Good Money Management is key to making profits trading forexIn this section I plan to cover aspects of trading above and beyond the basics of Money Management that have been touched on previously.
The mechanics of MM are very simple at the beginning. Follow the rules as I showed you earlier. If you’re trading a non-USD pair remember the pip value is slightly less than normal so you could, if you wish, increase your position size to allow you to utilise the maximum number of lots permissible within your risk percentage. In the early days, particularly with penny trades, it’s neither here nor there. Later on you will want to bring this into the equation, and there are several position calculators around the forum that will work out exactly what size position you should be trading for any account size, and any specific pair.
Always remember to work out your stop loss first. You have to know what you are prepared to lose before you place the trade.
What I’m going to talk about in this section is a combination of things that include some of the Psychological aspects previously discussed, and also how the market, as I understand it, works. It has taken me a long time to adjust my way of thinking even to start to comprehend what I’m up against here. Unless you get to understand some of the games going on you will be fighting a constant battle with the big boys.
I’m not referring to all the so-called broker tricks that people complain about; some complaints may have validity, many do not. It’s just the way the market works, so accept that this is the league you’ve chosen to play in, and adjust your tactics in order to level the playing field as best you can.
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Forex Money ManagementMoney Management whilst trading forex is THE MOST IMPORTANT aspect of trading.
It is imperative that you apply strict money management to your forex trading.
Good money management is the key to becoming a successful forex trader
Good money management is the key to becoming a successful forex trader
Good money management is the key to becoming a successful forex trader
Good money management is the key to becoming a successful forex trader
It cannot be repeated enough times, make a tape recording if you have to and go to sleep at night whilst playing it lol
Never ever ever trade with more than 1% risk to your trading capital, if you stick to 1% or less you will reduce the stress of trading enormously.
Greed and fear are the traders worst enemies and you need to eliminate them from your trading methods.
Always know your risk BEFORE entering a trade.
Your risk is calculated by multiplying your worst case stopl oss by the value that you are trading each pip for.
As an example if you have £1000 in your account and you have spotted a potential trade that has a stoploss of 100 pips, then you can trade at 10 pence a pip. That's it folks just 10p a pips, if your stoploss is 50 pips then you can afford to bet 20 p a pip, you get the picture now?
Never ever break that rule and you will be on your way to becomming a better, more profitable and less stressed out trader.
Try to have a planned risk reward, for example when I started learning forex I was taught to only enter trades with a 1 to 3 risk reward ratio, that is if you have a stop loss of 100 pips then your profit target should be 300 pips. That way you can lose 50% of your trades but still double your money over time.
Strict discipline is required at all time, for me it took years to get my emotions under control whilst trading, a turning point for me came when I joined a live online trading room and started being mentored by successful experienced forex traders.
I am sure without this I would still be losing fortunes. I am still using one now because I find it very useful to be constantly reminded of the rules of disciplined trading and good money management.
I started off in a live room run by a guy called Nick, he was a truly amazing trader. He traded classic support and resistance, along with trend analysis only trading in the direction of the trend confirmed by two higher timeframes than his trading timeframe. That means say for instance he was trading the 15 minute chart / timeframe he would analyse the direction of the trend using the hourly and the four hourly timeframe.
Once Nick had confirmed the direction of the trend in two higher timeframes he would wait for confirmation that the current 15 minute trend was intact and that support or resistance had been broken before letting the price retrace back to old support or resistance., then he would take the trade.
Nick was incredibly acurate and it was interesting to see that during the year he was teaching our small group his success rate rose from 70% winning trades to nearer 95% winning trades. He is a truly amazing trader, superbly disciplined. I owe a huge debt of gratitude to Nick.
Nicks targets were also taken from old support or resistance levels which was how he was able to work out his risk and reward. He got so good at it that he was even able to predict his profit targets to the exact pip and he was also able to trade through news spikes.
Nick had fantastic discipline and brilliant money management, his trading method allowed him to enter trades on the 15 minute timeframe with stops often less than 15 pips and with profit targets of 150 pips or more.
As far as I know Nick doesn't teach any more. I am now a member of another live forex trading school. One thing I have learned is that you never ever stop learning from trading and for me more heads are better than one. Also trading from home can be quite lonely so I thoroughly reccomend being a member of one of the many rooms available. I now have a huge network of trader friend scattered all over the word.
Click here to checkout the live forex traders school I am a member of
It will be the best £97.oo a month you ever spend.
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Understanding the Retail Forex Market
First, let’s get it clear that any trade you make at this stage will have NO effect on the market in any way, shape or form. There will be many days when you get the feeling that as soon as your trade is triggered everyone in the FX world has decided to play against you. You’ll be saying – ‘why do they keep doing this to me?’ It starts to get personal, and this is a fatal attitude. Revenge rears its ugly head. Don’t take anything personally, apart from accepting that you made the decision to trade at that point. Only you can take the credit, or otherwise, for this trade. The market doesn’t even know you exist. Nevertheless, there are plenty of professionals who do.
They don’t know you by name, of course. However, they’ve got a pretty good idea that you, and 100s, maybe 1000s, of small-time traders just like you are about to pull the trigger to go long. They’ll have a pretty good idea where your stops are set. They need to get long as well so they’ll go looking for your Sell Order (your stop loss) and Buy it from you. Bingo, there’s another bad trade, you think. Shortly after away goes price on its merry journey to the next point of resistance 150 pips away, and you’re left sitting on the sidelines. Hard not to get upset when this seems to happen more often than not.
So let’s try and gain a basic idea of how all this works, and how it differs from your normal retail experience. Understanding even this simplistic view of what’s at stake should help you develop a feel for the market’s mechanics.
OK, in the normal retail situation, you walk into a shop, see something you like, and pay the man. After you’ve walked out of the shop Mr Jones, the shopkeeper, couldn’t care less what you do with your purchase. He’s made his profit, and he’s got rid of a bit more inventory, so Mr Jones, and his accountant, and his bank manager will all be happy.
If you sell it at a later date, the only person who’s lost money is you, assuming it’s an everyday item rather than a work of art.
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Understanding the Retail FX Market (Stop Hunting)
In FX it’s different. You decide to buy X amount of GBP (i.e. you go long Cable), so you need to sell US Dollars (i.e. you go short US Dollar). To do this someone has to be prepared to sell you X amount of GBP (i.e. he goes short Cable) and buy your US Dollars (i.e. he goes long USD). At our level of trading, this someone will normally be your broker. At the higher levels it will be either another professional, or an institutional trader.
Now here’s the rub. We’ll imagine you went long 100 lots GBP/USD at 1.700. I’ll ignore the spread, we know it exists, but I want to keep this simple. Your broker is sitting there having sold you 100 lots at 1.700, and three days later price has moved up to 1.800 and he’s short the market. Remember, to complete this transaction he has to simultaneously buy your USDs, while at the same time selling you your GBPs. At the present time (last quarter of 2007) the Dollar is in decline, and most retail traders wouldn’t consider buying the US dollar.
At this point a couple of situations will have occurred. The broker will have made a decision on where the market is going and, if he concurs with general market sentiment, will pass the risk to a higher level (i.e. he will also buy X amount of GBP thereby selling his Dollar risk). If, through a superior knowledge of the market, he knows, or suspects, that a change of sentiment is about to occur he may well hold your trade in-house.
The retail market, by which I mean your average micro and mini account trader, although huge, is generally a follower of the market. The volumes simply aren’t large enough to make a trend change direction.
At the top end of the retail market, where a trader is placing substantial amounts through an ECN, the situation is different. Although, in themselves, they may not be able to force a major reversal in a trend, these traders are serious exponents of market analysis; and, more to the point, they understand how the minnows think. They, along with institutional traders, can go hunting your stops in order to enter a position at a more favourable rate. |
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Volatility on lower timeframesUnderstanding the Retail FX Market (Pit Traders and us)
As very few of us have any experience of how pit traders (also known as a locals) work, we can have no idea of the ways that price can be manipulated to a professional’s advantage.
Consider this, however. All around the world there are 1000s of traders, of all different skill levels, trying to make money on the movements of various currency pairs. You need to understand where you are in the great scheme of things, and adapt your way of trading to suit.
I can best describe this mass of traders in simple terms; one of the world’s toughest contact sports – Rugby. For those of you not familiar with this sport, it’s similar to American (Gridiron) Football, but without all the padding. A Rugby team will have 15 players on the field at any one time, and a limited number of substitutes. In Gridiron Football you’ll have a bunch of guys sitting on the bench tooled up and ready purely for either offensive, or defensive plays. In Rugby every player has to have a combination of offensive and defensive skills. The rules governing Rugby are more complex, and to the layman can seem impenetrable.
So how can we relate this to FX trading? Well I look at it this way; you have a team of mixed skills; some, called the backs, are speedy and can move fast if an opening presents itself. What they can do is easy to see, if there’s a gap they’ll go for it. If they’re running into trouble they’ll off-load as soon as they can. These are your typical intraday scalpers, and shorter-term traders. They need to be fleet of foot, and have a highly developed sense of self-preservation. Very occasionally, they’ll get the chance to go for a long run and make big yards for a try (touchdown).
In front of them are our forwards; heavyweight hitters who dictate field position, setting up opportunities for the backs to exploit. Without their expertise the team has nowhere to go. The real stuff that goes on amongst the forwards, at times, is beyond even the referee’s ability to apply the rules. When the two sets of forwards get into a scrum, only those in the front-row really know what’s happening. To be honest, even their own backs have little knowledge, or desire, to get involved. All they’re concerned about is will they get a chance to run with the ball?
Pit traders are like the forwards; we don’t understand what they’re up to, and it’s unlikely we’ll ever get the chance. Even if we did, we would be trampled underfoot in no time at all.
So how can we apply this to our trading? If you remember that during normal trading times, when liquidity is low, your local is looking to gain his profit on very small moves in the market. Our forwards are like this, always trying to gain a few yards here, a few yards there. Imagine a situation where a local, or group of locals, are short the market, but the market gives every indication of rising. These guys are looking to get out with any sort of profit, to break-even or, at worst, a small loss. At times of low liquidity it may be possible for them to bid the price enough to shake the confidence of the weaker traders, causing them to cover themselves by selling their long positions. Other weak traders, seeing the market starting to head down, jump in to climb on the sell-off bandwagon.
Now that the locals have moved price enough, they get out of their short positions with whatever they’re happy with and start snapping up (buying) all the sell orders that are sitting around. Price can now do what it wanted to do and head up. This is why it’s hard for newcomers to make money trading the short time-frames. You’re up against people that understand the rules better than you, and they can trade position sizes big enough to affect the market, and so confound your systems.
A classic example of this is the Overbought/Oversold type of indicator. We all make the mistake, as newbies, of poor analysis of the indicators we choose for our trading; falling into the trap of only seeing the points where a trade would have won. It’s human nature to look for the upside, and skip over those same scenarios where we would have had a losing trade. We want to win, so we blank out the negatives.
All I would ask is that you go back over your charts and really look at them. See how long an oversold, or overbought, situation can last. Look at your losing trades and see how you could have been more selective before entering. Just because the indicator is crossing some arbitrary boundary doesn’t mean that the world and his mother has suddenly changed their outlook on where price is heading overall. Balance what you see with what is happening in the next higher time frames. Missing a few pips at the start of a move is immaterial, if it keeps you out of a losing trade.
Just remember, you don’t know what the forwards are doing, and neither does the rest of the on-line trading community, the small-time parts of it, anyway. Let them do their stuff, wait till the move looks set, pick up the ball and run for all you're worth.
But off-load your trade as soon as trouble appears!!!
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Understanding the Retail FX Market ( Retail Brokers and us )
It's a fact of life that when we first start trading, we feel there is nothing to learn other than price goes up, and price goes down, and as long as we are on the right side we'll make money. We may demo for a while, if we're lucky, and find out that things aren't as simple as we first thought. Nevertheless, at some point we enter the arena with our cash, expecting to keep making the same sort of gains we did on demo, or, at worst, minimise our losses while we fine-tune the latest strategy that we've found somewhere.
Along with the early frustrations, when we feel the market itself is out to get us, we now discover that what appeared to work on during our demo trading is, in our eyes, being undermined by broker trickery. A quick stroll around Forex Factory will highlight the many ways that traders feel that they are being cheated out of their dues.
First, and foremost, the single biggest problem is a simple lack of understanding of how the market works. To function effectively the market needs liquidity; i.e. it needs money flowing in and out on a regular basis. This liquidity, for example, enables companies to do business by purchasing the currencies of the countries they're trading with, or selling currencies to hedge against movements that could impact on bottom-line profits. The range of participants is wide, and all are in the market for particular reasons. It's the demand, or lack of demand, that keeps currencies moving. It's this movement that speculative traders seek to make money on.
Whilst being crucial to our attempts to profit from these movements, a lack of understanding of how to place your orders is one of the most common reasons for many of the complaints regarding brokers. Whilst I realise that different platforms have variations on this theme, I want to cover the most common misconceptions about the standard order types we use. In essence there are only two basic types of order:
1. Market orders
2. Limit orders
Let's look at these in more detail, and how they impact on our trading.
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Market orders and Slippage Market orders: a market order is an instruction to your broker to buy or sell a currency at the best price available at that time. Now here's the problem. At a certain point you see the price rising, you decide to go long and you click the button. By the time the order is processed, and hits the floor, that price may not be available. Your broker will re-quote you, in effect he's saying 'sorry no can do, but I can offer you this price, do you still want it?’. You then have a choice; to accept, or decline.
Our greed comes into play then, plus our fear of missing out on the move. Your first instinct will be to say yes, simply because you've decided that price is going to rise and you want a part of the action. At times of high volatility (i.e. lots of money and orders flying around) this may happen more than once. It's not your broker keeping you out of the market; it's a simple case of his inability to find someone to match up your order with. Think about it; you're looking to buy X at 1.6000, but everyone else is selling X at 1.6010. Why should another trader take a 10-pip hit just to fill your order? Life doesn't work that way, and it certainly doesn't in FX trading. If you keep saying yes, and you keep getting requotes, get out of the market. Let the dust settle and re-think your approach. If you thought 1.6000 represented good value for X, don't pay more than you have to. This is a business, and you won't survive if you keep paying more for your goods than you think they're worth.
So, what's the next option? Let's try Buy/Sell Stops, they must be better, mustn't they? This way we can wait for price to hit our order, get filled, and carry on moving on up/down. Fine in principle, and I used them regularly at one time, but what I failed to realise is that a Buy/Sell Stop becomes a Market Order, when your Stop Order is hit. This means, of course, that you are back to the same situation as above, you're fighting to get into the market along with everyone else. No doubt that at our level it's easier to get filled on a Buy/Sell Stop, at least I've never had a re-quote on one, and that can lull us into a false sense of security. When the time comes, and you've a Buy Stop for several million dollars waiting to go, things may not be so cut and dried.
I'm not a news trader, nor likely to be, but all the complaints I read seem to stem from this one simple fact; at times of high volatility, like a major news announcement, orders get filled with large amounts of slippage. Even I can understand why this happens. Your broker is reflecting the width of the market (spread), so if he has to widen his spread, and it hits your Buy Stop (now a Market Order), how on earth can he take the time to offer you a re-quote? With millions of dollars being traded wildly every second, while everyone tries to make sense of the news itself, is he really going to bother to ask if you still want your $500 order to be accepted at a price which may not last more than a couple of seconds? The outcome is that you'll get the only price that he can get taken up by someone on the other side, and, unfortunately, it's probably not the price you wanted,
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Limit Orders Limit orders: there is one major difference between a stop (market) order and a limit order; with a limit order you have control over the maximum or minimum price you are prepared to sell at or buy at.
For example, you would place a limit-buy order when you expect price to fall to a certain support level. Behind this thinking is the expectation that price will rise from this level, assuming you are in an uptrend, and continue its way up. It follows then, you would place a limit-sell order when you expect price to rise to a certain resistance level and then return to continue its previous downtrend.
So, just to make this point clear; to place a pending limit-buy order you must position this below current price; to place a pending limit-sell order you must position this above current price.
You may be asking yourselves why I prefer to use these types of orders. The simple answer is discipline. In the bad old days, before I fully understood what was happening, I would do as most of you starting out tend to do and that is buy or sell whenever I thought the market was going up or down. Even when I started using stop orders I didn't fully realise why, sometimes, my fill did not reflect the actual order I'd placed. In addition, mainly because I was working on short-term charts, occasional spikes would trigger a trade and then price would fall back causing me to suffer unnecessary drawdowns.
Nowadays, I sit back and take time to study the daily and weekly charts; look carefully for solid areas of support and resistance; aim to assess if the current move is a retracement or a possible trend change. Having made my decision based on the points above I then consider whether to simply place a limit order or wait for further price action around my selected area.
As with all things in Forex, nothing is cast in stone. Just because price rejected a support area three weeks ago it doesn't mean to say it will be rejected again. A quick check in most charts would lead you to think that the first time back to support and resistance areas as high probability opportunities producing profitable trades simply by playing the bounce.
Yes, it does happen and quite often price will bounce two or three times and each time you could have made substantial pips and at the same time working with relatively tight stops. But look carefully at any chart, and you'll see price, being price, will sometimes blast straight through these areas.
Nevertheless, if applied with common sense and good risk control it can be a good way to trade. Needless to say, when I take these trades I do them using a limit orders. Depending upon the sort of price action that is occurring around these areas, and the particular pair I'm dealing with, I will typically set my order 10-15 pips plus spread above a support area or below a resistance area.
To better understand how this can work for you I'll go over three trading terms that need to be understood in order to apply these techniques. First, I'll reiterate a golden rule that all newcomers should follow;
Trade with the trend: it's every trader's favourite catchphrase, but I think it's true to say if you can't learn to spot and trade with the trend you will always struggle in this business.
Okay, let's study three different situations;
Range bound: there is a well-known saying that the market is only trending 30 percent of the time and it is vital that you learn to spot those times when it's in a period of consolidation. This is when you look for signs of a breakout and look to ride the next trend. Breakout trading is a skill all of its own but once mastered is a typical situation where a limit order comes into its own.
Let's assume we are looking at a pair that is in an uptrend, and, for whatever reason, price has stalled and entered an area of consolidation. At some point price will breakout, and more often than not will come back to retest the breakout point. This is where we would set our limit-buy just above the previous resistance zone, which should now provide support.
Retracement: again we're talking about a trending currency pair, but this time instead of entering consolidation price simply retraces back below its last high. Retracements can occur due to several factors; profit-taking, indecision, concern about upcoming news to name but a few. But it is a fact of life in Forex that retracements will occur somewhere, sometime. So, how do we exploit this? Initially, by looking at previous areas of support or resistance we may be able to estimate where this retracement might stall. It might be enough to simply set your limit order close to this previous support or resistance area. Better yet, certainly if you have not done this before, you wait to see some sort of price action around this area. If there appear to be reasonable signs that support is holding then a limit order could be placed somewhere close to that support area. As price comes back again your order is triggered and you've achieved what all new traders love, a bargain!
Fade: this is one of those expressions you hear in the early days but never quite understand. Essentially, it means trading against the current short-term trend. It's typical use, certainly by experience traders, is to take advantage of small-scale retail traders who are jumping, excitedly, onto what they think is the current dominant trend. Once you fully understand trend trading and retracements, you'll see exactly how this works. Because many new traders tend to work off short-term charts and are zoomed in on the very latest action they tend to miss the bigger picture. Consequently, they are riding an upward moving retracement that is just about to hit a resistance area. The professionals, meanwhile, are happily sitting there with their limit sells filling your positions, satisfying your buy orders knowing full well that shortly the market is likely to turn. The closer the new trader gets to that unseen resistance area the keener they will be to buy, simply because price appears to be going ever upward. The moment price turns and heads south the professionals can wait until the next support area and buy back their shorts. Simple really, but this is why many new traders do not become old traders. |
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Fade in forexThis is an excerpt from the previous section but it deserves a second read.
Fade:
this is one of those expressions you hear in the early days but never quite understand. Essentially, it means trading against the current short-term trend. It's typical use, certainly by experience traders, is to take advantage of small-scale retail traders who are jumping, excitedly, onto what they think is the current dominant trend. Once you fully understand trend trading and retracements, you'll see exactly how this works. Because many new traders tend to work off short-term charts and are zoomed in on the very latest action they tend to miss the bigger picture. Consequently, they are riding an upward moving retracement that is just about to hit a resistance area. The professionals, meanwhile, are happily sitting there with their limit sells filling your positions, satisfying your buy orders knowing full well that shortly the market is likely to turn. The closer the new trader gets to that unseen resistance area the keener they will be to buy, simply because price appears to be going ever upward. The moment price turns and heads south the professionals can wait until the next support area and buy back their shorts. Simple really, but this is why many new traders do not become old traders. |
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