Thursday, December 17, 2009

Risk and Your Forex Trading Style

The most valuable part of any style of investing, is understanding your personal risk tolerance. Without a good understanding of this, it will be way too easy for you to loose all your capital. Each type of Forex trade carries its own risk parameters and these tie in directly with your risk tolerance. Then there is your style of trading, conservative, moderate, and aggressive.

When you first come to Forex trading you may decide to trade a day chart. The pip movement over a day can be 100’s of pips, so when you select your stop-loss position you have to assess what your drawdown risks are. If your money management dictates a 3% funds exposure, you will get into problems on day charts unless your account is significant.

The 5M or 30M charts maybe more appropriate since the pip range tends to be smaller, so your stop strategies can fall within your management criteria.

Yes, we all want increase our wealth from out trades, but risking ones account to wide stop positions and excessive draw-downs is going to burn out your account and trading career very quickly.

A common risk level is 3% or $300 on a $10,000 account. Switch this to pips, 1 standard lot ($100,000) has a pip value of $10 so if you trade end of day and your stop loss placement, whether count-back or support and resistance or any other, indicates a 100 pip stop position, then you are not risking 3% but 30%! Three wrong trades and your account has vanished!

An aggressive trader is willing to take riskier trades that a conservative trader. Their tendency is to expose bigger sums or money in riskier trades with the hope of achieving larger returns – often over extended trading time frames but they may still use the similar strategies for shorter times as well. Very much the ’all risk’ trader.

So where do you place yourself? Are you a disciplined trader with correct money management and risk rates, or a trader that will take over the top risks with all or nothing gains? If you are the latter, you won’t be around for long, that’s a guarantee.

If any of this leaves you a bit uncertain, you need to learn more, so begin by getting your Forex training with Top Dog Trading, you will learn a huge amount and it will help you trade with safety to win pips not risk everything.

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Friday, December 11, 2009

Currency Trading Methods

Risk Management : I would like to continue the dialogue on ways to find the right trading strategy for Forex trading. Previously, I shared that for any Forex trading methodology to be considered, it has got to be a total technique ( insert link to prior article ) .

Today, I need to add to that by talking about risk management. This is maybe the area where 95% of Forex traders screw up and lose cash. Managing risk is about reducing your losses AND about protecting trade capital by employing specific strategies to accomplish each of these simultaneously.

What do I mean by that and why is it important?

First, most Forex traders make simple trading mistakes: they take too large of a position and expose themselves to serious and steep losses should the markets move against them. Second, they fail to protect their ENTIRE account by allowing ONE trade to put their full account balance at risk.

Here's a quick and perhaps extreme example:

Suppose a forex trader has a ,000 account balance. The foreign exchange trader takes a five standard lot forex trade on the EUR/USD pair. The forex trader now has at least ,000 'margin' at risk (or 50% or more of the forex trader's account balance).

For every 1 point that this forex trade moves against the forex trader, the trader loses 1/2% of the total account balance. Find out more see this Forex Income Engine 2.0 Report. At first glance, that may not seem like a steep loss. However, should the Forex trade move a total of fifty pips against the Forex trader , and the trader afterwards exits the position, the currency exchange trader 's total loss would be an INCREDIBLE ,500! ( 25% of the trader 's account balance ). This is poor risk management and it often leads to finish wipeouts of Forex trading accounts.

How did we figure out that loss? One pip for the EUR/USD pair is the same as ( on the standard lot trade ). A fifty pip loss equals a financial loss of 0 ; and remember our example currency exchange trader had traded five standard lots -- for a gigantic loss of ,500!

Instead, any trading technique should teach you highly specific rules for incorporating money management and risk management into each foreign exchange trade you take. Find out more see my Forex Income Engine Review.

Money Management should involve the distribution of a forex account among the various trades a forex trader takes. For instance, foreign exchange traders should never trade their complete account on a single trade, and should seldom have more than some open positions. By using multiple positions, the foreign exchange trader distributes the chance among every one of the foreign exchange trades they have taken.

Risk management should involve the maximum risk in any SINGLE Forex trade, and should limit the impact of a losing Forex trade on the trader 's account balance.

Here are 2 fast examples:

Money Management : A unproven foreign exchange trader takes four separate one lot trades on 4 separate pairs. Assuming here that each of the pairs have a pip value of on a standard lot, then the total amount of the account being margined across all four trades is about 40% (it may be higher depending upon the actual pairs traded. With correct stop loss management in association with risk management, it is Doubtful the currency exchange trader would attract a complete 40% loss.

Carrying forward to chance management : In each one of the unproven currency exchange trades above, the foreign exchange trader risks only 2% of the trader 's total account balance on each foreign exchange trade. That suggests a maximum loss of 0 per foreign exchange pair traded if ALL FOUR trades are stopped out. Total loss in this situation would be 0 -- a way more recoverable eventuality than the 00 in the 1st currency exchange trade example.

Furthermore, Risk Management has the capacity to make loss recovery less complicated. For example, in the first case, where the Forex trader lost 00, the trader would need a nearly 250% gain on their next trade to recover the lost value on the first trade.

In the second example, however, the forex trader would need only an 8% gain.

A second part of Risk Management not typically discussed in poor trading methods is protecting gains. Though this starts as a consultation on Exit Technique rules, it's also a factor of risk management. Once a forex trade turns profitable, it is imperative that the forex trader manage the gains with smart stop loss management. The worst thing a foreign exchange trader can do is permit a moneymaking position to reverse and become a losing position. Thus, managing risk extends to the protection of gains on a forex trade, just as it does protecting against deep losses on a forex trade.

Therefore, in considering any trading method for use in your Forex trading, you must ensure that risk management is not only discussed, but clearly explained in conjunction with the use of the trading method. If risk management isn't present, confusing, or not particular to the trading technique, you need to avoid using that trading method. For additional info see read my Forex Income Engine 2 Review.

Monday, December 7, 2009

Separating the Brokers from the Bucketshops

Forex (Foreign Currency Exchange) traders invest a great deal of time wringing their hands and discussing their various uncertainties regarding the retail brokers they use to handle their money. Of course it's natural to presume that to make money in Forex merely means to 'beat the market' by finding and executing good quality trades. Sadly, the agency that a client employs can have as much to do with whether or not he wins as anything else.

Bucketshops are retail brokers which take unfair advantage of their traders by taking positions against their clients and sometimes by manipulating the price values they give. Very few companies will own up to doing this, primarily due to the undeniable fact that it gives them a strong reason to make their clients lose. The appellation 'Market Makers' also is often used to denote those agencies who commonly assume the opposite half of their clients' trades. They are creating the market that their clients are trading in, rather than simply sending their trades on to the broader market. A truthful look at the environment of currency, though, shows us that this type of practice is actually vital to making it possible for small retail trades to happen, and though it is often used for illegal purposes, it's not necessarily a nefarious business model.

The reason for this is because there's no physical 'Forex market', in the way that there is for typical kinds of trading. As an example, commercial stocks are available only by way of typical stock exchanges -- the NYSE being among the largest. Exchanges like these are governing agencies that qualify each corporation to be listed, define the terms of the acceptable trading contracts, keep an eye on brokers, and finally clear all trades financially. Stock exchanges establish the daily hours of business and have the authority to decide whether any stock or brokerage should be delisted or shut down as a result of policies that run the risk of compromising the market at large. They exist at actual physical addresses and are themselves regulated by government offices.

The Forex market, on the other hand, is made up largely of giant organizations that need to swap capital with other nations. The real Forex market is made up of giant multinational corporations and international banks that transfer currency from place to place in order to facilitate global trade. If a Japanese company sells products in America, it will likely be paid in the form of US Dollars, but it have to pay its internal costs in the form of JPY, such that it must be able to convert significant amounts of currency on a consistent basis. Companies like this and the banks they use to exchange the currency are the real market, and small time traders are incapable of being involved at this level; they simply don't have the huge sums of capital that would be of interest to the major currency players.

That's the reason why Forex brokers trade with their own customers. The brokers create manageable trade opportunities for the small time guys (that's us) who might not ever be able to participate in the Foreign Exchange market. Then they make bigger offsetting trades on the open market via agreements they have with 'Liquidity Providers'. By ourselves we could never be able to attract the attention of the major banking institutions. It simply would not be reasonable for them.

Because of this, the trader depends on her broker to provide their own currency prices rather than receiving a unified price from a central exchange. Each broker does trades with their specific liquidity providers and different brokerages can be expected to employ different banks. Those differences are apparent in the variation between broker quotes. From this truth arises the requirement for a broker to make the market for its customers, not purely from a want to defraud them (though some few most likely do). A broker can be upright and still have the need to trade opposite its clients, even though they're not attempting to mess with prices and make those clients lose.

So we can see, with regard to most trades a typical broker will be forced to 'trade against' their clients, though they are required by law and ethics not to do this in a way that harms them. This sets up a serious case of 'caveat emptor' - let the buyer (and especially those looking to learn forex) be careful. It's crucial to always keep a close watch on the quoted prices and trading practices of their agency, and to select that brokerage sensibly. It would be unjust, however, to assume that a broker who takes the other side of a client's trades is doing so to screw them. It might seem strange and also somewhat distressing, but it's a fundamental and important part of the small capital foreign currency exchange business model.