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:
Forex Money Management 101. Do not look for a holy grail of trading. Just don't lose 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.
The first rule of Forex Money Management is to be used, not abused. Let me run you through a typical day for me in a volatile forex trading market. I have my $10,000 4x trading account. I am only allowed 4 pips for my stop losses because I am going to be trading with 5 lots. 5 lots is $50 per pip, and with only being allowed to risk $200, I must not lose more 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?
Fact is I was going out shopping with the girlfriend and I had trading signal software telling me I should be long. So I had placed 2 pending orders. The first was a 5 lots pending buy limit order at 1.4080 (in case of a dip in my favor), and to cover this potential and to obey forex money management rules, I also placed a 5 lots pending sell short order - one cancels the other out should they get executed.
While I was shopping, the market dipped to 1.4069 and I was losing $500 on the long position which was balanced out by the $500 profit on the short position. Think about it. The market could do whatever it wanted and I could not lose. The first rule of forex money management was safely in place with the risk of loss limited to the 0.9 pip spread to do the trades. it only took an hour to close out the short position at zero loss and then I was free to let the long position have as much as it wanted.
I closed out with a 20 pip trailing stop at 1.4245 up $8,250 for the day on a $10,000 account. That's 82.5% profit for the day I went shopping.
Hedging your positions is just one essential technique that a professional trader will use to enforce the forex money management rules. - 23221
Forex Money Management 101. Do not look for a holy grail of trading. Just don't lose 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.
The first rule of Forex Money Management is to be used, not abused. Let me run you through a typical day for me in a volatile forex trading market. I have my $10,000 4x trading account. I am only allowed 4 pips for my stop losses because I am going to be trading with 5 lots. 5 lots is $50 per pip, and with only being allowed to risk $200, I must not lose more 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?
Fact is I was going out shopping with the girlfriend and I had trading signal software telling me I should be long. So I had placed 2 pending orders. The first was a 5 lots pending buy limit order at 1.4080 (in case of a dip in my favor), and to cover this potential and to obey forex money management rules, I also placed a 5 lots pending sell short order - one cancels the other out should they get executed.
While I was shopping, the market dipped to 1.4069 and I was losing $500 on the long position which was balanced out by the $500 profit on the short position. Think about it. The market could do whatever it wanted and I could not lose. The first rule of forex money management was safely in place with the risk of loss limited to the 0.9 pip spread to do the trades. it only took an hour to close out the short position at zero loss and then I was free to let the long position have as much as it wanted.
I closed out with a 20 pip trailing stop at 1.4245 up $8,250 for the day on a $10,000 account. That's 82.5% profit for the day I went shopping.
Hedging your positions is just one essential technique that a professional trader will use to enforce the forex money management rules. - 23221
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 foreign currency
posted by X - Men @ 4:18 AM
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