Forex Highlights

Money Management – The Most Important Aspect on Making Money Trading the Forex

March 13th, 2010 by admin in Forex Money Management with 0 Comments

The key to making money in trading Forex, or other markets for that matter, is having small losses and BIG wins. You don’t have to be 80-100% winning to make money but simply need to focus on ALWAYS having very small losses and maximizing your winning trades.

How do you guarantee you won’t have a big loss?

That’s easy.

First you determine where the market has to go to to PROVE to you that your buy or sell trade is likely to be wrong. I typically use the previous swing low for buys and swing high for sells plus a few pip padding so noise doesn’t knock you out and you miss the resulting profitable move. With the TopGun Software myself and my partner have created our systems are typically 60 to 80% winning however as I said above you don’t have to have such a high win rate. A high win rate system will however allow you to use smaller stops (10-12 pip stops are our maximum for most USD pairs).

The next stop is to decide how much in % terms you are willing to risk per trade.

Risking 2% per trade is a good base line

This way you can have 5 losses in a row which rarely if ever happens if you know how to trade Forex but does occasionally happen.

ADVANCED TRADERS ONLY NOTE

If you are a profitable and experienced trader you will likely have different trading styles, methods, and strategies. Some may work 50% of the time while others don’t occur too often but when they do are 80-100% winning. For advanced traders only I recommend they risk more on the super high winning % trades that also often have much bigger pip gains than other systems.

So for example if your normal systems are 40 to 60% winning but one only finds a few trades per week but is usually 80% winning and gives you huge wins, say 30 to 50+ pips on average I recommend to INCREASE your trading size. I will increase the size on my trades 30 to 100%. This can have dramatic impact on your AVG WIN size which I’ll explain later and how it impacts your NET PROFITABILITY!

Once you’ve made the above 2 DECISIONS you can then decide how many Forex lots to trade. A mini lot is $10k and a full lot is $100k of currency and a mini lot is worth $1 per pip while a full lot is worth $10 per pip of price movement.

Number of lots to trade = ( Account Size X Risk % per trade ) / ( Stop in pips * Value per pip )

So for example you have a $5,000 account and are risking 2% on this trade where you are having a 10 pip stop and are trading mini lots ($1 per pip)

$5,000 x .02 = 100. You can only lose $100 on this trade which would be 2% of your account.

Then simply take the 100 and divide by your 10 pip stop * $1 per pip = 10 which results in 10. You can trade 10 mini lots in this trade which is the equivalent to 1 full lot.

If you were a full lot trader you take ($5,000 x .02) / (10 * 10) and the result would be 1 lot!

Simple!

Now this is only the beginning. In order to be profitable you should have 50% bigger average wins than losses! This means that if on average you lose $100 when wrong you should be making $150 on average in your winning trades.

In both my experience and in watching the accounts of my close to 2,000 traders I’ve found that big wins (30-50+ pips) happen 10 to 20% of the time for most of us. This means that often times our wins are 5, 10, 15, or 20 pips. The huge 30-50+ pip wins just increase our average win amount even more.

The profitability formula is Number of trades X winning % X average win amount in dollars minus Number of trades X losing % X average loss amount in dollars.

So there are a few things you can do to MAXIMIZE how much you make trading Forex. First obviously increase your winning percentage but also do whatever you can to reduce your losses. We teach our traders to move their stops to BREAK EVEN once the market moves 10-12 pips their way. This does slightly lower winning % but also DRAMATICALLY reduces the average loss in dollars! It’s one of the secrets to trading that you will rarely read in books and I have many 40% winning traders that make a good income trading Forex because they have so few losses, just break evens on most trades that don’t work!

You should also AVOID trades that are NOT likely to make you 50% more than you risk. For example, if you see 2 or 3 major resistance points 5 pips above current price and you are using a 10 pip stop DO NOT TAKE THE TRADE! If you are “likely” to only make 5 pips while risking 10 this is a recipe for disaster when trading currencies. Don’t do it, EVER!

If on the other hand the next resistance area is 30 pips away and you have a 10 pip stop and trade is 50 to 60%+ likely to work you HAVE to take the trade because those 20-30 pip wins will increase your average winning trade. That’s another reason above why I told you to increase your trade size on trades you feel have a 80-100% chance of working or are more likely to give you huge gains.

The article discusses the VERY MINIMUM you must 100% understand in order to make money trading the Forex.

If you would like to come to a week of our Forex Training Classes free or get our software that has many 60 to 80% winning Forex Systems please visit LeverageFX.com

Chris Donnell
LeverageFX
800-439-9125
Forex Software & Broker

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Money Management Skills For Forex Trading

March 12th, 2010 by admin in Forex Money Management with 0 Comments

I want to share with you some skills I’ve developed when it comes to managing my money when I’m trading Forex. A great way to manage your money is to make sure you’re making trades to put only put a couple percentage points of your money at risk.

If you have $5000 you want to start investing in the forex market, you’re going to have to decide what kind of account you’re going to get to hold onto your money. You can start with the mini accounts which are for new people, or you can get a standard account. The best to start with is the mini account because you can make much smaller trades, instead of doing the larger ones the professionals do.

Before you start making trades, it’s time to decide how much you could risk losing, rather than how much you’re going to potentially invest. If you’re starting with $5000, try doing 10%. That means you would be perfectly fine financially if you lost $500. Make sure you’re okay with that. If not, you shouldn’t be in this business. This means you’re going to trade with $500 this month. There’s no need to risk more money at this point.

Now the next skill you need to develop is assessing the risk per trade. This allows you to gauge the probability that you’re going to win or lose with this particular trade. For this you’re going to need a piece of software, like Forex Killer. All you have to do is input the data feed of a particular currency and it can let you know if it is risky or not. It can also calculate rate of return as well, as it is an automated software. With this tool you won’t be risking anything that could potentially lose more than 5% of your money. You just set up the software to sell at specific points and you’re home free.

These skills will help you manage your money much better with forex trades. Remember that you need to be cool calm and calculating. If you start risking more money because you have a “feeling” about something, you’re bound to lose out.

The skills are important to win at forex, but Forex Killer is just as important. Check it out now at Forex Charting Software.

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Money Management – Martingale Type Strategies

March 11th, 2010 by admin in Forex Money Management with 0 Comments

Martingale type of strategies state that as the value of an account is decreasing, the size of the following trades increase. As the account suffers losses, the trading size increase in order to cover the losses.

This type of money management strategy is practiced in gambling where the systems or the games are negative expectancy. No type of money management can change the odds of the game or change the expectancy of the system. A simple example is a coin flip.

You can bet on heads or tails. If you win you win 1$ and if you lose, you lose 2$. This is negative expectancy. If after 100 flips, you have 60 heads and 40 tails, you will win 60$ and lose 80$ netting a loss of 20$.

Although you won 60% of the times, your wins were half the size of your losses. However, by practicing martingale, you can increase your bet size after every loss to 2$ to win 2$, in this case if a streak of wins start, you can manage to come up as a break even player.

This type of money management is highly dependent on streak of consecutive wins. Classically, the gamblers or traders try to take advantage of the streaks in the game. However, this is not going to change the negative expectation of the game. Any losing streak lasting for long enough will chew up the capital.

The theory behind doubling of size of the bet is that eventually the losing streak has to come to an end. I do not recommend this method of money management in forex, stocks, options or any other type of trading. The risks are too great and there is a good chance that 4-6 or more losing trades will ruin the account.

There are other better money management techniques which are antimartingale in nature. This will be discussed further in my other articles on money management techniques here on EzineArticles.

Adnan Kaleemi is a Registered Commodity Trading Advisor and has been advising Forex traders all over the world in more than 60 countries for the last five years. He is currently registered with the commodity and futures trading commission in the US. He reaches global forex traders where he provides daily forex signals and forecasts in the major currency pairs EURUSD,GBPUSD,USDJPY and USDCHF along with money management strategies At http://www.forexforecasting.com you will find informative articles, newsletters and other tools which will help transform your Forex Trading.

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Money Management Lesson For New Forex Traders

March 10th, 2010 by admin in Forex Money Management with 0 Comments

This article is dedicated for new forex traders. I am going to show you how to control your forex capital using simple money management tips. I can’t say it more enough, money management plays a key role in your success or failure with your forex trading. This is not just words, a bad money management can easily ruin your forex capital.

How to Apply Money Management

I believe the best way to learn new things is by practicing and examples. Let us assume that you have a capital of $1,000 (One thousand U.S. dollars) in your forex trading account. You need to set certain rules and apply them to your trading, those rules are:

Size Per Trade

You must put a rule for yourself, for your lifetime trading which is size per trade. How? You need to ask yourself, how many U.S. dollars you are going to use per trade? and how many trades can be left open at a single time? Enough questions, let me answer you.

A $100 trade would possibly have a $1 pip value, trading with leverage of 100:1. So never trade more than 10% of your entire forex account at a time. I am serious about this, all your open trades combined should not exceed 10% of your account. So in our case, you can trade a maximum of $100 from your $1000 at the same time (All Your Trades Combined).

But be careful, if you have a bigger leverage (more than 100:1) with your broker, you need to take down the trade value. Try to keep the total pip value for all trades near $1 or less for a $1,000 account. This step is very serious and trust me it is going to help you in your new forex journey.

Risk Per Trade

This step is mandatory. You must know how much loss or gain you are going to accept. Otherwise, your trade could just loss forever, until all your money is gone! So do not do this mistake, it is very very common. Planning is key to success, plan everything before you start. Oh, show me example please. OK!

Let us say I have $1000, and I bought (longed) Euro/Dollar at 1.5000 rate, the trade is worth $100, and the pip is worth $1. I decided to take a Gain:Loss ratio of 1.5:1. So If I put my stoploss at 1.4950, my TakeProfit would be at 1.5075. Risk (What I can afford to loss) is 50 pips or $50. (5% of your account which is an average for many trades. Some traders even risk 2% only though.) Gain is 75 pips (1.5 X 50) or $75.

Basically that above example shows you how to apply money management rules to your stoploss and takeprofit levels. But now I have some important and real important notes for you.

Important Notes

A. You must plan your trade, put your take profit and your stop loss. B. The above example risks 5% of your account per trade. But many trades risk only 2% per trade. Just do not over risk your capital. C. Leverage heavily modify money management parameters. I highly recommend avoiding any broker with a leverage higher than 100:1. D. The Gain:Loss ratio will be different from a trader to another. In plain words, it is the ratio which controls how much you are willing to risk, to make a certain gain. Your gain ratio should exceed your loss ratio but to be honest it depends on your technique and which system you are using. I will talk about that in later articles.

A Word for New Traders

If you have a technique with 50% accuracy. Yes, only 50% accuracy and a Gain/Loss ratio of 2:1. That means you are making profits on the long run. In theory, things are simple but to do this practical, you need to be a restrict person about your trading experience. Some people have no discipline at all and you can’t blame me for that.

Okay good. Now what we’ve learnt together in this article?

1. Never risk more than 10% of your account per all open trades. 2. Plan your trade, stoploss, and take profit levels. 3. Never! Never risk more than 2-5% of your account per all open trades. 4. According to your system, your gain ratio should well exceed your loss ratio.

Article by Ahmed Fouad, BlogForex.info [http://blogforex.info]. Forex web log with news, commentary, and education center.

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