Archive | 6:54 pm

Money Management.(I)

29 Nov

Have you come across a trader who reported a large amount of profit from a relatively small account? Such stories are wide spread and often attract inexperienced trader’s attention.  In this 4 part article we will explore into traders mind and psychology plus look into ways of money management in Forex the right way. Anyone claiming outstanding gains overnight is probably exposing his trading account to enormous risk by trade large number of lots. It is only matter of time before huge losses would wipe out gains and beyond, leaving trader feel devastated financially and emotionally. Trust me, I know that from personal experience.  Money management in Forex Trading is a combination of specialized techniques and your trading judgment.  Lets look further into it.

The Right Trading Size/Lot:

Overexposing or underexposing your account can change the end result drastically and hence the first thing we need to do is to come up with the right size for our trades. Also remember that this is not a one time process, in fact it is an ongoing process because variables like account size, stop loss and pip value keep changing with time.Before we can even look into the formula for successfully calculating the right trade size we need to agree one very important thing, Risk. So what should be the ideal risk per trade?  Answer to this question would depend on the trader however most successful traders would recommend 2-3%. In my personal opinion you should not risk more than 3% per Pair Category.

Once you have made up your mind about the Risk % then calculate Risk in Dollars by multiplying the account size by Risk %. For Example if you have $10,000 account and willing to risk 3% then total risk in dollars is $300 ({10,000 x 3} / 100).

Next step is to determine the Stop Loss.  Whatever trading system you are using, you would know by now what is your  Stop Loss. Lets say for the sake of this exercise your  Stop Loss is 100 pips.  The next important factor is to determine Pip Value of the pair your are about to trade. The easiest way to find out is to look at your brokers trading platform. Look at the attached screenshots from MBT and FXCM trading Platform. MBT represents Pip Value/Lot for a Mini Lot under their Watchlist or Position window and FXCM calls it Pip Cost under Simple Trading Rates window represented for a Standard Lot.

In  the example I’ve used MBT Pip Value as 1 resulting in Trade Size in Mini Lots. If you use FXCM Pip Value then the result would be in Standard Lots. Also keep in mind that resulting Trade Size may not come out as whole number and may be a fraction. In that case always go down to whole number and never go up. For Example,  If the resulting Trade Size is 2.32 Mini Lots then make it 2 Mini Lots and not 3. Some broker may let you trade fractional lot sizes and in that case you won’t need to worry about it.

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25 Disciplinary Rules in Day Trading.(III)

29 Nov

11. The first loss is the best loss. Once you come to the realization that your trade is no good It’s best to exist immediately. “It’s never a loser until you get out” and “Not to worry, it’ll come back” are often said tongue in cheek, by traders in the pit. Once the frase is stated, it is an affirmation that the trader realizes that the trade is no good, it is not coming back and it is time to exit.

12. Don’t hope and pray. If you do, you will lose. When i was a new and undisciplined trader, I can’t tell you how many times that I prayed to the “Bond god”. My prayers where a plea to help me out of  a less than pleasant trade position. I would pray for some sort of divine intervention that, by the way, never materialized. I soon realized that praying to the  “Bond god” or any other “futures god” was a wasted exercise. Just get out!

13. Don’t worry about news. It’s history. I have never understood why so many electronic traders listen to or watch CNBC, MSNBC, Bloomberg News or FNN all day long. The “talking heads” on these programms know very little about market dynamics and market price action. Very few, if any, have ever even traded one lot in any pit on any exchange. Yet they claim to be experts on everything. Before becoming a “trading and markets expert,” the guy on CNBC reporting hourly the Bond Pit, was a phone clerk on the trading floor. Obviously this qualifies him to be an expert! He, and others can provide no utility to you. Treat it for what it really is… entertainment. The fact is: The reporting that you hear on the business programs is “old news.” The story has already been dissected and consumed by the professional market participants long before the “news” has benn diseminated. Do not trade off of the reporting. It’s too late.

14. Don’t speculate. If you do, you will lose. In all of the years that I have been a trader and associated with traders, I have never met a successful speculator. It is impossible to speculate and consistently print large winners. Dont’t be a speculator. Be a trader. Short-term scalping of the markets is the answer. The probability of a winning day or week is greatly increased iy you trade short term: small winners and even smaller losses. (I like this one)

15. Love to lose money. This rule is the one that i get the most questions and feed -back on by traders from all over the world. Traders ask, “What do you mean, love to lose money. Are you crazy?” No, I’m not crazy. What I mean is to accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly. It will save you a lot of trading capital and will make you a much better trader.

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