem […]

It simply isn’t possible to become a successful Forex trading without implementing a solid money management plan. Fund management and market analysis are indeed the keys to successful trading. Here, we provide you with three vitally important tips for managing your funds while trading FX.

Tip #1: Figure Out If you Have a Spending Problem

Consider how much money you make, how much you spend on bills, and where the rest of your money goes. Do you have money in savings? How much do you eat out on a monthly basis? Do you frivolously blow money on random things that you don’t even use? Or perhaps you’re prone to paying those pesky overdraft fees after overspending if you have a bank account. If you do use a bank, try looking at your previous spending over the last few months and figure out your monthly total. You might be surprised just how much you spend on unnecessary items, eating out, overdraft fees, subscriptions you don’t use, and so on. You can then move on to create a record of your spending habits. A pie chart is useful for this, as it can break down just where your paycheck is going. 

Tip #2: Create a Budget

Once you figure out where your money is going, you need to give yourself a realistic budget that you can actually stick to. Don’t deprive yourself of everything you like but try to cut down in some places. For example, if you spend $100 eating out every month, try to lower that amount by at least $20. You could also cancel some of those old subscriptions that you barely use to save $10 or more every month. It’s easiest to cut down on frivolous spending but take a look at some of your bills as well. Maybe you could be saving on car insurance, home insurance, your cell phone bill, or something else. You might even realize that you barely use your cable service and consider canceling in favor of streaming services. Once you analyze your budget and make cuts, you’ll have more money to save.

Tip #3: Invest in Trading

Once you have more money in hand, you could always follow traditional means by putting it up in a savings account. However, you could also consider investing this money to make more money. This can also lead to more benefits down the road, as it can contribute to paying for family vacations, Christmas, and can even help you float through retirement someday. You won’t get rich overnight if you do decide to take up trading, but we highly suggest it if you’re willing to put in the hard work. After all, you’ve already thought about your spending and where you could cut back, so why not invest the money you’re saving? This is one of the best financial tips out there for anyone that is looking to make more money without getting a second or third job. 

Categories
Beginners Forex Education Forex Basics

Pros and Cons of Trading with a Small Account Balance

When we talk about retailers, one of the biggest differences between them and professional traders, as well as institutional traders, is the size of the accounts they handle. This creates huge differences in the way these traders will address their situation, but at the end of the day, the math shows us that the differences […]

When we talk about retailers, one of the biggest differences between them and professional traders, as well as institutional traders, is the size of the accounts they handle. This creates huge differences in the way these traders will address their situation, but at the end of the day, the math shows us that the differences […]

When we talk about retailers, one of the biggest differences between them and professional traders, as well as institutional traders, is the size of the accounts they handle. This creates huge differences in the way these traders will address their situation, but at the end of the day, the math shows us that the differences between these types of accounts should not be exceeded.

The Reality

We are not trying to dissuade any reader from negotiating, but you should know that there is too big a difference between a trade of 10 million USD account and a $100 account. As information, the average retail account in the United States is located somewhere near the level of $2000, and I suspect that in other countries it is much smaller. This is because the Forex is sold as a “scheme to get rich quickly,” by layers and layers of people who have an interest in taking their money, one way or another.

But the reality is that it is true that you can create a lot of money faster in Forex markets than in other markets. This is due to leverage and the fact that markets tend to have a very long-term trend. And indeed, it is very common for a currency pair to have a trend of three years at a time. However, mixing that with leverage is both a good thing and a bad thing. Trading with a small account

The Advantages

Let’s start with the advantages of trading in a small account. The most obvious benefit of trading with a small account is that you don’t have to worry about turning the market against oneself if go in and out of it. If you are trying to close a 10,000 unit position, you will have a lot of trouble doing it at any price. However, if you are trying to exchange a position of 100 million units, it is a completely different situation. Indeed, the retail trader has considerably more flexibility when putting or removing a position.

Another advantage is that if you remove it, it should not be a crucial mistake in life. After all, the average person who is trading forex can handle being deleted from an account if it is small, but again, the biggest problem you will have will be related to your financial situation. For example, if you have a net value of $3000 at the time of trade and have an account of $1000, that could cause a problem. In this sense, the declaration of a “small account” is reduced to an individual situation.

Another great advantage of trading a small account very often is that they will have a greater amount of leverage in your Broker. In that sense, it gives you the opportunity to make more money with a small stake, but the problem is that, of course, high leverage often leads to large losses. However, again, that said, if you’re risking a few hundred dollars and making no difference to your livelihood, that risk can be advantageous.

The Disadvantages

There are a multitude of disadvantages to a small account. The most obvious one is that it will be difficult to make the rewards worthwhile. For someone who earns $100,000 a year, it won’t be exciting to win $100 at the end of the same year through trade. This comes down to just having more patience, and whether or not you know how to drive. Most of the traders I know don’t. This is why many of the small traders end up having big problems, as the lack of a significant reward makes concentration difficult. This leads to over-negotiation or over-exploitation of their position.

If your account is too small, you may not be able to determine whether the storm is a major setback or a period of time that presents much volatility. This is because your losses must be too small. Beyond that, you will most likely continue to love yourself too much, thinking about things as follows: “I just need a couple of crazy trades, then I can do trading normally after I have increased my account a little”. To say, this is bound to be counterproductive, as the emotions of seeing a big change in its profit and loss section will make you make decisions that will usually be bad for your business results. Even if you get that sudden explosion and the ability to make a massive game, it is very rare that a trader can reduce the size of his position after winning like this. Greed finally takes over, and then the broker gets all his money.

The Solution

Obviously, you’ll do much better with a bigger account. If you think this way: if you win 1% on a $10,000 account, that’s $100. That is much more sustainable and is likely to happen than trying to make a 10% on a $1000 account. So the solution is obvious: Trading with a larger account. No, I’m not kidding.

The way to get to larger account sizes is something most people don’t want to hear, taking their time. You can create your account in a gradual and responsible way while adding it along the way. Maybe I can put $100 a week into your account to fill out the balance. Finally, you can find enough commercial capital to make a difference. That’s the biggest problem most traders face in trading markets, they just don’t take the time to make it all work. After all, your retirement accounts, which are managed by professionals at large firms, seem fine for you to earn 10% a year. However, like retail traders, we expect to outperform many of the professionals who have huge advantages over us. Commercial capital is crucial, so you must first worry about preservation and then add it once you show that you are able to make a profit.

It’s probably not the word you’re looking for, but the reality is that operating with a small account is very difficult.

Categories
Forex Risk Management

Tips for Traders Wanting to Take on Larger Positions

Thinking of increasing your position sizes to bring in more profits? It’s true that this can help put more money in your pocket but increasing your position sizes also entails risking more money to make more money. Some traders rush to take larger positions too quickly and wind up blowing their accounts because they just […]

Thinking of increasing your position sizes to bring in more profits? It’s true that this can help put more money in your pocket but increasing your position sizes also entails risking more money to make more money. Some traders rush to take larger positions too quickly and wind up blowing their accounts because they just […]

Thinking of increasing your position sizes to bring in more profits? It’s true that this can help put more money in your pocket but increasing your position sizes also entails risking more money to make more money. Some traders rush to take larger positions too quickly and wind up blowing their accounts because they just aren’t ready, and they have issues along the way because they exceed their risk tolerance when doing so. If you want to pull off position size increases successfully, take a look at our tips below to get the best start. 

Tip #1: Check out your Performance so Far 

Is your desire to trade larger justified by your performance thus far? The truth is that you shouldn’t even think of trading larger positions if your account is in the red. If you jump to larger sizes when you aren’t doing well trading smaller ones, can you really expect to make a profit? If this is the case, don’t be discouraged, as you simply need to keep focusing on improving your results or practice on a demo before you start risking more money. On the other hand, if your account is in the green and has been for a while, this is a good sign that you’re ready to move on. 

Tip #2: Try a Gradual Approach

If you’ve determined that your profits prove you’re ready to take on larger position sizes, you don’t want to make the mistake of making a much larger increase all at once. Trading larger means taking more risks and might come with some downsides you didn’t expect. For example, you might start feeling anxious or fearful now that more money is on the line. Or you might find yourself feeling depressed if you take a large loss that you aren’t accustomed to. The best way to do this is to gradually increase your position sizes over time. As long as you’re getting good results and still feeling confident, you’ll know that it’s time to increase the size you’re taking a little more. 

Tip #3: Look at Percentages vs Dollar Amounts

If you lose money, it can be a lot harder to accept if you’re thinking of the exact amount of money you lost in terms of cash. Allow us to explain: if you risk 2% on a trade on an account that holds $10,000, then you would lose $200. If you risked the same 2% on an account holding $100,000, you could wind up losing $2,000 instead. Losing the $2,000 is obviously much more devastating, and this is why you should think of your losses in terms of percentages instead. It’s a lot easier to think of your loss in terms of over 2% over the raw dollar amount, so you’ll be less likely to become emotional over it. 

The Bottom Line

Before you even think of taking larger position sizes, you’ll need to make sure that you’re account is making money, rather than losing it. Once you’ve confirmed that you’re ready, it’s best to take a gradual approach to trading larger so that you can ensure you keep a secure profit coming in with no nasty surprises. If you ever start to feel overwhelmed, you might want to stay at the size you’re at or go back to taking smaller trades until you’re feeling more comfortable with the increased risk tolerance. Our final pro tip is to think of your risk in terms of percentages rather than dollar amounts so that you’ll be able to cope with larger losses without feeling overwhelmed. Remember that losses are inevitable, so you’ll need to ensure that you’re ready for the increased risk that comes with taking larger trades.

Categories
Forex Basics

Use these Tips to Reduce your Number of Lost Trades

The forex market can be unpredictable at best. It’s important for traders to track their results with each of the trades they take to keep up with how well their trading strategy is performing. On the downside, traders rarely track the stats of the trades that they don’t take – unfortunately, many of the trades that we miss out on might have actually turned out to be winners.

The forex market can be unpredictable at best. It’s important for traders to track their results with each of the trades they take to keep up with how well their trading strategy is performing. On the downside, traders rarely track the stats of the trades that they don’t take – unfortunately, many of the trades that we miss out on might have actually turned out to be winners.

The forex market can be unpredictable at best. It’s important for traders to track their results with each of the trades they take to keep up with how well their trading strategy is performing. On the downside, traders rarely track the stats of the trades that they don’t take – unfortunately, many of the trades that we miss out on might have actually turned out to be winners.

The truth is that trades avoid these potentially rewarding trading moves for a variety of reasons, for example, maybe they’ve chosen to sit back and do nothing after a couple of losses in a row. At first, this might seem like the safer option, but that trader is actually losing out on even more money because they chose to do nothing. If you’re struggling with this problem, take a look at our helpful tips below for advice to overcome it.

Tip: Journal Missed Trades!

You’ve probably read about the importance of keeping a trading journal before and if you haven’t, you should know that is definitely something you want to do if you’re looking for productive results. Even if you already keep a trading journal, you probably aren’t logging the trades you haven’t been taking. You might have avoided a trade here and there and wanted to kick yourself later because it would have been a winner, but you might not realize just how much money you’re missing out on. 

Whenever you want to take a trade that has evidence it could win but you don’t for some reason, like anxiety or recent losses, journal everything as if you had actually taken it. After some time, you can look back at your results to see if the majority of those trades would have been winners or losers. If you see that you would have made several good decisions, you will feel motivated to follow your instincts the next time an opportunity presents itself. Also, remember to keep these journal logs separate from your actual trading logs so that you don’t get confused when comparing results. 

Tip: Consider Smaller Position Sizes

One of the main reasons that you’re avoiding trades likely has to do with your amount of confidence that the trades will be winners. Rather than missing out altogether, you could try lowering your position sizes so that less money is on the line. This can help to take some of the pressure off so that you’re more likely to enter trading moves that could be winners. In this case, it would be better to walk away with some winnings rather than nothing and you could gradually work your way towards taking larger position sizes once you start seeing positive results.

Tip: Set Alerts

Another possible contender on the list of reasons why you’re missing out on trades could be the fact that you simply don’t have the time to sit around monitoring your charts and waiting on good opportunities. Rather than letting those winning trades go, you could consider setting price alerts or using entry orders to ensure that you aren’t missing out simply because you don’t have the time to monitor everything. 

Tip: Don’t Forget About the Big Picture!

Losses are an inevitable part of trading and are usually logged in a trading journal and reviewed. However, missed trades are rarely written down and are easily shrugged off by traders because they don’t realize how much money they are actually missing out on once all their missed trades are added up. If you’re looking to maximize your profit potential, you have to start thinking of all those trades you aren’t taking for whatever reason so that steps can be taken to overcome the problem. If you try following all of our tips, you’ll likely make a lot more money. Who could argue with that? 

Categories
Forex Risk Management

The 4 Most Common Errors in Capital Management

One of the driving forces behind forex traders is being able to escape their monotonous daily routines. We all fantasize about quitting our conventional jobs and experiencing freedom while making money off our computers. But does this mean that you can sit on the couch and occasionally press the buy or sell button while watching […]

One of the driving forces behind forex traders is being able to escape their monotonous daily routines. We all fantasize about quitting our conventional jobs and experiencing freedom while making money off our computers. But does this mean that you can sit on the couch and occasionally press the buy or sell button while watching […]

One of the driving forces behind forex traders is being able to escape their monotonous daily routines. We all fantasize about quitting our conventional jobs and experiencing freedom while making money off our computers.

But does this mean that you can sit on the couch and occasionally press the buy or sell button while watching “Game of Thrones”? Probably not. The reality is that you are leaving a world in which you have been raised to survive and are entering another world for which nothing has prepared you. In the forex currency market, there is a different set of rules.

As traders we know, deep down in our minds, how important capital management is, not only for the health of our trading account but also for our mental health. The average trader’s approach makes it very difficult for him or her to ever make a profit or sustain real growth in forex.

We’ve talked to many traders, and there seem to be a few common mistakes that continue to occur. In this article, we fully intend to expose about capital management and highlight some bases on which you might be building your money management mentality, and which may be harmful to your chances of getting where you want.

Don’t orient your goals toward money.

Some of the most common questions say something like:

  • Can I do 10% a month?
  • How many signals a week can I expect?
  • How long will it take me to double my account with $1,000?

All these questions have a strong focus: the urge to make money really fast. The big problem we have with these kinds of “goal-oriented” questions is that they cannot be answered the way the trader wants to be answered.

The foreign exchange market is a dynamic environment. A month could be very productive, with many “easy prey” and lucrative trading signals. The next month could be a dead zone, where the price is consolidated and compressed with low volatility, preventing you from making money from price movements.

Don’t try to force rigid money management goals in a fluctuating environment. Pretend you are in the last week of the month; What are you going to do if you are not even close to completing your “monthly fee”? In what way you will give an answer to the pressure you put on yourself to achieve your monetary goal?

With a sense of urgency, you might need to be more aggressive and start forcing operations; operations in which you wouldn’t normally pull the trigger, but now under this pressure, you feel you need to take immediate action.

The best way to fix this is to not set any goals, but instead, concentrate on becoming an excellent trader who is a master at reading graphics and managing risks. Learn to take what the market has to offer. Take action only when the market offers you a valid signal for your trading system, which you know gives you an advantage with the odds in your favor.

We don’t like to admit that we can’t predict or control what’s going to happen every time we look at the graphics. Sometimes the market is too noisy and hostile to operate, it’s that simple. In these cases, it becomes a black hole, in which you throw money and it is consumed by consolidations.

Some months you will do well, in others you will not see profit or even suffer a loss. What you never want to do is define your possible success with absolute numbers, which will lead to self-inflicted emotional pressures, and a negative self-assessment if these are not met. If you try to make money fast, you’ll be taking an incredibly high risk.

Measure Success in Pips

If you’ve seen a forex blog, you’ll notice that traders measure the outcome of their pip operations, or “how many pips are up or down this day. This has become the social standard for forex traders, we are all used to talking to each other in this way, using pips as a benchmark for performance. But the truth is, it’s not the right way for a serious trader to assess how well an operation has gone or its risk.

Pips are only a measure of distance on a price chart. Catching a move is great, but the most important thing is how the setup has allowed us to catch that move. You see, 1 pip for us could mean something different than what it means for you, and at the same moment totally different from what it means for someone else. Pips are very relative measures and therefore have relative values. If you “win 100 pips“, but your stop loss was placed at a distance of 500 pips, it is a negative-oriented operation, which gives you no right to brag about winning those 100 pips.

You should also note that a movement of 100 pips will look very different in EUR/USD compared to the EUR/AUD pair, and in turn will be different in GOLD. If you see a movement of 100 pips in EUR/USD, it would not be uncommon to see the EUR/GBP move 250 pips on the same day. The GOLD can easily move 2,000 pips in a session, and when you compare the graphics side by side, they all look quite similar despite the drastic differences in the movements of pips.

100 pips in EUR/USD is not the same as 100 pips in GOLD, and to further expand the differences, we can say that pips also contain an “intrinsic value” that is unique for each operation.

The value of each pip is defined by the following factors:

  • Size of the position (lotion).
  • The quoted currency of the currency pair you are trading (it is the currency that appears 2º in the pair).
  • The currency in which you have your trading account.

If your trading account is in USD, then any pair whose quoted currency is USD (XXX/USD) will always have a pip value of $10 per lot. If you were using AUD in your trading account, and you operated these same pairs (XXX/USD), then the value of each pip would be determined by the AUD/USD pair exchange rate and the batch size in the pair you are operating.

Let’s say we open a transaction in GBP/USD with 5 standard lots, and the trading account is in USD. In this case, each pip would be worth $50. The operation would increase or decrease our account by $50 for each pip earned or lost. A movement of 100 pips in our favor would put us ahead by $5,000.

Compare the same situation with that of another person who takes the exact same operation but uses AUD on his account. The “pip value” will be different in this case, and this person should fix this difference by adjusting the position size to compensate. We won’t get into mathematical calculations here, the important thing is that you understand the idea.

So, when someone tells you they’ve won 200 pips on their operation, it doesn’t really mean much. If it was in EUR/USD, the movement has been pretty decent, probably a good operation, but if it was in GOLD, it’s not even an accomplishment.

Remember, the real measure of the success of an operation is how much return on investment you were able to get with it. The bottom line for trading is money, we are not exchanging magic beans, here we are looking to earn $$$$.

If you’ve had to risk $1,000 to win $100, then you’re playing to destroy your account. If instead, you risk $100 and earn $1,000, you’ve done very well! , getting a 900% return on investment. We all know that to fit into society you must speak in the classic terms of pip movements here and there, but when it comes to recording your own data, don’t be a pip counter when measuring your success.

Capital Management: Under-Capitalisation

How many accounts have you ruined or seriously compromised because you weren’t happy with the profits you were making and decided to expand your risk to compensate? A serious forex trader knows that trading should be treated as a business. One of the most common failures for small businesses is under-capitalisation, that is, not having enough money.

The ironic thing about forex is that you can start and operate with small amounts of money. Technically you can operate with initial investments as small as $100! That being said, if you want forex to generate $500 a week with a $100 investment, then you’re very undercapitalized!

The undercapitalisation affects the trader deeply at a psychological level. Undercapitalized traders want the big income they want, but they don’t have the power to make it happen in their account, so they are prone to risk more and overexposure to the market. This can lead them to clear their account quickly, and then become frustrated and angry traders.

Do not be the one who overexposes your account to a massive risk by the desperation of getting “the big win”. This is a betting mentality that provides an incorrect framework for developing the trader mentality.

Cutting Operations Too Soon

One of the fastest ways you can do harm yourself is to become a “micro forex manager“, the trader who sits down to make lots of fine micro-adjustments to their open positions. Sometimes you may feel like you should babysit your open operations until they reach a profit. When a trader makes adjustments to his stops, or does anything outside the original trading plan, this will usually result in an unfavorable outcome.

Don’t sit back and look at your floating gains and losses, because each pip of movement will generate more and more emotions. If you do this, you will therefore have a better chance than close an operation based on emotions even when there are no clear exit signs.

Think of all those times you’ve interfered with your open operations and all you’ve achieved is to deprive yourself of the potential earnings that you would otherwise have achieved.

The price will not move in the straight line you would like, but will move in “waves” or zig-zag patterns. It is logical to expect a transaction to come in and out of profits several times as the financial market gradually moves in the direction it wants to go. This is a basic principle of swing trading.

Do yourself a favor: put your operation in a logical way that you have confidence in and then just walk away from it. Close your trading terminal and don’t even look at it until the next day. This type of “prepare, forget, and collect” system will do wonders for you, financially, mentally, and emotionally.

Categories
Beginners Forex Education Forex Basics

Can You Start Trading Forex With Only $200?

Can you really start to trade Forex with as little as $200? Let’s take the short and sweet answer here, yes you can. Many brokers allow you to open up accounts for as little as $10, so it is incredibly accessible, however, should you be trading with just $200 let alone the $10 entry requirement? […]

Can you really start to trade Forex with as little as $200? Let’s take the short and sweet answer here, yes you can. Many brokers allow you to open up accounts for as little as $10, so it is incredibly accessible, however, should you be trading with just $200 let alone the $10 entry requirement? […]

Can you really start to trade Forex with as little as $200? Let’s take the short and sweet answer here, yes you can. Many brokers allow you to open up accounts for as little as $10, so it is incredibly accessible, however, should you be trading with just $200 let alone the $10 entry requirement? This is where the answer is not quite as straightforward and we need to consider a number of different things before deciding whether to go ahead with such a small balance.

Many people often ask the question of how much they are able to make with a balance such as $200. Forex and trading as a whole is very much a have money to make money industry, so you may well be held back by your capital at one point or another. But we aren’t here to look at how to get rich, we are simply going to look at whether or not it would be advisable or sensible to trade with a balance as low as $200.

The first thing that we need to consider when going for such a low balance is how your risk management skills are and whether they are at the standard that you will require. The lower your balance, the stricter they need to be and the less wiggle room you will have. Have you actually tested with a balance similar to what you want to go into? Many people get the wrong idea when they sign up to a demo account and it comes with a balance of $50,000. The risk management that you can do on that account is far higher than you can on a small account, the little mistakes are hardly noticed, while on a small account, those little mistakes could potentially blow the entire account. One thing though, is that it would be a real credit to your risk management skills if you are able to grow a small account. Many people try and the vast majority of them fail, so if you are able to then it simply means that you have a knack for trading and know what you are doing.

You won’t be making millions on your $200 account, that this is perfectly clear. You can, however, make money and in the future, that may be considerably more than it is now. The wonders of compounding, this where you add whatever profit you have onto your next trade to trade slightly larger. Over a long period of time this can add up and that $200 account can grow to something substantially bigger, it will take time but it is possible. So having the motivation to carry on and to start small can mean in the future you are doing quite well for yourself.

So starting with a small account you should still be thinking about the usual risk management, things like only risking 1% of your account per trade as an example, of course, 1% of a “400 account is only $2, while on a $10,000 account it is $100, so the wiggle room is a little smaller. The good thing is that it will really allow you to hone your skills and to develop much stricter management of your funds and your account. Something that you can use in the future to really benefit yourself. Then whatever you have learned to do on your small account, it should be pretty easy to use the same techniques on a larger account in the future should you get there.

More than 20% of traders these days start with accounts lower than $999 which is often referred to as a micro account, so you are certainly not alone in starting with a smaller balance. Not everyone has the money available to trade and some are simply not serious about it, simply dipping their toes in to try it out, there are many reasons why people open up smaller accounts. It is important to remember that the higher the balance, the more flexibility that you will have. Build your account up with patience, do not risk more than you need to, and simply take your time, treat this as a long term business, and not a short term get rich quick scheme. 

We touched briefly on a demo account, something that you should have been using before going into a live account. Try and get one set up that is at a similar balance to what you are going to be using with your live account. This way, the risk management that you are using on the demo account can simply be transferred over to a  live account. There is no point practicing on a $50,000 demo account if you are going to be using a $200 account, as when you transfer over your skill, the account will most likely blow pretty quickly.

So some final thoughts to think about. If you are thinking of joining with a small balance, it is certainly possible for you to be successful, it will simply take a lot longer to achieve than it would if you start with a larger balance. It is important that you are on point with your risk management skills, do not try to push them as your account will not have the wiggle room available to do this, stick to the plan and do not deviate from it. One of the benefits of having a small account is the damage is limited, you can only lose what you have put in. So the loss of $200 will be much easier to take than the loss of $10,000, however, we know for some, that $20 is an awful lot, even or reason to ensure that you are taking your time.

So to answer our original question, yes you can trade with a $200 account. It will simply be a long and rather slow process, but something that if you are able to achieve. You can be proud of saying that you have achieved something that a lot of traders have tried but failed at.

Categories
Forex Course

114. How To Trade Bearish & Bullish Pennant Patterns

Introduction

Introduction

Introduction

The Pennant is both a bullish and bearish continuation pattern that is used by technical analysts across the globe. This pattern can easily be identified on the price chart and is typically used for trading the upcoming price movements. In an ongoing trend, when the instrument experiences a significant upward or downward movement, followed by a brief consolidation, the Pennant pattern is formed.

Pennant Pattern’s Key Characteristics

A Flagpole – The Pennant pattern always begins with a flagpole, and that is the initial strong move.

Breakout Level – Two breakouts should occur in this pattern. The first one will be at the end of the flagpole, and the second one should be after the consolidation period.

The Pennant Itself – A triangular pattern is formed when the market consolidates between the flagpole and the breakout, and we call that a Pennant.

How To Trade The Pennant Pattern?

The Pennant is a relatively simple and easy-to-spot pattern on the price charts. We will find this pattern on all the timeframes, and the strategies that we are going to discuss will work on any timeframe you trade. In the below examples, we have used 15 minutes, Daily, and Weekly charts to prove the same. All you need to do is to train your eyes well to spot the pattern. Once we master this pattern, we can easily increase the probability of our winning trades.

Trading The Bullish Pennant Pattern

Example 1

In the below EUR/GBP chart, we have identified the formation of a Bullish Pennant Pattern.

We must always look to take long or short positions depending on the breakout in the Pennant chart pattern. If we find a bullish Pennant pattern, we must wait for the price action to break out in the north direction to take a buy trade.

In the below chart, you can see that when have placed a buy order after the price action broke the Pennant’s upper trend line. The take-profit should be placed at the higher timeframe’s resistance area, whereas the stop-loss order should be below the lower trend line. The best part about trading this pattern is that it offers a good risk to reward ratio, and most of the trades hit the targets within a few hours.

Example 2

In the below AUD/NZD chart, we have found another Bullish Pennant pattern.

Here, we can see the market has started a new downtrend, and we have placed a buy order right after the price broke the upper trend line. We can see our trade hitting the TP within a few hours. If we find this pattern in active trading hours, or when any trading session is about to begin, it is advisable to take bigger trades because opening trading hour breakouts have higher chances of succeeding.

Trading The Bearish Pennant Pattern

In the image below, you can see that we have identified a Bearish Pennant pattern on the GBP/NZD pair.

In the below chart, we can see that a brand new downtrend has just begun. The first leg of the pattern (flagpole) was quite strong. When the price action broke below the lower trend line, it is an indication for us to go short in this pair. The take-profit is as placed as same as the size of the flagpole, and stop-loss was just above the pattern formation.

That’s about Bullish and Bearish Pennant pattern and how to trade them along with appropriate risk management. Following money management principles is as crucial as entering the market at the right time. If you have any questions, let us know in the comments below. Cheers!

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Categories
Forex Course

68. Using Fibonacci Retracements To Place Appropriate Stop-Loss

Introduction

Introduction

Introduction

Until now, we have paired the Fibonacci levels with various technical tools to find appropriate trading opportunities. Some of them include support/resistance, trendlines, and even candlestick patterns. In the previous lesson, we also saw how to place appropriate ‘take-profit’ orders to maximize our profits. The uses of the Fibonacci levels do not end here. There is another incredible application of these levels, and that is to find the appropriate ‘stop-loss’ levels. ‘

As a trader, one should always use the ‘Stop-Loss’ orde as they are critical to avoid the risk of bearing huge losses. In some adverse situations, if this order is not used, it would result in a complete drain of trading capital where we can have the risk of losing everything in a single trade. Placing an appropriate stop-loss ensures that we do not expose ourselves to the unbearable risk.

However, placing the stop-loss order randomly might expose us to the risk of getting stopped out very early. So the proper placement of this order is crucial, and it can be hard for traders who aren’t experienced enough. So the Fibonacci tool can be a great help for us in determining accurate stop-loss levels.

Using Fibonacci Levels To Place Appropriate Stop-Loss Orders

In the below chart, we see a big initial move to the upside on which the Fibonacci levels are plotted using the Swing low and Swing high. Using the ‘Fibonacci strategy,’ we can notice a retracement that has reacted fairly well from the 61.8% Fib level, and now if the next candle is green, this could be a confirmation for us to go ‘long.’

We notice in the below chart that the next candle appears to be Green, and now with that confirmation, we can place our ‘buy’ trades with appropriate ‘stop-loss’ and ‘take profit.’ The traditional way of using a stop-loss order is to place it 50 pips away from the point of entry. Most of the novice traders use this method even today. This is said to be a layman’s approach with no suitable reasoning. When we use such methods, there is a high chance of we getting stopped out before the trade moves in our favor.

The below chart shows that how placing a 50 pip stop-loss can prove to be dangerous. We can see the stop-loss getting triggered by the immediate next candle after the entry was made.

Now let’s see how to place the stop-loss order using Fibonacci levels. The strategy is to place the stop-loss at the Fib level, which is below the Fib level from where the retracement reacts and gives a confirmation candle. Taking the above example, since the retracement touched the 61.8% Fib ratio and gave a confirmation candle, the stop-loss will be placed at the 78.6% Fib ratio. This seems to be very simple, yet most traders are not aware of this.

In the above chart, we can see how the price just misses our stop-loss placed at the 78.6 Fib level and later directly went to our take-profit. This shows the precision of stop-loss placement, which was established using the Fibonacci levels.

Conclusion

We must understand that stop-loss determination is a crucial step and has to be calculated mathematically using any reliable technical indicators. Indicators like Fibonacci have a mathematical approach in determining these levels. Make sure to use these levels before going to place your stop-loss levels next and let us know how they have worked for you. Cheers!

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Categories
Forex Course

67. Using Fibonacci Extensions To Place Accurate Take-Profit Orders

Introduction

Introduction

Introduction

We have discussed the many applications of the Fibonacci levels in our previous course lessons. Now its time to explore the scope of these levels in the most integral part of trading, which is money management. We are all familiar with the ‘take-profit’ order and also know how crucial it is to determine the same before entering a trade.

There are numerous ways to determine the ‘take-profit‘ levels to maximize our profits, but the Fibonacci levels are said to be extremely accurate. In this article, we will validate the accuracy of the Fibonacci indicator in determining the ‘take-profit’ levels.

Placing Accurate Take-Profit Order Using Fib Levels

To find a trade, we need first to establish a significant trend. The primary trend could either be a continuation of a previous trend or beginning of a new trend after a market reversal. In the below chart, we can observe the market reversal to the upside. We must wait for its retracement; if the retracement follows all the rules of our Fibonacci strategy (discussed in the Fibonacci article), we can proceed to take the trade.

In the below image, we can notice a pullback coming in from the swing high. We will be evaluating this swing high using the Fibonacci levels. The Fibonacci levels used in this particular strategy for determining the accurate ‘take-profit’ placement are different from the usual Fibonacci levels we used in all the previous articles.

We are going to use ‘Fibonacci Extensions’ instead of retracements here. These extensions can be plotted on to the charts by using an indicator that can be found in most of the trading platforms. We use the Tradingview platform for our charting purpose, and this indicator can be found on the drawing panel of TradingView. It is available in the sub-menu of the Fibonacci tool folder and named as ‘Trend-Based Fib Extension.

To plot Fibonacci extension on the chart, first, click on a significant low, then drag the cursor and click on the recent high. Finally, drag the cursor back to the swing low. We can also highlight the Fib ratios by clicking on the retracement levels. Don’t forget to include the Fib ratios on the chart that are above 100%, as our take-profit methodology is based on those ratios.

The below chart shows how the Fibonacci Extensions are plotted on the chart using the swing low and swing high. We also see from the chart that the retracement is exactly reacting from the 50% Fib levels, which could a sign of trend continuation. But to be sure, it is prominent to have a confirmation candle at this place.

We get a bullish confirmation candle in the direction of the dominant trend, after which a potential trade entry can be made to the ‘buy’ side.

Right after entry, it is essential to determine our take-profit and stop-loss areas. Here is the part where we will be using our Fibonacci Extensions. The strategy is to take some profits at 127%, and then at 141% and remaining profits at 161%.

The take-profit points are clearly shown in the below chart. One can see that the market falls exactly after touching the respective Fib extension levels. By following this method, one can maximize their gains by taking profits at every subsequent point. The risk to reward ratio in this trade is also outstanding.

The below chart shows that the market continues to take support at the 50% fib level and eventually breaks out above our final take-profit order. The trend has completely reversed from a downtrend to an uptrend.

Conclusion

The Fibonacci tool can be used to find potential exit points in a trade with a great degree of accuracy. Hence, rather than taking a simple approach to determining the target points of the trade, we must make use of Fibonacci Extention levels to maximize our grains. Please remember that these extensions are not guaranteed levels too. So it is important not to depend upon them completely. Cheers!

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Categories
Forex Market Forex Risk Management

These Are Some Of The Best Position Sizing Techniques You Should Know!

Introduction
In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which

Introduction
In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which

Introduction

In our previous article, we addressed the concept of position sizing, drawdown, and techniques. Now we extend this discussion and look at other crucial aspects of position sizing, which are very important. In this article, let’s determine how one can position themselves in the forex market based on three different models. Each of these has its own merits that impose some sort of position sizing discipline in traders.

The three core position sizing techniques in terms of risk are:

  • Fixed lot per amount
  • Percentage margin
  • Degree of volatility

These models can be applied to all the asset classes and are time frame independent.

We suggest you stick to one model to estimate the position size or at most two position sizing techniques. Following every given method will increase complexity, and that is not good for a trader.

Fixed Lot Per Amount

This is a fairly simple model. It requires a trader to simply state how many lots he is willing to trade for a given amount of capital. For example, let us assume a trader is having $2000 in his trading account, and he trades only the major currency pairs like  EUR/USD, GBP/USD, GBP/JPY, USD/JPY, etc.

The trader simply needs to make a thumb rule that he/she will not trade more than one standard lot of futures (of major currency pairs) per $2000 at any given point.

The lot size can also be determined based on their risk appetite and money management principles. This technique of ‘fixed risk’ is based more on the discipline than strategy.

Percentage Margin

This position sizing technique is more structured than the ‘Fixed lot per amount’ technique, especially for intraday traders. It requires a trader to position themself based on the margin. Here, a trader essentially fixes an ‘X’ percentage of their capital as margin amount to any particular trade. Let’s see how this works with the help of an example.

Assume a trader named Tim has a trading capital of $5000; with this, he decides not to expose more than 20% as margin amount on a particular trade. This translates to a capital of $1000 per trade.

Now, if Tim gets an opportunity in another currency pair, he would be forced to let go of this margin as it would double to 40% (20% + 20%). This new opportunity will be out of his trading universe until and unless he increases his trading capital. Hence, one should not randomly increase the margin to accommodate opportunities.

The percentage margin ensures a trader pays roughly the same margin to all positions irrespective of the forex pair and volatility. Otherwise, they would end up in risky bets and therefore altering the entire risk profile of their account.

Degree Of Volatility

The degree of volatility accounts for the volatility of the underlying asset. To measure volatility, we make use of the ATR indicator, as suggested by Van Tharp. This position sizing technique defines the maximum amount of volatility exposure one can assume for the given trading capital.

Below we have plotted the ATR indicator on to the USD/JPY forex chart.

The 14-day ATR has a peak and then a decline, which shows a decrease in volatility. As you know that high volatility conditions are the best times to trade (less slippage, high liquidity, etc.), you can risk up to 5% of your trading capital on the trade while one should not risk more than 1% when the ATR is at the lowest point. Do not forget the risks involved while trading highly volatile markets. Only use this position sizing technique when you completely trust your trading strategy.

Conclusion

A trader should not risk too much on any trade, especially if their trading capital is small. Remember, your odds of making a profit are high when you manage your position size and risk the right amount on each of the trade you take.

Beginners should trade thin to get experience with open positions, so they can assess the stress of a loss and gradually increase the position size as he is comfortable with the strategy results and performance. As a matter of fact, this is also the right way to proceed when trading live a new strategy, be it a beginner or an experienced trader.

Cheers!

Categories
Forex Market

Finding The Optimal Risk % In Forex Trading

Introduction
Calculating risk is one of the most important parts of Money Mangement. Many novice traders or traders with limited experience won’t be aware of the amount of risk they

Introduction
Calculating risk is one of the most important parts of Money Mangement. Many novice traders or traders with limited experience won’t be aware of the amount of risk they

Introduction

Calculating risk is one of the most important parts of Money Mangement. Many novice traders or traders with limited experience won’t be aware of the amount of risk they can tolerate. In this article, we shall focus on determining the appropriate risk % that fits your trading style. The goal of risk management is to gain control over three things:

  • Emotions
  • Leverage
  • Sustenance

Furthermore, by limiting the loss per trade, a trader can ensure that his/her trading capital is not wiped out in one single trade. Having this discipline systematically reduces the loss per trade and provides an opportunity for the trader to re-look at the situation.

Calculating the risk

One can determine the risk based on the following factors:

Win rate

Win rate refers to how often a trader takes profitable trades relative to the trades that result in a loss. Win rate is determined by using the risk-to-reward ratio (RRR) and is calculated by the following formula.

Win rate = 1/(1+RRR)

The above-given formula is also referred to as the Minimum win rate. If any trader is trading with an RRR of 1, then his/her minimum win rate will be 50%. So out of 100 trades, we require a minimum of 50 trades to end as winners to compensate for the losing trades.

This will help a trader in deciding their maximum risk based on the win rate. This formula can also determine if a trade can be taken or not. For example, if someone has a win rate of 25%, he/she will not be able to take trades that have a risk-to-reward ratio of less than 3.

Nature of the market

Depending on the market situation, the risk can vary substantially. In a trending market, like the one in the below chart, risk should be reduced as much as possible by using a stop-loss order. We are recommending this idea as you would most probably be trend trading, and there is no point in risking more than the usual (can be lesser).

Trending Market

In a market that is trapped in a range (below image), the risk is always higher. This means anyone who trades the consolidation market is essentially increasing their risk. This would mean increasing the stop-loss, thereby reducing the risk-to-reward ratio (RRR) of the trade.

Ranging Market

Maintaining a risk of 1% constantly, regardless of the market conditions, will help the traders to sustain the loses and stay in the game even after a series of losing trades. This is a conservative method that reaps fewer rewards, but the risk is certain.

Conclusion

The aim is to achieve some level of consistency in trading by allowing yourself and your trading strategy to fight the evil forces of the market. We would say in all circumstances, a max risk of 1% appears to be the winner if you are a conservative trader. When the risk increases, it is said to impact not only the capital of the trading account but also the psychology of a trader. Hence it is better to keep risk at a bare minimum in times of uncertainty.

Categories
Forex Basic Strategies

Trading With The Bollinger Band %B Indicator

Introduction
If you have experience trading with the Bollinger Bands indicator, you will find it easy to trade with the Bollinger Band %B indicator. The only difference is that, in

Introduction
If you have experience trading with the Bollinger Bands indicator, you will find it easy to trade with the Bollinger Band %B indicator. The only difference is that, in

Introduction

If you have experience trading with the Bollinger Bands indicator, you will find it easy to trade with the Bollinger Band %B indicator. The only difference is that, in this indicator, you can identify the relationship between the price and the bands with at most clarity.

What is the Bollinger Band %B indicator?

It is basically a technical indicator that quantifies the price of an asset with respect to the upper and lower limits of Bollinger Bands. We have derived 6 relations between the price and the indicator.

  • The %B is at zero when the currency pair is at the lower band.
  • % B will be at 100 when the currency pair is at the upper band.
  • The indicator is above 100 when the price of the currency pair above the upper band.
  • It is below zero when the price goes below the lower band.
  • The %B is above 50 when the price goes above the middle band.
  • And it is below 50 when the price goes below the middle band.

The Bollinger band %B uses the 20-day simple moving average (SMA) as the default parameter, just like the Bollinger Bands. This indicator is available on most of the trading platforms and terminals.

Bollinger Band %B formula

%B = (Price – Lower Band) / (Upper Band – Lower band)

Things to know

Before understanding the strategy, it is necessary to know a few things about the indicator as these concepts will be used in every step of the strategy. Below is the chart of a forex pair with the Bollinger Band %B indicator plotted to it.

  • The upper dashed line represents the 100% level of the %B indicator also known as the upper band.
  • The lower dashed line represents the 0% level also known as the lower band of the indicator.
  • The area in between the two dashed lines is known as the middle band.

These bands help us in identifying different trading opportunities. Hence, one needs to know about it before knowing the strategy.

The Strategy

Step 1: Identify the major trend

To identify the overall trend of the market, the trader needs to shrink the chart and determine the trend.

An uptrend is defined as a series of higher highs and higher lows, while a downtrend is defined as a series of lower lows and lower highs. In this strategy, we have taken the example of a downtrend, as shown in the figure. One can also see lower lows and lower highs in the above chart.

Let us see how the strategy works.

Step 2: Find the price where %B is above 100 or below 0 in the currency pair.

In this step, we are looking for the price where the indicator is above the upper band or below the lower band. This extreme price action is said to continue for long after taking a suitable entry.

A sell setup is formed when the indicator crosses below the lower band, and a buy setup is formed when the indicator crosses above the upper band. This strategy is almost reverse of other strategies (as oversold indicates buying in other strategies).

The above chart shows the crossing of the indicator below the lower band, which is apt for a sell trade. Just because the price is below the dashed line, we cannot take an entry immediately.

The next step is to find a pullback and then make an entry. We will then see how and where to take profits.

Step 3: Take an entry only at a suitable pullback.

By suitable pullback, we mean the opposite color candles should not be swift candles and should not make higher highs. If this happens, the current trend can be weak and may not sustain. The %B indicator can also assist us with the same, as the indicator should move slowly after crossing the lower band. If the indicator reacts and moves fast, it means the pullback is strong and could also result in a reversal. Finally, an entry can be taken after the close of at least two pullback candles.

The below figure explains the above paragraph clearly.

Step 4: Determining how to take profit

In this strategy, we follow a rule-based system for making profits which are again based on our indicator. A trader needs to cover his position after the indicator crosses the lower band once again and goes above the dashed line. This style of taking profit is different than in other strategies where it is based on a fixed percentage. This way of taking profits ensures that a trader is trading based on rules and guidelines which is a disciplined approach.

The below figure explains how profit is taken and the position is covered.

When the indicator goes above the 0% (lower band) level after crossing below, it means profit can be taken now and the trade can be closed.

Step 5: Place a protective stop

Stop-loss is a mandatory and essential part of risk management, hence it needs to determined before entering a trade. For this strategy, stop-loss is placed above the high of the pullback which makes it an optimal place. The stop-loss, in this case, is very small which increases the risk to reward ratio (RR) considerably.

Here is exactly where it is recommended to put the stop loss.

The final trade setup would look something like this 👇

This results in a minimum of 2:1 RRR.

Final words

This is one of the easiest strategies which can be learned by new and experienced traders. It makes use of simple Bollinger bands added with a %B indicator. This indicator can also be combined with several other technical indicators and trading systems, but this alone, too, has a very good level of accuracy.  Now, we have to follow the money management principles to take the best trades and make huge profits from the same strategy. For this, you can also refer to our money management article series, which talks on various risk management topics. Cheers!

Categories
Forex Risk Management

Basics of Risk To Reward Ratio In Forex Trading

Introduction
The Risk to Reward Ratio is one of the most critical aspects of risk management in Forex trading. Traders with a clear understanding of what RRR is can improve

Introduction
The Risk to Reward Ratio is one of the most critical aspects of risk management in Forex trading. Traders with a clear understanding of what RRR is can improve

Introduction

The Risk to Reward Ratio is one of the most critical aspects of risk management in Forex trading. Traders with a clear understanding of what RRR is can improve his/her chances of making more profits. In this article, let’s discuss the fundamentals of Risk to Reward ratio with examples and also the ways through which it can be increased while taking your trades.

What is the Risk to Reward Ratio?

Before getting right into the topic, let’s define the meaning of ‘Risk’ here. Risk is the amount of money that a trader is willing to lose in a trade. If you have read our previous money management articles, we mentioned that a trader should not be risking more than 2-3% of their trading capital in each trade. It means when they find a trade setup, they should choose their position size in such a way that if the market hits their stop-loss, they lose a maximum of 2-3% of their trading capital.

Now, the Risk to Reward Ratio is simply the ratio between the size of your stop-loss to the size of your target profit. Let’s say your stop-loss is five pips away from your entry price and your target profit is ten pips away from the entry. In this case, your risk to reward ratio is 1:2 (5 Pips/ 10 Pips).

The larger the profit against the stop loss, the smaller the risk to reward ratio. Which means your risk is a lot smaller than your reward.

What is the recommended risk to reward ratio in the forex market?

Typically, a minimum of 1:1 or 1:2 RRR is recommended for novice traders. There are super conservative traders where they look for a minimum RRR of 1:5.

The risk to reward in every trade cannot be fixed as it varies depending on the market condition. For example, 1:3 or 1:5 RR ratio is achievable when the market is trending, and you enter the market at the right time. Whereas when the market is not very volatile, we should be happy with a risk to reward ratio of 1:1.

How to increase the risk to reward (RR) ratio?

🏳️ Raising target and putting stop-loss to breakeven

A trader can think of raising the target if the market moves to the initial take-profit quickly. This is because when the market moves so fast, it has the potential to move further, thereby increasing the profits.

🏳️ Finding trade setups from the larger time frame

Another way to increase the risk to reward (RR) ratio is by taking the strong trade setups from the higher time frames like daily, weekly, and monthly. We need to wait for such strong trade setups to form. Once formed, the price will move for hundreds of pips, and so we can have wide targets.

Final words

Higher the RRR, the better it is, and of course, higher RRRs are more challenging to achieve. So, do not forget to keep the expectations real and the risks appropriate. You do not have to avoid perfect trades just because the RRR is not as high as 1:5. Make sure to do proper risk management before placing a trade. Never trade with a risk to reward ratio that is too less and try to maximize it as much as possible. Cheers!

Categories
Forex Market

Leverage Trading & Important Money Management Rules To Follow

What is Leverage?
Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk

What is Leverage?
Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk

What is Leverage?

Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk while expecting for additional rewards. This is done by the traders only when they think the odds are in their favor. Leverages is basically represented as a ratio or with an ‘X’ next to the times of leverage. For instance, to take a trade what is double the size of the amount you want to risk, you are essentially taking leverage of 2:1 or 2x.

The main leveraged products available today for Forex traders are spread betting and contract for difference (CFDs). Other products include options, futures, and some exchange-traded funds (ETFs). Before using leverage, a trader needs to understand the risk associated with it. Controlling risk means having money management principles that can be used on a daily basis. Since leverage trading can be risky, as losses can exceed your initial investment, there are appropriate money management tools that can be used to reduce your potential losses. Now let’s look at a few of these tools.

Money management rules

Using stops

Putting a stop-loss to your position can restrict your losses if the price moves against you. As mentioned in previous articles, markets move quickly, and certain conditions may result in your stop-loss not being triggered at the price you’ve set. Do not forget to trail your stop-loss after you get in a profitable position. By trailing your stop-loss, you will be able to lock in the profits you have made on your trade. There is no need to monitor your position nor the need to adjust your stop-loss manually.

The right risk to reward ratio

The risk to reward ratio can be calculated by taking the total potential profit and then dividing it by the potential loss. You need to calculate risk based on your trading capital (risking not more than 2% of trading capital) and the leverage that you use to trade, as the leverage can alter your stop-loss.

Choosing the right leverage level

It is hard to determine the right margin level for a trader as it depends on trading strategy and the overall market volatility. But from a risk perspective, there is a maximum level of margin that one should use in order not to overexpose themselves to the market. It is seen that scalpers and breakout traders use high leverage when compared to positional traders, who often trade with low leverage. Irrespective of the type of trader you are, you should choose the level of leverage that makes you most comfortable. Since forex brokers provide a maximum leverage of 1:500, newcomers find it attractive and start trading with that amount of leverage, which is very dangerous.

If you are a novice trader, the optimal leverage to use in Forex should be below 10X. But if you are an experienced trader and are extremely sure about the trade you are about to take, the maximum you can go up to is 50X. But as discussed, Forex brokers offer a maximum leverage of 500X and some time more too. But it is advisable not to go that far until and unless you have the appetite to take that risk. By using less leverage, you can still trade even after having a series of losses in the market as you are taking a calculated risk.

Bottom line

A simple rule to keep in mind is that you shouldn’t be risking more than you can afford in the market. You can open a special type of account with a forex broker known as limited-risk accounts, which ensures that all your positions have a guaranteed stop. They decide your account type and leverage based on the information you give them while opening an account. Hence, leverage can be used successfully and profitably with proper money management techniques.

Categories
Forex Market

Dealing With Liquidity & Volatility In The Forex Market

What is liquidity?
When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest

What is liquidity?
When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest

What is liquidity?

When a trader starts his trading journey, one of the things he finds most attractive is the amount of liquidity offered by the forex market. The latest figures suggest that the daily trading volume of forex is close to $5.1 trillion.

Liquidity is the ability to trade a currency pair on demand. In simple terms, it is the measure of how easily a currency can be exchanged. When you are trading major currency pairs, you have an exceedingly high amount of liquidity. This liquidity is provided by financial institutions, big businesses, and retail traders as well. However, not all the currency pairs are liquid; liquidity depends on whether a currency pair is major, minor, or exotic. Major pairs typically have high liquidity compared to the other currency pairs. In the next section, we will look at some of the money management principles in trading with respect to liquidity.

Liquidity and Risk

A market with low liquidity has chaotic moves and gaps because of the absence of buyers and sellers at any given point of time. These gaps occur when news announcements are made over the weekend or if an event happens at the same time. The chart below depicts such a gap after a news release.

According to money management principles, when you know that there will be a change in liquidity levels between Friday to Monday, it is not advised to carry huge positions on Friday. The risk drastically increases, if the price opens above your stop loss on Monday, it will become a market order, and this loss will be much higher than the predefined loss (determined using stop-loss). A conservative trader especially should not take any positions during times of news releases.

Retail forex traders need to manage liquidity risk by lowering their leverage and putting stop losses based on higher time frames. In this way, you would be safe from any kind of gaps that happen at the beginning of the week.

Volatility

Volatility refers to the currency fluctuations in the global exchange market. Price movements can vary from hour to hour, minute to minute, and second to second, depending on many factors. A lot of forex traders enjoy volatility, but it comes with a risk. Therefore it is important to manage volatility and do plenty of research before placing a trade.

Eliminating the risk of volatility

In order to make the most out of volatility, follow the below-mentioned techniques:

Volatility strategies

Money management, in relation to volatility, essentially suggests traders invest in strategies that can perform in different market conditions. Some of the strategies that can be used to turn the volatility in your favor include widening your targets, placing tight stop-losses, and analyzing the higher timeframes.

Stay diversified

Don’t rely too much on any asset class or forex pair. If one investment performs poorly, other investments may perform better over that same period and thereby reducing your overall losses. This happens due to the difference in volatility across various asset classes. A balanced portfolio protects from losses and provides a high return on investment.

Money management should always be a top priority for every trader, as these principles guide us while taking trading decisions. A lot more concepts related to money management will be discussed in the upcoming articles.

Categories
Forex Daily Topic Forex Money Management

Things you should Know about Leverage, Drawdown and Risk

Novice traders usually prefer to focus on trade ideas and strategies, believing that the path to success is the knowledge about entries and exits. But in a trading environment with

Novice traders usually prefer to focus on trade ideas and strategies, believing that the path to success is the knowledge about entries and exits. But in a trading environment with

Novice traders usually prefer to focus on trade ideas and strategies, believing that the path to success is the knowledge about entries and exits. But in a trading environment with leverage, risk management plays a crucial role. This article tries to show why.

Key points

 In trading, There are two key points a trader must care and make sure:

  1.  That his strategy is good
  2. Risk management trough proper position sizing

Good Strategies and Bad strategies

The first thing to consider is the quality of the trading system or strategy. There are risk management ideas that might convert a losing system into a winner if the problem was that stop-loss settings were wrong, But no position sizing can change a losing strategy into a winning one. Therefore, the first thing a trader should care about is for his system to have a positive edge.

In statistical terms, the strategy should have a positive expectation. If not, the trader should analyze it, find the weak points, and modify it for profitability. Once the system is profitable, it can be traded. Finally, depending on its quality, the system will make grow the trading account fast or slow, and, also, its growth can be optimized through position sizing.

Strategy basic Statistical 

To analyze a trading strategy, we need to normalize its trades to a basic unit and, then extract its four main statistical parameters:

  • Percent winners
  • Mean reward-to-risk Ratio
  • Mathematical expectation
  • Standard Deviation of the expectation.

For example, the system we are going to use as an example in this article shows the following parameters:

STRATEGY STATISTICAL PARAMETERS : 

  •  Nr. of Trades: 143.00
  •  Percent winners: 58.74%
  •  Mean Reward Ratio: 1.22
  •  Mathematical Expectation: 0.0887
  •  Standard dev: 0.4090

It is not a really good system, but it’s tradeable. The Mathematical expectation says that the system, using a basic unit of risk of one dollar, is able to extract a mean of 8.87 cents per dollar risked on every trade. Therefore, the system has an 8.87 cents edge against the market, which is 8.87%.

Drawdown

You can see that here, we did not show the drawdown as a parameter to consider. That is because drawdown is dependent on position sizing. The parameter we can compute, though, is the losing streak, which is the number of continuous losses we could expect based on the percent of losses. As we know, the percent of losers is 1-percent winners. Therefore, in this case, Percent losers = 41.26%

With that information, we can create a probabilistic curve of a losing streak of size N, such as the one here. But the trade size is what is going to define the drawdown parameter.

Fig 1 – Losing Streak Probability Curve

Leverage and Drawdown

Forex is a leveraged trading environment, and many brokers offer its customers the ability to go up to 500:1, meaning traders can use up to 500x the size of its trading account to open positions. But is it wise to get that leveraged? Let’s do an experiment using the above-mentioned system.

As said above, the system has been taken from a real trader and is a good, although not brilliant system. But it is a real no-hype system that can be traded what we want to test. For this test, we will always start with a balance of $10,000 and will increase the trade size using the same trade segment. 

Leverage = 1

Fig 2 – 0.1 Lots per trade

Using a leverage of one, we see that the system shows a max drawdown of 10.4 percent, and the final equity after 143 trades is a bit more than $11.600, which is 16% growth.

Leverage = 5

Fig 3 – 5X Leverage

Using 5X leverage, we notice that the Max Drawdown went to 39.58%, and the final equity ended up at $18,400.00 for an 84% profit.

Leverage = 10

Fig 4 – 10X Leverage

If the trader dares to go to 10X leverage, he must endure close to 61% drawdown for the opportunity to receive 168% profit and a total equity of $26,800 at the end of a 143-trade cycle.

Leverage = 20

Fig 5 – 20X Leverage

Leverage 20X is even wilder. The trader has to withstand up to 83.4% drawdown for a gain of 336.00 % profit.  The question is when to stop? Will a 40X leverage be even better for the profit-hungry trader?

Leverage = 40

Fig 6 – 40X Leverage

We can see that at some point, the risk is too much, and a profitable system, with the wrong risk and size management, can be converted into a very fast losing system and wipe the entire account.

As we see here, a 40X leverage is wild enough to wipe an entire account using a very profitable trading system. We must understand that up to one point, increasing the leverage will increase risk while decrease profitability.

As a summary, let’s see the plot of several account histories with increasing leverage

Fig 7 – 40X Leverage

This time we have plotted the histories on a semi-log scale to be aware of the enormous scale of the drawdowns. On the graph, we can see that the most critical moment of the histories happens at about trade Nr. five or six, which crashes all accounts above 30X leverage. But, if we take this event aside, we can see that to reach its destination traders must endure four more events when they lose close to 80% of their initial funds. We must take into account that at the moment of these events happening, there is no way to know when will they stop and start recovering the funds back.

A Propper Attitude Towards Risk

Position sizing and risk management are the tools traders have to accomplish their trading objectives, but it has to be done correctly.

We first need to set the daily, weekly, or monthly profitability of the trading strategy. Let keep using the previous example.  We know that the system has a mean of 8.87 cents per dollar risked.  Let’s suppose the system has an average of six daily trades. Then, the profitability of this system is $0.53 daily, and $10.64 monthly per dollar risked.

From the losing streak curve, we see that it is wise to be prepared for a max streak of, at least eight losing trades.  Then, we define our comfort zone for drawdowns. Let say we are bold and wanted to risk up to 40% of the capital. To accomplish this, we divide the max 40% drawdown by our defined max losing streak of 8, and the result will be the maximum percent risked on every trade. In this case, Risk per trade = 5%. (That is a huge of risk, we do not recommend more than 1%, by the way).

Now, if your current account balance were $10,000,  the risk per position should be 5% * 10,000, = $500. With that information, we can see that the system would deliver $5,320 monthly, on average.

If we were to double this amount, we would need to double the account balance or wait roughly two months until the profits reached the $10K mark.

The concept of applying a trade size proportional to the account balance helps traders to apply compounding growth to their accounts, while automatically reducing the trade size while in a losing streak on a dollar basis. More on compound growth will be developed in a future article.

 

Categories
Forex Market Analysis

DAILY ABSTRACT for 30th January 2018

Daily Abstract’s Hot Topics:

DOLLAR – RAISES WITH ALL EYES ON THE FOMC MEETING.
NZD – NEW ZEALAND TRADE BALANCE (MoM) STRIKES A RECORD SINCE MARCH 2015.

 
Daily performance

Daily Abstract’s Hot Topics:

DOLLAR – RAISES WITH ALL EYES ON THE FOMC MEETING.
NZD – NEW ZEALAND TRADE BALANCE (MoM) STRIKES A RECORD SINCE MARCH 2015.

 
Daily performance

Daily Abstract’s Hot Topics:

  • DOLLAR – RAISES WITH ALL EYES ON THE FOMC MEETING.
  • NZD – NEW ZEALAND TRADE BALANCE (MoM) STRIKES A RECORD SINCE MARCH 2015.

 

Daily performance of main currencies

The Dollar dominated the first session of the week <DOLLAR> gaining 0.31% in a week that will be driven by the last Janet Yellen FOMC meeting. The Crude Oil registered the worst performance <USOil > that plunged -1.03%.

 

 

DOLLAR – RAISES WITH ALL EYES ON THE FOMC MEETING.

The dollar has started a bullish week where it has been dominant today. This week all eyes will be on the last meeting of Janet Yellen as Chair of the Federal Reserve. Although many analysts expect an increase in the interest rate, our view is that it will remain unchanged until March.

On the technical level, our vision continues to be bullish. In the short term, we expect a slight retracement and a new momentum that will lead to the level of resistance R1 in weekly temporality.

US Dollar Index 1-hour Chart ( click on the image to enlarge) kamagra online kaufen ohne rezept

NZD – NEW ZEALAND TRADE BALANCE (MoM) STRIKES A RECORD SINCE MARCH 2015.

The New Zealand Trade Balance (MoM) has reported a historic surplus of $ 640M, the highest value since March 2015. The main factor that has contributed to this increase has come from dairy products exported to China.

 

Our vision for the Kiwi is that the oceanic currency is completing a bullish structure to make way for a higher grade connector. The first target zone is 0.723.

NZD-USD 1-hour Chart ( click on the image to enlarge)

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Forex Educational Library

Basics of Money Management and Position Sizing

This is a 12-minute video on the basic concepts of money management and position sizing.

We observe that people that trade Forex and futures markets use leverage without knowing how

This is a 12-minute video on the basic concepts of money management and position sizing.

We observe that people that trade Forex and futures markets use leverage without knowing how

This is a 12-minute video on the basic concepts of money management and position sizing.

We observe that people that trade Forex and futures markets use leverage without knowing how much they are risking and, consequently, they burn their accounts.

After watching this video, a trader will have a methodology to properly assess risk and position size calculation, based on their own risk preferences.

Forex Academy

Categories
Forex Educational Library

The Meaning of Cutting Losses Short

Abstract
In this article, we deal with the different ways and aspects of the stop-loss setting. A crucial task for a successful trader.
Introduction
What a price to pay for

Abstract
In this article, we deal with the different ways and aspects of the stop-loss setting. A crucial task for a successful trader.
Introduction
What a price to pay for

Abstract

In this article, we deal with the different ways and aspects of the stop-loss setting. A crucial task for a successful trader.

Introduction

What a price to pay for bad wisdom? Too young to know too much too soon… (Suzanne Vega)

The decision where to cut losses if a trade is not working should be part of the trade selection process for every trade, and should be assessed in connection to the potential profit; so the risk to reward should comply with our trading rules.

One key example of the need for cutting losses short (in other words having high reward to risk trades) was given by trader Glen Ring when interviewed by Bruce Babcock (The Four Cardinal Principles of Trading).

He had a month when he made eight trades, with seven winners and one loser, but the net result was a losing month, just because of a single big loss.

The opposite may hold: you might experience eight trades with seven losers and still be profitable just because your system’s mean reward-to-risk ratio is excellent and that winning trade erased the losses of the seven losers.

The key lesson is: Although psychologically, we need to be right, we must focus on a reward-to-risk ratio, not in the frequency of our gains.

In Glen’s words: “Having those small losses is what keep us in the game, keeps your position for when you do catch a trend or big move. But, it’s a law of numbers to me. If we can make enough controlled-loss trades, even a blind squirrel is going to find a nut once in a while.”

The Stop-Loss Concept

The stop-loss concept is related to position size. Trend following’s main idea is to catch the big trend. Its rate of success is reduced -below 35%-, but with potential big reward to risk ratios.

There’s a small chance for a trader to have ten losses in a row. A trader that risk no more than 2% of its equity on a single trade experiences a 20% drawdown at the end of 10 consecutive losses, but may still keep following the rules. A trader risking 5-6% will be 50 or 60% down, and undoubtedly will lose perspective and may stop following the rules, even though the system hasn’t failed.
The main lesson is: Trade thin instead of big at the beginning, analyze your potential drawdowns in losing streaks as a mean to optimize your position size of your system.

Minimizing losses means that we are in control. Being in control is the difference between being a speculator and a gambler. Being a speculator means we can decide on the odds. Be in control about when to enter the market and when to exit. That can’t be done gambling.

We’ll discuss the several methods top traders use in their trading systems. They can be divided into the following categories:

  • Chart-based stops
  • Indicator stops
  • Entry method stops
  • Volatility stops
  • Money management stops
  • Account equity stops
  • Margin-based stops

 

1.    chart-based stops

Chart-based stops are those stops put near a meaningful point on a chart. This may be related to a chart pattern, trend line or pivot point that represents support or resistance.

Cutting losses short don’t mean unrealistic tight stops, though. It’s important to give latitude enough to let the trade work.

So, cutting losses short means to close a trade if, by our rules, has touched the stop point. But that point shall be placed according to the logic of the price movement.

Also, it’s wise to let a wide margin at the beginning of the trade using a small position, but, as the trade develops in our favor, we should move the stop higher and, optionally, add to the position.

What happens if the chart stop defines a trade that’s too risky? In the futures market, the minimum risk one can take is the one assumed by trading one contract. In the case of currency markets, this isn’t an issue, so the answer is: reduce your position to the level you have set in your trading rules. The number one rule is to protect our capital.

The chart method to set the stop has its detractors. In Babcock’s book already mentioned, Jake Bernstein says that John Granville used to say: “if it’s obvious, it’s obviously wrong.” “Let’s put the stop at the low of the day.” Ten thousand people are thinking the same way. The odds are that approach is not going to work.

How To Set Stop Loss In Options Trading

The Last Day Rule:

Peter Brandt, mentioned in Babcock’s book, has what he calls “the last day rule”. He applies it to breakout trades to reduce losses on failed breakouts.

The rule calls for a stop set at the opposite extreme of the last day of the previous range pattern. If the break is to the upside, he sets the stop to the low of the last day within the pattern. If to the downside, he uses the high of that last day.

The use of retracements, Fibonacci:

Some traders use retracements as places to start a trade using Fibonacci retracements. One way to place entries and stops is, for instance, entries at a 50% retracement and stops at 62%, that way we plan for a 50% potential profit with a 12% risk; more than 4:1 RR.

Moving to break-even:

One method that helps release stress and anxiety from the trader is to move the stop to the break-even point if and when the price has moved to a level that allows to do it.  Then the rest of the trade is a free ride. This has been recommended by many authors focused on trader’s psychology (Alexander Elder, Mark Douglas, Van K. Tharp).

2.    indicator stops

Indicator stop means setting the stop by virtue of an indicator, such as a moving average or momentum.  It’s not a chart-based stop since it’s computationally based.

Indicator stops seek to optimize the relationship between cutting losses short and not getting chopped up at the same time. That’s difficult to achieve without studying past trades for improvement. Indicator stops tries to optimize the relationship between cutting losses short and not getting chopped up at the same time. That’s difficult to achieve without studying past trades for improvement.

To optimize stops we need to back (or forward) test which is the stop distance beyond which there is are more money lost than gained. For more on this, I recommend John Sweeney’s concept of Maximum Adverse Execution. To optimize stops we need to back (or forward) test which is the stop distance beyond which there is are more money lost than gained. For more on this, I recommend John Sweeney’s concept of Maximum Adverse Execution.

The main idea of the MAE using Sweeney’s words is:

 “It turns out that if your trading rules are consistent and can distinguish between good and bad trades, then, over many experiences, you can measure how far good trades go bad and, usually, see at what point a trade is more likely to end badly than profitably. That is the point at which you stop and/or reverse.”

 

How To Set Stop Loss In Options Trading | Forex Academy

How To Set Stop Loss In trading

(figures taken from John Sweeney’s book)

3.    entry method stops

By entry method stops, it means some stop point that is set by the entry method. It may be a reverse entry signal, or it may occur as a result of the violation of some or all of the trade’s entry conditions.

“The same methodology that says enter the trade has to tell you when the trade is wrong. [..] If a market exceeds the price and time projection windows, then the trade is wrong” (Robert Miner)

Robert Miner has a price and time zone. If price breaks the zone or if the time window is reached without gains, he closes the position.

4.    volatility stops

Volatility stops are stops placed at a distance from the entry calculated as some percentage of recent or historical volatility. In general, volatility is measured as a price range computed over a time-lapse.

Stan Tamulevich, interviewed by Babcock for his book, uses the three to four-day volatility. If the market takes out the distance of the last day, he quits the trade. Usually even less than that. If the market takes out 50% of last day move ¡t enters in a danger zone.

Russell Wasendorf, another trader interviewed, sets his stop outside the range set by historical volatility. Short-term volatility increases don’t change his plan. His method is more concerned with not getting shaken off a potentially winning position rather than improve its short-term risk.

5.    money management stops

Money management stops mean fixed dollar amount stops. It’s a combination of stops and dollar risk management.

The two main advantages the author sees are:

  • If the purpose of stop-loss is to manage risk, a dollar stop is the most direct way to manage it.
  •  That kind of stops don’t go to obvious places, except by coincidence, so the risk to be whipsawed by the market is reduced.

6.    account equity stops

An Equity stop is based on a fixed percentage of the account equity. A variant of money management stop.

It’s a methodology that starts by defining in dollar terms what’s the risk allowed by the account’s rolling balance of the trader. If we assume 1% risk is set,  this leads to a dollar risk amount for that account balance.

Then the risk-dollar amount of the potential trade is computed. If it falls within the 1% risk the trade is taken, opening the number of contracts within the 1% risk rule.

If the loss is not within the 1% rule, the entry point must be adapted to bring it close enough to the exit point, so the risk is no more than 1%.

7.    margin-based stops

A variation of the previous type. Stops are calculated by taking a percentage of the exchange margin. This is specific to futures trading.

8.    main points to remember

  • Cutting losses short is the most important rule in a trading plan
  • The trader should be more concerned with the reward-to-risk ratios than with the percentage of winning trades.
  • Chart-based stops set stop points in the proximity of market bottoms/tops.
  • Indicator-based stops look to optimize the stop point using math and historical analysis of past trades.
  • Volatility stops try to keep stop points away from the volatility cloud.
  • Account-equity stops move the entry point of a trade to a place that complies with the percent risk rules of the account.

9.    conclusions and criticism

Stop-loss definition is a difficult task, but it has to be designed with care, as is the main concept to success in trading.

In Mr. Babcock’s book, the primary focus is the futures market, that presents a very poor atomization of the position. I mean, the minimum size allowed in the futures market is ONE contract so that the minimum risk would be the risk of that single contract from an entry point to a stop point. That makes it difficult to split the concept of “cutting losses” with the concept of “position size.” In the currency markets, this is not the case, as we can do it down to micro-lots, which makes it possible to do independent optimization of the two concepts.

I think a combination of Chart or volatility-based stops is the initial stage towards the definition of this task as part of a trading system. But a second step might be to optimize stops using John Sweeney’s MAE concept. For this, we might need a computerized analysis of our past trades, or a back-test, if the system rules can be automated.

We may design a continuous improvement process, by a careful annotation of the behavior of our current stops for further analysis in search of better places.

Regarding position sizing, this is a subject for another essay, it suffices to say for the moment that we could use the before mentioned rule: don’t to risk more than 1% of our current trading account balance, and if you’re starting trading, don’t risk more than 25% of that. There’s a Spanish popular wisdom sentence: ” En dinero y amistad, la mitad de la mitad” (about money and friendship divide by half and then by half).

We should remember that the primary goal of a trader is to survive.

 ©Forex.Academy