Trade With Sufficient Captial
One of the worst blunders that forex traders can make is attempting to trade without sufficient capital.
The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.
Exercise Discipline
Discipline is probably one of the most overused words in forex trading education. However, despite the clich��, discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan.
It��s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you��ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.
Employ Risk-to-Reward Ratios
The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.
Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)
40/20 (2 to 1) = 67%, 40/40 (1 to1) = 50%, 40/60 (1 to 1.5) = 40%,
40/80 (1 to 2) = 33.5%,
60/20 (3 to 1) = 75%,
60/60 (1 to 1) = 50%,
60 /90 (1 to 1.5) = 40%,
60/120 (1 to 2) = 33.5%
Important Note
Never risk more pips on a trade then you plan to make. It doesn��t make sense to risk 100 pips in order to make only 10. Why? See below example.
Profit taking level (pips): 10
Stop used or pips at risk: 100
You win 10 times which makes 100 winning pips. You ONLY lose once and have to give back all profits!!!
This type of trading makes no sense and you will lose on the long term guaranteed!
Wednesday, July 21, 2010
Tuesday, July 20, 2010
Forex Money Management
Forex money management is one of the most important things you can learn before you actually begin making live trades.
The money management principles discussed here will teach you how to avoid the costly mistakes many new traders make, often to the degree that they lose their entire investment on the first handful of trades.
Psychology is really the most important factor to money management in forex. You have to be able to separate yourself from any emotional attachment you may have to your money. This is not very easy to do, but it works and it can be done.
If you allow yourself to become emotional on a trade, you will not exit the trade properly, and this could mean holding on to a trade when you should have let it go, or letting go before the trade had a chance to turn profitable.
First and foremost, you should consider leverage and risk. It is advisable that you never risk more than two percent of your account balance on any trade. However, some go further and allow for as much as ten percent, but never more than that. This gives you the ability to withstand market fluctuations, and if the trade goes bad, you still have money to try again. You should never operate under the assumption that you will profit from every trade. You should also plan for losses. Therefore, most traders will tell you that the best thing to do is to keep your gains large and your losses small. Develop your trading strategy around this idea.
Keep track of your gains and losses. Keeping accurate and detailed records of your account activity will allow you to see whether or not the strategy is working, or if it needs to be re-built.
Never go blindly into trading without a way to keep track of results. You will lose all of your funds and never understand why it happened.
Finally, it is highly advisable that you first practice a strategy on a demo account. Nearly all brokers offer a virtual account whereupon you make trades in real-time, but with imaginary money, so nothing is risked. This is the best way to test a strategy before you put your real money on the line.
However, be careful, once again, of the psychology of trading. When you play with fake money, nothing is risked. When real money is on the line, you must not get emotional. If you do, you will find yourself with very different results, most likely losses, than you had with the demo account.
The money management principles discussed here will teach you how to avoid the costly mistakes many new traders make, often to the degree that they lose their entire investment on the first handful of trades.
Psychology is really the most important factor to money management in forex. You have to be able to separate yourself from any emotional attachment you may have to your money. This is not very easy to do, but it works and it can be done.
If you allow yourself to become emotional on a trade, you will not exit the trade properly, and this could mean holding on to a trade when you should have let it go, or letting go before the trade had a chance to turn profitable.
First and foremost, you should consider leverage and risk. It is advisable that you never risk more than two percent of your account balance on any trade. However, some go further and allow for as much as ten percent, but never more than that. This gives you the ability to withstand market fluctuations, and if the trade goes bad, you still have money to try again. You should never operate under the assumption that you will profit from every trade. You should also plan for losses. Therefore, most traders will tell you that the best thing to do is to keep your gains large and your losses small. Develop your trading strategy around this idea.
Keep track of your gains and losses. Keeping accurate and detailed records of your account activity will allow you to see whether or not the strategy is working, or if it needs to be re-built.
Never go blindly into trading without a way to keep track of results. You will lose all of your funds and never understand why it happened.
Finally, it is highly advisable that you first practice a strategy on a demo account. Nearly all brokers offer a virtual account whereupon you make trades in real-time, but with imaginary money, so nothing is risked. This is the best way to test a strategy before you put your real money on the line.
However, be careful, once again, of the psychology of trading. When you play with fake money, nothing is risked. When real money is on the line, you must not get emotional. If you do, you will find yourself with very different results, most likely losses, than you had with the demo account.
Monday, July 19, 2010
Stock Market Money Management Skills
Let's start by saying: You can't be afraid to take a loss. The investors that are the most successful in the stock market are the people who are willing to lose money.
Having a strategy and/or a specific philosophy is an excellent starting point to investing but it won't mean a thing if you can't manage your money. As I have said a million times: without cash, you can't invest.
Most investors spend far too much time trying to figure out the exact pivot point or perfect entry strategy and too little time on money management. The most important aspect to investing is cutting your losses, 90% of the battle is won by protecting your capital, regardless of the strategy.
Most successful money managers only make money 50-55% of time. This means that successful individual investors are going to be wrong about half the time. Since this is the case, you better be ready to accept your losses and cut them while they are small. By cutting losses quickly and allowing your winners to ride the up-trend, you will consistently finish the year with black ink.
Here are some methods that can help you with money management:
Set a predetermined stop loss (you must know where to cut the loss before it happens ��this will help control emotions when the time comes)." A 7-10% stop loss insurance policy is best. Tighten the stop loss range in down markets and loosen the range in strong bull markets.
Establish smaller positions if your account has had a recent losing streak (the losses may be telling you important information such as a critical turning point, it may be time to sell and get out).
If you think you are wrong or if the market is moving against you, cut your position in half ��this is the best insurance policy on Wall Street."
If you cut your position in half two times, you will be left with only 25% of the original position ��the remaining stock is no longer a big deal as your risk is very low."
If you sell out of a trade prematurely based on a minor correction, you can always reestablish the position again.
Initial position sizing plays a big part in money management ��don't take on too big of a position relative to your portfolio size. Novice investors should never use their entire account on one trade no matter how small the account
Know when you would like to get out of a position after a considerable profit has been made. Signs of topping could be a climax run, a spinning top or higher highs on lower volume.
Finally, cut any trade that doesn't act the way you originally analyzed it to act.
With these guidelines, you will be well on your way to solid money management skills that will help you profit in Wall Street year in and year out. Always remember, you are going to take-on losing trades at least half of the time. This is a tough concept to accept for most novice investors but it a fact. If you don't cut losses, you won't be investing for very long as you will run out of cash and the desire to continue to invest.
Having a strategy and/or a specific philosophy is an excellent starting point to investing but it won't mean a thing if you can't manage your money. As I have said a million times: without cash, you can't invest.
Most investors spend far too much time trying to figure out the exact pivot point or perfect entry strategy and too little time on money management. The most important aspect to investing is cutting your losses, 90% of the battle is won by protecting your capital, regardless of the strategy.
Most successful money managers only make money 50-55% of time. This means that successful individual investors are going to be wrong about half the time. Since this is the case, you better be ready to accept your losses and cut them while they are small. By cutting losses quickly and allowing your winners to ride the up-trend, you will consistently finish the year with black ink.
Here are some methods that can help you with money management:
Set a predetermined stop loss (you must know where to cut the loss before it happens ��this will help control emotions when the time comes)." A 7-10% stop loss insurance policy is best. Tighten the stop loss range in down markets and loosen the range in strong bull markets.
Establish smaller positions if your account has had a recent losing streak (the losses may be telling you important information such as a critical turning point, it may be time to sell and get out).
If you think you are wrong or if the market is moving against you, cut your position in half ��this is the best insurance policy on Wall Street."
If you cut your position in half two times, you will be left with only 25% of the original position ��the remaining stock is no longer a big deal as your risk is very low."
If you sell out of a trade prematurely based on a minor correction, you can always reestablish the position again.
Initial position sizing plays a big part in money management ��don't take on too big of a position relative to your portfolio size. Novice investors should never use their entire account on one trade no matter how small the account
Know when you would like to get out of a position after a considerable profit has been made. Signs of topping could be a climax run, a spinning top or higher highs on lower volume.
Finally, cut any trade that doesn't act the way you originally analyzed it to act.
With these guidelines, you will be well on your way to solid money management skills that will help you profit in Wall Street year in and year out. Always remember, you are going to take-on losing trades at least half of the time. This is a tough concept to accept for most novice investors but it a fact. If you don't cut losses, you won't be investing for very long as you will run out of cash and the desire to continue to invest.
Sunday, July 18, 2010
Forex Article Collection » Money-management » Forex Money Management by FX Master Forex Money Management by FX Master View PDF | Print View Total vi
Money management is a critical point that shows difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don't understand how important it is.
It's important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.
There are different money management strategies. They all aim at preserving your balance from high risk exposure.
First of all, you should understand the following term Core equity
Core equity = Starting balance - Amount in open positions.
If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade,your core equity will be 8,000$
It's important to understand what's meant by core equity since your money management will depend on this equity.
We will explain here one model of money management that has proved high anual return and limited risk. The standard account that we will be discussing is 100,000$ account with 20:1 leverage . Anyway,you can adapt this strategy to fit smaller or bigger trading accounts.
Money management strategy
Your risk per a trade should never exceed 3% per trade. It's better to adjust your risk to 1% or 2%
We prefer a risk of 1% but if you are confident in your trading system then you can lever your risk up to 3%
1% risk of a 100,000$ account = 1,000$
You should adjust your stop loss so that you never lose more than 1,000$ per a single trade.
If you are a short term trader and you place your stop loss 50 pips below/above your entry point .
50 pips = 1,000$
1 pips = 20$
The size of your trade should be adjusted so that you risk 20$/pip. With 20:1 leverage,your trade size will be 200,000$
If the trade is stopped, you will lose 1,000$ which is 1% of your balance.
This trade will require 10,000$ = 10% of your balance.
If you are a long term trader and you place your stop loss 200 pips below/above your entry point.
200 pips = 1,000$
1 pip = 5$
The size of your trade should be adjusted so that you risk 5$/pip. With 20:1 leverage, your trade size will be 50,000$
If the trade is stopped, you will lose 1,000$ which is 1% of your balance.
This trade will require 2,500$ = 2.5% of your balance.
This's just an example. Your trading balance and leverage provided by your broker may differ from this formula. The most important is to stick to the 1% risk rule. Never risk too much in one trade. It's a fatal mistake when a trader lose 2 or 3 trades in a row, then he will be confident that his next trade will be winning and he may add more money to this trade. This's how you can blow up your account in a short time! A disciplined trader should never let his emotions and greed control his decisions.
Diversification
Trading one currnecy pair will generate few entry signals. It would be better to diversify your trades between several currencies. If you have 100,000$ balance and you have open position with 10,000$ then your core equity is 90,000$. If you want to enter a second position then you should calculate 1% risk of your core equity not of your starting balance!. Itmeans that the second trade risk should never be more than 900$. If you want to enter a 3rd position and your core equity is 80,000$ then the risk per 3rd trade should not exceed 800$
It's important that you diversify your prders between currencies that have low correlation.
For example, If you have long EUR/USD then you shouldn't long GBP/USD since they have high correlation. If you have long EUR/USD and GBP/USD positions and risking 3% per trade then your risk is 6% since the trades will tend to end in same direction.
If you want to trade both EUR/USD and GBP/USD and your standard position size from your money management is 10,000$ (1% risk rule) then you can trade 5,000$ EUR/USD and 5,000$ GBP/USD. In this way,you will be risking 0.5% on each position.
The Martingale and anti-martingale strategy
It's very important to understand these 2 strategies.
-Martingale rule = increasing your risk when losing !
This's a startegy adopted by gamblers which claims that you should increase the size of you trades when losing. It's applied in gambling in the following way Bet 10$,if you lose bet 20$,if you lose bet 40$,if you lose bet 80$,if you lose bet 160$..etc
This strategy assumes that after 4 or 5 losing trades,your chance to win is bigger so you should add more money to recover your loss! The truth is that the odds are same in spite of your previous loss! If you have 5 losses in a row ,still your odds for 6th bet 50:50! The same fatal mistake can be made by some novice traders. For example,if a trader started with a abalance of 10,000$ and after 4 losing trades (each is 1,000$) his balance is 6000$. The trader will think that he has higher chances of winning the 5th trade then he will increase ths size of his position 4 times to recover his loss. If he lose,his balance will be 2,000$!! He will never recover from 2,000$ to his startiing balance 10,000$. A disciplined trader should never use such gambling method unless he wants to lose his money in a short time.
-Anti-martingale rule = increase your risk when winning& decrease your risk when losing
It means that the trader should adjust the size of his positions according to his new gains or losses.
Example: Trader A starts with a balance of 10,000$. His standard trade size is 1,000$
After 6 months,his balance is 15,000$. He should adjust his trade size to 1,500$
Trader B starts with 10,000$.His standard trade size is 1,000$
After 6 months his balance is 8,000$. He should adjust his trade size to 800$
High return strategy
This strategy is for traders looking for higher return and still preserving their starting balance.
According to your money management rules,you should be risking 1% of you balance. If you start with 10,000$ and your trade size is 1,000$ (Risk 1%) After 1 year,your balance is 15,000$. Now you have your initial balance + 5,000$ profit. You can increase your potential profit by risking more from this profit while restricting your initial balance risk to 1%. For example,you can calcualte your trade in the following pattern:
1% risk 10,000$ (initial balance)+ 5% of 5,000$ (profit)
In this way,you will have more potential for higher returns and on the same time you are still risking 1% of your initial deposit.
It's important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.
There are different money management strategies. They all aim at preserving your balance from high risk exposure.
First of all, you should understand the following term Core equity
Core equity = Starting balance - Amount in open positions.
If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade,your core equity will be 8,000$
It's important to understand what's meant by core equity since your money management will depend on this equity.
We will explain here one model of money management that has proved high anual return and limited risk. The standard account that we will be discussing is 100,000$ account with 20:1 leverage . Anyway,you can adapt this strategy to fit smaller or bigger trading accounts.
Money management strategy
Your risk per a trade should never exceed 3% per trade. It's better to adjust your risk to 1% or 2%
We prefer a risk of 1% but if you are confident in your trading system then you can lever your risk up to 3%
1% risk of a 100,000$ account = 1,000$
You should adjust your stop loss so that you never lose more than 1,000$ per a single trade.
If you are a short term trader and you place your stop loss 50 pips below/above your entry point .
50 pips = 1,000$
1 pips = 20$
The size of your trade should be adjusted so that you risk 20$/pip. With 20:1 leverage,your trade size will be 200,000$
If the trade is stopped, you will lose 1,000$ which is 1% of your balance.
This trade will require 10,000$ = 10% of your balance.
If you are a long term trader and you place your stop loss 200 pips below/above your entry point.
200 pips = 1,000$
1 pip = 5$
The size of your trade should be adjusted so that you risk 5$/pip. With 20:1 leverage, your trade size will be 50,000$
If the trade is stopped, you will lose 1,000$ which is 1% of your balance.
This trade will require 2,500$ = 2.5% of your balance.
This's just an example. Your trading balance and leverage provided by your broker may differ from this formula. The most important is to stick to the 1% risk rule. Never risk too much in one trade. It's a fatal mistake when a trader lose 2 or 3 trades in a row, then he will be confident that his next trade will be winning and he may add more money to this trade. This's how you can blow up your account in a short time! A disciplined trader should never let his emotions and greed control his decisions.
Diversification
Trading one currnecy pair will generate few entry signals. It would be better to diversify your trades between several currencies. If you have 100,000$ balance and you have open position with 10,000$ then your core equity is 90,000$. If you want to enter a second position then you should calculate 1% risk of your core equity not of your starting balance!. Itmeans that the second trade risk should never be more than 900$. If you want to enter a 3rd position and your core equity is 80,000$ then the risk per 3rd trade should not exceed 800$
It's important that you diversify your prders between currencies that have low correlation.
For example, If you have long EUR/USD then you shouldn't long GBP/USD since they have high correlation. If you have long EUR/USD and GBP/USD positions and risking 3% per trade then your risk is 6% since the trades will tend to end in same direction.
If you want to trade both EUR/USD and GBP/USD and your standard position size from your money management is 10,000$ (1% risk rule) then you can trade 5,000$ EUR/USD and 5,000$ GBP/USD. In this way,you will be risking 0.5% on each position.
The Martingale and anti-martingale strategy
It's very important to understand these 2 strategies.
-Martingale rule = increasing your risk when losing !
This's a startegy adopted by gamblers which claims that you should increase the size of you trades when losing. It's applied in gambling in the following way Bet 10$,if you lose bet 20$,if you lose bet 40$,if you lose bet 80$,if you lose bet 160$..etc
This strategy assumes that after 4 or 5 losing trades,your chance to win is bigger so you should add more money to recover your loss! The truth is that the odds are same in spite of your previous loss! If you have 5 losses in a row ,still your odds for 6th bet 50:50! The same fatal mistake can be made by some novice traders. For example,if a trader started with a abalance of 10,000$ and after 4 losing trades (each is 1,000$) his balance is 6000$. The trader will think that he has higher chances of winning the 5th trade then he will increase ths size of his position 4 times to recover his loss. If he lose,his balance will be 2,000$!! He will never recover from 2,000$ to his startiing balance 10,000$. A disciplined trader should never use such gambling method unless he wants to lose his money in a short time.
-Anti-martingale rule = increase your risk when winning& decrease your risk when losing
It means that the trader should adjust the size of his positions according to his new gains or losses.
Example: Trader A starts with a balance of 10,000$. His standard trade size is 1,000$
After 6 months,his balance is 15,000$. He should adjust his trade size to 1,500$
Trader B starts with 10,000$.His standard trade size is 1,000$
After 6 months his balance is 8,000$. He should adjust his trade size to 800$
High return strategy
This strategy is for traders looking for higher return and still preserving their starting balance.
According to your money management rules,you should be risking 1% of you balance. If you start with 10,000$ and your trade size is 1,000$ (Risk 1%) After 1 year,your balance is 15,000$. Now you have your initial balance + 5,000$ profit. You can increase your potential profit by risking more from this profit while restricting your initial balance risk to 1%. For example,you can calcualte your trade in the following pattern:
1% risk 10,000$ (initial balance)+ 5% of 5,000$ (profit)
In this way,you will have more potential for higher returns and on the same time you are still risking 1% of your initial deposit.
Saturday, July 17, 2010
Forex Money Management - The Foundation For Huge Gains and Forex Trading Success
Most traders use solid Forex trading systems but they fail to poor money management and really poor money management is the reason most traders lose lets take a look at in more detail...
If you watch any good football team it will have a strong defence it keeps the team in the game, until the offence gets an opportunity. If a team falls to far behind it doesn't matter how good the attack is, the team will lose and it's the same in Forex trading you need to defend what you have and keep your losses small until you get good high odds opportunities.
In Forex trading lose 50% of your account and you have to make a 100% to get back to profit and that's hard!
In Forex trading picking trend direction is easy but getting in at the best risk to reward is hard. So what tips can I give you?
The first is to cut leverage sure most brokers give you 200:1 but 10:1 is really plenty for most traders. Leverage up to far and you will have to have your stop to tight and will get taken out by the market noise so cut back leverage.
Next don't put stops to close!
This isn't being rash but you need to have stops outside of random volatility, so you don't get clipped out. Even more important is never jack your stop up to far to lock in profit - leave it back and accept short term dips in equity, to make a longer term gain.
Most traders either use to much leverage or think by having stops close, they reduce their risk but they don't, all they do is increase the probability of being stopped out to 100%. Many traders calculate their risk reward as - their target minus their stop but this is just an opinion! It does not take into account the probability if the trade.
To Win You Need to Deal with Volatility
When I ask traders I teach, do they know anything about standard deviation of price?
They look at me with a blank look yet; this should be essential knowledge for any Forex trader's essential education - why?
Because it gives you the volatility of the market and allows you to place stops more effectively. If you don't know what it is, make it part of your essential Forex education and look up our other articles.
Here are some simple money management tips.
- Always assume the worst when you enter a trade and things can only get better, there is no sure fire winner!
- Never place stops inside random volatility
- Never leverage up to hilt, keep leverage low
- Never trail a stop to quickly give the market room to breathe
- Never trade in random time periods so no day trading or scalping!
- Be patient and wait for high odds trades
- Don't place mental stops, they affect discipline and you may let a loss run
- Risk reward is NOT Your target minus your stop! Don't fall into this common trap
- If in doubt get out - any doubts liquidate
In forex trading your only trading the odds, you need to preserve your equity above all else fall too far behind and you will never recover. Forex money management is the key to this and always keep in mind the old gamblers saying:
To bet and win you need to be at the table but you can't bet if you lose your chips!
Obvious really - but very true. The foundation of your success is sound Forex money management SO pay attention and make it part of your essential Forex education or lose.
If you watch any good football team it will have a strong defence it keeps the team in the game, until the offence gets an opportunity. If a team falls to far behind it doesn't matter how good the attack is, the team will lose and it's the same in Forex trading you need to defend what you have and keep your losses small until you get good high odds opportunities.
In Forex trading lose 50% of your account and you have to make a 100% to get back to profit and that's hard!
In Forex trading picking trend direction is easy but getting in at the best risk to reward is hard. So what tips can I give you?
The first is to cut leverage sure most brokers give you 200:1 but 10:1 is really plenty for most traders. Leverage up to far and you will have to have your stop to tight and will get taken out by the market noise so cut back leverage.
Next don't put stops to close!
This isn't being rash but you need to have stops outside of random volatility, so you don't get clipped out. Even more important is never jack your stop up to far to lock in profit - leave it back and accept short term dips in equity, to make a longer term gain.
Most traders either use to much leverage or think by having stops close, they reduce their risk but they don't, all they do is increase the probability of being stopped out to 100%. Many traders calculate their risk reward as - their target minus their stop but this is just an opinion! It does not take into account the probability if the trade.
To Win You Need to Deal with Volatility
When I ask traders I teach, do they know anything about standard deviation of price?
They look at me with a blank look yet; this should be essential knowledge for any Forex trader's essential education - why?
Because it gives you the volatility of the market and allows you to place stops more effectively. If you don't know what it is, make it part of your essential Forex education and look up our other articles.
Here are some simple money management tips.
- Always assume the worst when you enter a trade and things can only get better, there is no sure fire winner!
- Never place stops inside random volatility
- Never leverage up to hilt, keep leverage low
- Never trail a stop to quickly give the market room to breathe
- Never trade in random time periods so no day trading or scalping!
- Be patient and wait for high odds trades
- Don't place mental stops, they affect discipline and you may let a loss run
- Risk reward is NOT Your target minus your stop! Don't fall into this common trap
- If in doubt get out - any doubts liquidate
In forex trading your only trading the odds, you need to preserve your equity above all else fall too far behind and you will never recover. Forex money management is the key to this and always keep in mind the old gamblers saying:
To bet and win you need to be at the table but you can't bet if you lose your chips!
Obvious really - but very true. The foundation of your success is sound Forex money management SO pay attention and make it part of your essential Forex education or lose.
Friday, July 16, 2010
How Forex Money Management Protects Currency Traders
If you consider Forex money management a boring distraction from the real fun of Forex trading, you've missed the whole point. Before you can make any real and consistent gains in the Forex, you must come to understand that money management is just as important as the trading part. One of the most essential ingredients of successful Forex trading is the unfailing use of money management techniques to minimize losses and protect your gains.
Before you even begin laying out money and making trades, you'll want to decide on a set of Forex money management guidelines. Placing bets without any kind of safety net is irresponsible toward yourself and your family.
Successful traders recommend that you start small and gain a gut-level grasp of the markets before moving on to bigger bets. Hoping for a big score right at the beginning is the mark of a casino gambler, not an investor.
The best advice:
Keep your risk, right from the beginning, at about one percent or less of your total equity on any one trade. Keeping your risk low, in the one percent range, protects you if disaster strikes and you have a string of losses. You could actually survive 20 consecutive bad trades and still have 80 percent of your equity remaining. Taking tiny little one percent baby steps may seem boring, but it certainly beats being wiped out by a run of adverse trades. It will ensure that you're still around to invest next week, next month and next year. It also helps you safely build confidence, judgment and experience.
Many new Forex traders ask how much they should put into their trading account. The surest and wisest advice is never, ever bet your rent or grocery money. In other words, only use money you can afford to lose. Yes, I know that in your special case there aren't going to be any losses, and you're in a big hurry to make it big. But long experience says it's not going to happen that way for you either. If you were to lose everything you invest, would you and your family still eat okay? Would you still be in your home, or would you have to move into your brother-in-law's basement? Just think about this, okay?
It's important for you to know about the four stops. These are standard (and very wise) ways to prevent losses from ravaging your finances as you begin trading the Forex markets. You or your broker can use one or more of these four stops to protect your money.
1. Equity Stop
This stop lets you decide beforehand how much you're prepared to risk on a single trade, and you won't risk anything beyond that percentage. A beginner may set the equity stop to one or two percent. Once you've gained considerable experience, you might eventually raise this to five percent, but never forget that at the 5% level, ten consecutive bad trades (not impossible) could wipe out half of your account.
Downside: This stop makes no allowance for positive fluctuations. The protection is strong, but if you never vary from it, you may miss out on some of the more profitable trades. When you're a newbie, the safety net it provides while you're learning is more important than any gains you might miss while you'e learning.
2. Chart Stop
The trading charts that technical analysis provides can be accurate indicators of market movements. Technically minded traders who live, eat and breathe mathematics and probabilities often love chart stops. But the smart ones don't get reckless. They also include equity stops in their calculations.
Downside: Generating charts and analyzing them can take significant time for newbies. This is time in which the market has moved on, leaving all that beautifully charted data a little (or a lot) outdated.
3. Volatility Stop
Related to the chart stop but more complex, this one assigns risk values according to volatility rather than price action. Until you're experienced in Forex trading, it's best to leave this difficult technique to your broker. It's based on subtle and sophisticated evaluations of high versus low volatility of currency pairs and assigns greater or lesser risk to each market situation.
Downside: Demands steady, unflinching nerves and a great deal of experience.
4. Margin Stop
With the Margin Stop you're deciding beforehand that you'll get out of any trade before you're out of money. If you have ,000 in your account, setting your margin to 0 means you'll trade with the top textarea,500 but if your losses ever reach that amount, you'll close your position and preserve that last 0.
Downside: It's hard to find a downside to the Margin Stop. You keep control of your account, even when using an account manager.
Forex money management is essential when trading in the currency markets. And these stops are important backup measures to be used in tandem with your own patience, caution and growing judgment to minimize losses while maximizing your gains.
Before you even begin laying out money and making trades, you'll want to decide on a set of Forex money management guidelines. Placing bets without any kind of safety net is irresponsible toward yourself and your family.
Successful traders recommend that you start small and gain a gut-level grasp of the markets before moving on to bigger bets. Hoping for a big score right at the beginning is the mark of a casino gambler, not an investor.
The best advice:
Keep your risk, right from the beginning, at about one percent or less of your total equity on any one trade. Keeping your risk low, in the one percent range, protects you if disaster strikes and you have a string of losses. You could actually survive 20 consecutive bad trades and still have 80 percent of your equity remaining. Taking tiny little one percent baby steps may seem boring, but it certainly beats being wiped out by a run of adverse trades. It will ensure that you're still around to invest next week, next month and next year. It also helps you safely build confidence, judgment and experience.
Many new Forex traders ask how much they should put into their trading account. The surest and wisest advice is never, ever bet your rent or grocery money. In other words, only use money you can afford to lose. Yes, I know that in your special case there aren't going to be any losses, and you're in a big hurry to make it big. But long experience says it's not going to happen that way for you either. If you were to lose everything you invest, would you and your family still eat okay? Would you still be in your home, or would you have to move into your brother-in-law's basement? Just think about this, okay?
It's important for you to know about the four stops. These are standard (and very wise) ways to prevent losses from ravaging your finances as you begin trading the Forex markets. You or your broker can use one or more of these four stops to protect your money.
1. Equity Stop
This stop lets you decide beforehand how much you're prepared to risk on a single trade, and you won't risk anything beyond that percentage. A beginner may set the equity stop to one or two percent. Once you've gained considerable experience, you might eventually raise this to five percent, but never forget that at the 5% level, ten consecutive bad trades (not impossible) could wipe out half of your account.
Downside: This stop makes no allowance for positive fluctuations. The protection is strong, but if you never vary from it, you may miss out on some of the more profitable trades. When you're a newbie, the safety net it provides while you're learning is more important than any gains you might miss while you'e learning.
2. Chart Stop
The trading charts that technical analysis provides can be accurate indicators of market movements. Technically minded traders who live, eat and breathe mathematics and probabilities often love chart stops. But the smart ones don't get reckless. They also include equity stops in their calculations.
Downside: Generating charts and analyzing them can take significant time for newbies. This is time in which the market has moved on, leaving all that beautifully charted data a little (or a lot) outdated.
3. Volatility Stop
Related to the chart stop but more complex, this one assigns risk values according to volatility rather than price action. Until you're experienced in Forex trading, it's best to leave this difficult technique to your broker. It's based on subtle and sophisticated evaluations of high versus low volatility of currency pairs and assigns greater or lesser risk to each market situation.
Downside: Demands steady, unflinching nerves and a great deal of experience.
4. Margin Stop
With the Margin Stop you're deciding beforehand that you'll get out of any trade before you're out of money. If you have ,000 in your account, setting your margin to 0 means you'll trade with the top textarea,500 but if your losses ever reach that amount, you'll close your position and preserve that last 0.
Downside: It's hard to find a downside to the Margin Stop. You keep control of your account, even when using an account manager.
Forex money management is essential when trading in the currency markets. And these stops are important backup measures to be used in tandem with your own patience, caution and growing judgment to minimize losses while maximizing your gains.
Thursday, July 15, 2010
What is the perfect % of total equity should I use per trade?
What is the perfect % of total equity should I use per trade?
A lot of traders have no clue how to use proper trading sizes per trade especially when they are trading live markets. That is the exact point of mistakes done by most of the traders. These cause them loosing money in Forex. We have to know proper money management & trading plans.
Every trading strategy must be taken into consideration of the maximum percentage of total trading capital that risk should be taken on any one single trade. They shouldn't risk too much money on any given any single trade which is very essential for a trader. The following rules are very important in order to survive financially in Forex trading. Your trading size should not be grater as 1/10th of your account size.
For instance, If your account size is 10.000 Dollar than your trading size can be 1 Lot, (or 10 Dollar per Pip)
On an 1000 Dollar account your trading size should not exceeded 0,1 Lot (or 1 dollar per Pip).
On an 100 Dollar account your trading size should not exceeded 0,01 Lot (or 0,1 dollar per Pip).
To keep these things into simplest form, I repeat:
1 Lot buying/selling are 100.000 Units of a currency. Pip value = 10 Dollar
0,1 Lot buying/selling are 10.000 Units of a currency. Pip value = 1 Dollar
0,01 Lot buying/selling are 1.000 Units of a currency. Pip value = 0.1 Dollar
With an account size of 100 dollar and you trade with pip value of 1 dollar, only 100 pips are needed and your account is empty. You lost all! As you can see to adjust the trading size to your account size is very essential.
But why they are doing this? Here is a psychological effect on trading. First they trade with lower as 1/1000 of account size. Than some losses occurred. Account size melt down to 70%. At this level people changed there risk and trade with 1/300 ( that mean trade size is 3 times now bigger as before) and they loss again. After account size is 50%, suddenly the risk grows exponential, and they trade with 1/100 or less from account size.
Let us see this as an example now with numbers. Suppose we have an account size of 1000 dollar. As I said above, we should not trade more than 1/1000 account size, that's 1 dollar /pip. (0,1 Lot). If we loose 300 dollar and have now an account size of 700 dollar. (70%). At this point we start to trade with 1/300 of account size.2,33 Dollar/pip (300 pip lost and we blow our account). We trade it & and make loss 200 dollar. Account size is now 500 dollar. Now we expanded the risk and trade with 1/100, that's 5 dollar/pip. Now we can't loss more as 100 pips, because at this level our account is going to be empty.
On a 50% account size the chances of losses are so strong for most traders and they will now attempts to recover the lost money with 1 or 2 trades. That's the reason why they blown up their accounts. I will not call this greediness, its only fear of loss. These traders can't accept losses anymore
psychologically. If they really want to survive, they must have to work on proper trading strategy and modify it again! If it's proved, than start trading with very small sizes and tries to win more trades. After winning a bunch of trades they would increase trading size easily.
Some stuffs to be remembered essentially:
To recover a lost from 50% we need to double our account size. Clear? If we start with 3000 dollar account size and we lost 50% (1500 dollar) Our account size is now 1500 dollar. We need the same amount of money which we lost. So we must earn 1500 dollar from trading to reach our trading account size from 3000 dollar. Can I able to make you a clear picture what do I mean? If we don't loose 50% of the account and start with 3K and
A lot of traders have no clue how to use proper trading sizes per trade especially when they are trading live markets. That is the exact point of mistakes done by most of the traders. These cause them loosing money in Forex. We have to know proper money management & trading plans.
Every trading strategy must be taken into consideration of the maximum percentage of total trading capital that risk should be taken on any one single trade. They shouldn't risk too much money on any given any single trade which is very essential for a trader. The following rules are very important in order to survive financially in Forex trading. Your trading size should not be grater as 1/10th of your account size.
For instance, If your account size is 10.000 Dollar than your trading size can be 1 Lot, (or 10 Dollar per Pip)
On an 1000 Dollar account your trading size should not exceeded 0,1 Lot (or 1 dollar per Pip).
On an 100 Dollar account your trading size should not exceeded 0,01 Lot (or 0,1 dollar per Pip).
To keep these things into simplest form, I repeat:
1 Lot buying/selling are 100.000 Units of a currency. Pip value = 10 Dollar
0,1 Lot buying/selling are 10.000 Units of a currency. Pip value = 1 Dollar
0,01 Lot buying/selling are 1.000 Units of a currency. Pip value = 0.1 Dollar
With an account size of 100 dollar and you trade with pip value of 1 dollar, only 100 pips are needed and your account is empty. You lost all! As you can see to adjust the trading size to your account size is very essential.
But why they are doing this? Here is a psychological effect on trading. First they trade with lower as 1/1000 of account size. Than some losses occurred. Account size melt down to 70%. At this level people changed there risk and trade with 1/300 ( that mean trade size is 3 times now bigger as before) and they loss again. After account size is 50%, suddenly the risk grows exponential, and they trade with 1/100 or less from account size.
Let us see this as an example now with numbers. Suppose we have an account size of 1000 dollar. As I said above, we should not trade more than 1/1000 account size, that's 1 dollar /pip. (0,1 Lot). If we loose 300 dollar and have now an account size of 700 dollar. (70%). At this point we start to trade with 1/300 of account size.2,33 Dollar/pip (300 pip lost and we blow our account). We trade it & and make loss 200 dollar. Account size is now 500 dollar. Now we expanded the risk and trade with 1/100, that's 5 dollar/pip. Now we can't loss more as 100 pips, because at this level our account is going to be empty.
On a 50% account size the chances of losses are so strong for most traders and they will now attempts to recover the lost money with 1 or 2 trades. That's the reason why they blown up their accounts. I will not call this greediness, its only fear of loss. These traders can't accept losses anymore
psychologically. If they really want to survive, they must have to work on proper trading strategy and modify it again! If it's proved, than start trading with very small sizes and tries to win more trades. After winning a bunch of trades they would increase trading size easily.
Some stuffs to be remembered essentially:
To recover a lost from 50% we need to double our account size. Clear? If we start with 3000 dollar account size and we lost 50% (1500 dollar) Our account size is now 1500 dollar. We need the same amount of money which we lost. So we must earn 1500 dollar from trading to reach our trading account size from 3000 dollar. Can I able to make you a clear picture what do I mean? If we don't loose 50% of the account and start with 3K and
Rules to Live By in Protecting Your Penny Stock Investments
As the market continues to try and rebound in 2010, it's penny stocks and other small-cap investments leading the way. And if you've taken a look at your portfolio recently, you've noticed this lead. But investing in penny stocks isn't something to be done blindly (nor any investment, for that matter).
Aside from the technicals, one of the big reasons savvy investors are making more from small-caps right now is because they're using some guidelines and protecting themselves well from potential losses. Investing in penny stocks means doing your research about the particular investment and seeing if it's worth your time and money.
In researching penny stocks, one must be aware of market timing. Knowing what the market is doing - when it's doing it - will go a long way in determining your success (or failure) as an investor…
Improve Your Market Timing with These 3 Simple Rules
Market timing is one aspect of trading that investors will squabble about until the end of time. There are those who will emphatically deny any chance at timing the market - or an individual stock's movements. On the flip side there are the traders who swear buy market timing, claiming there's no other proven method for buying and selling stocks.
While both of these methods can be effective, it's important to remember this cardinal rule: No matter what your investment style might be, you should always be sure to buy shares at the best possible day and time to maximize gains.
For some solid advice on the best time to buy stocks, we turn to a true expert: legendary financial writer and market forecaster Justin Mamis. Mamis literally wrote the book on trading strategies. Many of the practices outlined in his book How to Buy are still valid nearly thirty years after it was first published.
Here are three things to look for before you make your next trade:
1. The day of the week. Early gains on a Monday tend to fade; they are usually temporary reactions to weekend news, Mamis says. On Fridays, a strong close can indicate a healthy market. Our most important take-away would be to vigilant when planning to purchase shares at the beginning or end of the week: these days can give you a good indication as to what direction the market as a whole is headed.
2. The time of the day. As a rule, I will avoid the first half hour to 45 minutes after the market opens when looking to buy a stock. Unless you're acting on a fast-moving issue, it's best to let the market sort itself out. It's easy to be fooled by a stock's strong early performance, only to see those gains evaporate by the afternoon. Adding to this, Mamis suggests that investors should avoid lunchtime rallies as well, since they tend to be isolated.
3. Anticipate the weak and the strong. Mamis advises to never buy weakness in the late afternoon. His reasoning is simple: you could most certainly get just as good of a price early the next day as investors' sentiment carries over into the next trading session. The opposite holds true for strong stocks. Buying a strong stock at the end of the day is a great bet - you're anticipating a gap-up the next day.
As you've probably already guessed, market timing techniques like these are important when you're trading penny stocks - especially when you're searching for short-term gains. That's why I tell my readers to never rush into a position. Decide what price you're willing to pay, use a limit order and hone your timing skills. That way, you'll always get the shares you want - without succumbing to the emotional pulls of the markets…
And when the market does pull, you'll be better equipped to protect your investments against losses with another rule of thumb I encourage you to try. It will make all the difference in the world between successfully cutting your losses and preserving your gains…and just losing all you've worked hard for. It's a techniques known as the “stop loss”…
How to Use a Stop Loss to Limit Your Downside Risk
If you're trading penny stocks, it's important to understand the benefits of setting stop losses to limit the downside on your trades. When you learn how to set up a proper stop loss, you can avoid holding onto a failing position due to purely emotional reasons. And by cutting your losses at the correct time, you can drastically improve your portfolio. Today, I'm going to show you exactly how to do just that…
Take a look at the chart below (the name of the stock has been redacted - it's not important for our discussion):
In this example, let's say you entered a position in the stock at $1.09. You're hoping the stock is able to break through resistance at $1.15. But you also want to protect yourself should the stock break its trend and move lower.
That's where the stop-loss order comes in. A stop loss is an order with your broker to sell your shares in a particular stock automatically when its price hits a specific level. That means if your shares of Stock A are up 30%, you can set a stop loss to trigger when the stock drops to 25%, guaranteeing your minimum profit. And when you're entering into a new position, like the one above, placing a stop loss guarantees that you won't be bleeding red ink if the trade goes awry.
Here's how it works: I drew the horizontal blue line through recent areas of support and resistance. If you look toward the earlier dates on the chart (October, November, December), you will see similar points of support at 60 cents, 75 cents and 90 cents, respectively. Resistance is at 70 cents, 85 cents and $1.05. It's not perfect, but rather a general area where a stock encounters a bit of a speed bump in its movement in either direction.
Now let's apply support and resistance to stop losses. We don't want the stock to break its uptrend. The stock has been bumping its head on $1.15 since December, and we want it to break and hold this mark. And we don't want the stock to break support of $1.05.
If you prefer a tight stop loss, set it at $1.05. That is, if the stock closes below the $1.05 mark, not if it merely breaks the $1.05 mark in intraday trading. If you want to give your trade a little more breathing room, you might want to consider the all-important $1 mark as your stop.
Of course, you can revisit your stop loss if and when your stock moves up. That's why you need to continue to monitor the position, updating your stop loss as the trade progresses. When the stock finds a new point of support, reset the stop loss directly below the new support. If it breaks the mark, sell and take your gains off the table.
As I mentioned above, the stop loss helps protect investors against their own emotions. Wanting a stock to go up - and the stock actually moving in the right direction - are two very different things. All to often, investors will hold onto their losing trades much longer than they should. These losses will eat away at all of your profitable trades, potentially causing you to make increasingly risky bets to make up the lost ground.
Simply put, it can be a recipe for disaster.
But, of course, stop losses only work if you set them and stick by your decision, selling if and when the time comes. Constantly second-guessing the market is another big mistake that can spell doom for your portfolio.
Hopefully, this will give you a better understanding of stop losses - and will help you set your own exit points for all of your trading activities.
Aside from the technicals, one of the big reasons savvy investors are making more from small-caps right now is because they're using some guidelines and protecting themselves well from potential losses. Investing in penny stocks means doing your research about the particular investment and seeing if it's worth your time and money.
In researching penny stocks, one must be aware of market timing. Knowing what the market is doing - when it's doing it - will go a long way in determining your success (or failure) as an investor…
Improve Your Market Timing with These 3 Simple Rules
Market timing is one aspect of trading that investors will squabble about until the end of time. There are those who will emphatically deny any chance at timing the market - or an individual stock's movements. On the flip side there are the traders who swear buy market timing, claiming there's no other proven method for buying and selling stocks.
While both of these methods can be effective, it's important to remember this cardinal rule: No matter what your investment style might be, you should always be sure to buy shares at the best possible day and time to maximize gains.
For some solid advice on the best time to buy stocks, we turn to a true expert: legendary financial writer and market forecaster Justin Mamis. Mamis literally wrote the book on trading strategies. Many of the practices outlined in his book How to Buy are still valid nearly thirty years after it was first published.
Here are three things to look for before you make your next trade:
1. The day of the week. Early gains on a Monday tend to fade; they are usually temporary reactions to weekend news, Mamis says. On Fridays, a strong close can indicate a healthy market. Our most important take-away would be to vigilant when planning to purchase shares at the beginning or end of the week: these days can give you a good indication as to what direction the market as a whole is headed.
2. The time of the day. As a rule, I will avoid the first half hour to 45 minutes after the market opens when looking to buy a stock. Unless you're acting on a fast-moving issue, it's best to let the market sort itself out. It's easy to be fooled by a stock's strong early performance, only to see those gains evaporate by the afternoon. Adding to this, Mamis suggests that investors should avoid lunchtime rallies as well, since they tend to be isolated.
3. Anticipate the weak and the strong. Mamis advises to never buy weakness in the late afternoon. His reasoning is simple: you could most certainly get just as good of a price early the next day as investors' sentiment carries over into the next trading session. The opposite holds true for strong stocks. Buying a strong stock at the end of the day is a great bet - you're anticipating a gap-up the next day.
As you've probably already guessed, market timing techniques like these are important when you're trading penny stocks - especially when you're searching for short-term gains. That's why I tell my readers to never rush into a position. Decide what price you're willing to pay, use a limit order and hone your timing skills. That way, you'll always get the shares you want - without succumbing to the emotional pulls of the markets…
And when the market does pull, you'll be better equipped to protect your investments against losses with another rule of thumb I encourage you to try. It will make all the difference in the world between successfully cutting your losses and preserving your gains…and just losing all you've worked hard for. It's a techniques known as the “stop loss”…
How to Use a Stop Loss to Limit Your Downside Risk
If you're trading penny stocks, it's important to understand the benefits of setting stop losses to limit the downside on your trades. When you learn how to set up a proper stop loss, you can avoid holding onto a failing position due to purely emotional reasons. And by cutting your losses at the correct time, you can drastically improve your portfolio. Today, I'm going to show you exactly how to do just that…
Take a look at the chart below (the name of the stock has been redacted - it's not important for our discussion):
In this example, let's say you entered a position in the stock at $1.09. You're hoping the stock is able to break through resistance at $1.15. But you also want to protect yourself should the stock break its trend and move lower.
That's where the stop-loss order comes in. A stop loss is an order with your broker to sell your shares in a particular stock automatically when its price hits a specific level. That means if your shares of Stock A are up 30%, you can set a stop loss to trigger when the stock drops to 25%, guaranteeing your minimum profit. And when you're entering into a new position, like the one above, placing a stop loss guarantees that you won't be bleeding red ink if the trade goes awry.
Here's how it works: I drew the horizontal blue line through recent areas of support and resistance. If you look toward the earlier dates on the chart (October, November, December), you will see similar points of support at 60 cents, 75 cents and 90 cents, respectively. Resistance is at 70 cents, 85 cents and $1.05. It's not perfect, but rather a general area where a stock encounters a bit of a speed bump in its movement in either direction.
Now let's apply support and resistance to stop losses. We don't want the stock to break its uptrend. The stock has been bumping its head on $1.15 since December, and we want it to break and hold this mark. And we don't want the stock to break support of $1.05.
If you prefer a tight stop loss, set it at $1.05. That is, if the stock closes below the $1.05 mark, not if it merely breaks the $1.05 mark in intraday trading. If you want to give your trade a little more breathing room, you might want to consider the all-important $1 mark as your stop.
Of course, you can revisit your stop loss if and when your stock moves up. That's why you need to continue to monitor the position, updating your stop loss as the trade progresses. When the stock finds a new point of support, reset the stop loss directly below the new support. If it breaks the mark, sell and take your gains off the table.
As I mentioned above, the stop loss helps protect investors against their own emotions. Wanting a stock to go up - and the stock actually moving in the right direction - are two very different things. All to often, investors will hold onto their losing trades much longer than they should. These losses will eat away at all of your profitable trades, potentially causing you to make increasingly risky bets to make up the lost ground.
Simply put, it can be a recipe for disaster.
But, of course, stop losses only work if you set them and stick by your decision, selling if and when the time comes. Constantly second-guessing the market is another big mistake that can spell doom for your portfolio.
Hopefully, this will give you a better understanding of stop losses - and will help you set your own exit points for all of your trading activities.
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