4x Currency Trading: Forex Money Management Basics
Gambling with 4x trading, God complexes of chasing losses, emotional investing - all the hallmarks of forex losers. The fact is that 4x trading is neither easy or hard. It is simply different to what we find in other parts of life. Most novices and experienced players came from share trading. This has barely any resemblance to 4x trading at all. So, to bring clarity to this different market, rule number 1 of 4x trading is:
Rule 1 of Forex Money Management is Do Not Lose Money! Forget the holy grail of profits, just protect yourself from losing money.
It should make sense that with the largest market place in the World - where in one week more money changes hands than the entire USA economy does in a whole year - that there is no such thing as a 4x robot, any super computer or an Albert Einstein of 4x trading. That's OK, this simply means we don't get to ride every blip and pip of movement with profits. We will miss opportunities and that's just fine. I am allowed to sleep, I am allowed to be cautious. But I am NOT allowed to lose money!
2% of your 4x account is more than you should be risking on a trade if you have proper and effective forex money management.
Let me give you an example. Assume I have $10,000 in my account. 2% of $10,000 is $200. If I trade with full lots where 1 pip is worth $10, then I am allowed 20 pips for my stop loss. Sounds fair enough in principle, but I make most of my money in huge rebounds or retracements that happen after a break out on highly volatile days. Meaning, I often trade with 5 lot orders - so 2% of my money is now down to 4 pips for stop losses. If 20 pips is nothing, imagine only being able to to be wrong by less than 4 pips.
So far, I am sure you are thinking that only the rule of 2% maximum risk makes sense - that none of my plans for 5 lot trades seem reasonable at all. Well, lets look at a real trading day. Stop reading this now, and open up your metatrader charts or whatever platform you use and look at the H1 (hourly) EURUSD for 19th August, 2009. You will then see that the USD crashed after some bad and sad economic data came in. The Euro shot from 1.4111 to 1.4265 in 3 hours - 154 pips.
Not even a super computer could predict to buy at 1.4111. News traders would have got on board based on the USA problems sure. But actually, I was lucky enough to be already long a few hours earlier. But with only a 4 pips stop loss? Luck or stupid?
When I entered my buy limit trade at 1.4080 I did it as a pending order. Actually, when I placed that pending order, I was going shopping with my girlfriend and wasn't going to be back home for hours. SO, at the same time I placed a 5 lot sell stop order at the same price as my 5 lot pending buy order. IF the market dipped to pick up my buy order, it would also hit my sell stop. The market can then do what ever it likes after that. Each trade 100% cancels the other out. It's called hedging. I had hedged my position with opposite orders.
As it turned out, the market did dip down to 1.4069 and I was in for both buy and sell orders cancelling themselves out. When I got home the sell stop order was in profit, and my buy was at a loss. But the net effect to my account was only the 0.9 pips spread. I waited for an hour, the Euro rebounded, I closed my sell trade at break even and let the buy trade continue. Joy oh joy it then went seriously into the money a few hours later on the USA's bad news.
After an exciting few hours at the screen I watched that long position go crazy into profits, and so I switched it to a 20 pips trailing stop, which it did do at 1.4245. That was a tidy, ultra low risk, $8,250 profit on the day. 82.5% profit on a $10,000 trading account while I went shopping. The first rule about forex money management was never broken. I was never at risk of losing 2% of my account.
Hedging people. Learn it, get serious about the first rule of Forex Money Management. DON'T LOSE MONEY, and NEVER risk more than 2%. - 23229
Rule 1 of Forex Money Management is Do Not Lose Money! Forget the holy grail of profits, just protect yourself from losing money.
It should make sense that with the largest market place in the World - where in one week more money changes hands than the entire USA economy does in a whole year - that there is no such thing as a 4x robot, any super computer or an Albert Einstein of 4x trading. That's OK, this simply means we don't get to ride every blip and pip of movement with profits. We will miss opportunities and that's just fine. I am allowed to sleep, I am allowed to be cautious. But I am NOT allowed to lose money!
2% of your 4x account is more than you should be risking on a trade if you have proper and effective forex money management.
Let me give you an example. Assume I have $10,000 in my account. 2% of $10,000 is $200. If I trade with full lots where 1 pip is worth $10, then I am allowed 20 pips for my stop loss. Sounds fair enough in principle, but I make most of my money in huge rebounds or retracements that happen after a break out on highly volatile days. Meaning, I often trade with 5 lot orders - so 2% of my money is now down to 4 pips for stop losses. If 20 pips is nothing, imagine only being able to to be wrong by less than 4 pips.
So far, I am sure you are thinking that only the rule of 2% maximum risk makes sense - that none of my plans for 5 lot trades seem reasonable at all. Well, lets look at a real trading day. Stop reading this now, and open up your metatrader charts or whatever platform you use and look at the H1 (hourly) EURUSD for 19th August, 2009. You will then see that the USD crashed after some bad and sad economic data came in. The Euro shot from 1.4111 to 1.4265 in 3 hours - 154 pips.
Not even a super computer could predict to buy at 1.4111. News traders would have got on board based on the USA problems sure. But actually, I was lucky enough to be already long a few hours earlier. But with only a 4 pips stop loss? Luck or stupid?
When I entered my buy limit trade at 1.4080 I did it as a pending order. Actually, when I placed that pending order, I was going shopping with my girlfriend and wasn't going to be back home for hours. SO, at the same time I placed a 5 lot sell stop order at the same price as my 5 lot pending buy order. IF the market dipped to pick up my buy order, it would also hit my sell stop. The market can then do what ever it likes after that. Each trade 100% cancels the other out. It's called hedging. I had hedged my position with opposite orders.
As it turned out, the market did dip down to 1.4069 and I was in for both buy and sell orders cancelling themselves out. When I got home the sell stop order was in profit, and my buy was at a loss. But the net effect to my account was only the 0.9 pips spread. I waited for an hour, the Euro rebounded, I closed my sell trade at break even and let the buy trade continue. Joy oh joy it then went seriously into the money a few hours later on the USA's bad news.
After an exciting few hours at the screen I watched that long position go crazy into profits, and so I switched it to a 20 pips trailing stop, which it did do at 1.4245. That was a tidy, ultra low risk, $8,250 profit on the day. 82.5% profit on a $10,000 trading account while I went shopping. The first rule about forex money management was never broken. I was never at risk of losing 2% of my account.
Hedging people. Learn it, get serious about the first rule of Forex Money Management. DON'T LOSE MONEY, and NEVER risk more than 2%. - 23229
About the Author:
Phil Jarvie is a professional forex trader expert in 4x trading, 4 software and using 4x hedging for forex money management and may wish to visit his website to consider his reviews on trade forex currency
posted by X - Men @ 12:09 PM
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