4x Trading Made Simple: Forex Money Management 101
Trading 4x is not as easy or as hard as most people think. It's just different. Novice and experienced traders often make the same mistakes over and over again. Emotional investing, God complexes, or just plain gambling. So, the most important rule number 1 with 4x trading:
Forex Money Management 101. Do not look for a holy grail of trading. Just don't lose money!
The 4x market turns over more cash in 1 week than the whole USA economy does in 1 year. But add to that concept, how much does every up and down tick in the market all add up to? How many pips movement in a day do we miss? Forget about it. There is no such thing as Albert Einstein and the theory of everything with 4x trading. No super computer can help you. 4x robot software is useful but clumsy at the micro level. Missing opportunities is a big part of forex trading. The real heart of the matter is not losing money. Profit is about making profitable trades only.
Forex money management is essential to protecting us from our emotions and it quite simply means we never risk more than 2% of our trading account.
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.
I'm sure you think I am crazy, but hear me out. Open up your forex platform software of choice - metatrader is fine. You want H1 hourly chart for EURUSD on the 19th of August, 2009. Note the huge rise of the Euro from 1.4111 to 1.4265 in 3 hours - all of which happened after bad USA economic data and a billion dollar trader from the Middle East put his weight behind the Euro at the same time.
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%. - 23223
Forex Money Management 101. Do not look for a holy grail of trading. Just don't lose money!
The 4x market turns over more cash in 1 week than the whole USA economy does in 1 year. But add to that concept, how much does every up and down tick in the market all add up to? How many pips movement in a day do we miss? Forget about it. There is no such thing as Albert Einstein and the theory of everything with 4x trading. No super computer can help you. 4x robot software is useful but clumsy at the micro level. Missing opportunities is a big part of forex trading. The real heart of the matter is not losing money. Profit is about making profitable trades only.
Forex money management is essential to protecting us from our emotions and it quite simply means we never risk more than 2% of our trading account.
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.
I'm sure you think I am crazy, but hear me out. Open up your forex platform software of choice - metatrader is fine. You want H1 hourly chart for EURUSD on the 19th of August, 2009. Note the huge rise of the Euro from 1.4111 to 1.4265 in 3 hours - all of which happened after bad USA economic data and a billion dollar trader from the Middle East put his weight behind the Euro at the same time.
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%. - 23223
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 how to make money trading currencies
posted by X - Men @ 12:05 PM
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