3/31/09
Naws - you asked about Money Management - here is something from my files:
Money Management The focus of this page will revolve mostly around the risk/reward ratio aspect, though another important piece is the equity percent of your account you are working with. For example, a rule of thumb for equity is never bet more than 2% of your equity on a single trade. So, for example, if you have $10,000 in your account then you should not bet more than $200 or 20 pips on a single trade (or else get a a micro-account so you can wager 200 pips or $200). Too often new traders lose too much and then get increasingly desperate in their trades to attempt to “make up” the lost money. Ok, enough about equity. As I said above this page is going to focus on the risk/reward ratio. Risk/Reward Ratio In short, the risk/reward ratio means the amount you are risking (i.e. your stop loss amount) against the amount you stand to gain (your profit or limit on the trade). So if you enter long on the GBP/USD at 2.0040 and you enter a stop-loss or determine you will manually close the trade at 2.0020 if it goes the wrong way then your risk is 20 pips per lot. Pretty simple so far, right? Okay, now if on the same deal you determine that your target, or where you will take profit and close the trade is at 2.0140 then your reward is 100 pips (2.0140-2.0040=.0100 or 100 pips). So on this particular trade your risk/reward is 100 pips/20 pips or 5:1 Risk/Reward Ratio Example Before we get into what ratios mean to you and what ratios you should aim for, lets try another one. Take a look at the below trade signal and figure out what the risk/reward ratio is: Short Entry: 1.5950 Stop-Loss: 1.6005 Limit: 1.5840 Take your time, figure it out… Ok, what did you get? Was it 2:1? If it was then you are right! Risk = 1.6005-1.5950 or 55 pips. Reward = 1.5950-1.5840 or 110 pips. 110:55=2:1. Got it? Ok, if you don’t then read it a few more times, because this is very important. New traders too often do not set stop-losses and as a result may get a handful of 10, 20 or 30 pip gains (maybe even more) but then they get a 100 pip loss or worse because they keep hoping it will “just turn around” and it wipes out all of their gains plus some. Now, here is where good risk/reward ratios become important. Why is this important to me? If you have a risk/reward ratio of 1:1 - meaning you risk the same amount as your reward each time - then obviously you have to win 50% of your trades to break even. If you have a risk/reward ratio of 2:1 - or your target is twice as much as your risk every time - then you only need to win 33% of your trades to break even. Got that? You can lose 2 trades for every 1 you win and you will break even. And it only gets better from there. Below are a few risk/reward ratios and the win percentage you need to break even: 1:1 - 50% 2:1 - 33% 3:1 - 25% 4:1 - 20% 5:1 - 17% 10:1 - 10% Conclusion A lot of new traders make the mistake of thinking “Ok I will just capture a few pips at a time, up to 10 or so” and they don’t even bother to put in stop-losses! What ends up happening is they may go on a streak for a few hours, maybe even a few days or more. But inevitably they get a big loss that wipes out all their profit and then some. When that happens you lose your confidence, your edge and you start to trade scared - and that only makes things worse. The best traders I know practice good money management with good risk/reward ratios. Ratios of at least 2:1, up to 4:1. If you are a new trader I recommend you start with at least 3:1. The best traders sometimes don’t win 50% of their trades. But their wins are large enough where they make profit and then some. Hope this helps 3/31/09
Excerpts from stuff:
SUPPORT: Support is, simply put, a price at which point traders expect to see buying. Support can be a level that we have seen previous buying activity at (perhaps the price bounced off of it last month). The most common place for support level is an obvious spot where traders have seen a major reversal in the past. RESISTANCE As you might guess, resistance is the exact same as support except it is an area where we have seen traders selling the pair in the past. First is always to identify the direction in which the pair is trending. __________________
3/31/09
How to Succeed in the Forex Market
More excerpts: First off, if you are new and frustrated let me tell you I know exactly how you feel. When I started out I made every mistake you could. First I tried scalping (I didn’t know that was what it was called then, I just sold if I saw a huge green stick and bought if I saw a huge red one). I made a few pips at a time. If I got too far under I just bought more lots to get a “net position”. That worked great for a few weeks even until a one giant trade where I had bought four extra lots to “get a net position” wiped out all of my profits and then some! Big mistake. Next I tried trading the news. There was always a rise or fall with interest rate changes and all you had to do was buy or sell in the right direction, right? Sounds simple. In practice it is a little bit harder. Liquidity drops like a rock. The market tends to whipsaw, knock out stops or even go in the wrong direction you would expect it to. Again, Big Mistake. Lost a hundred pips on that one too. And this a regular lot sized account, too, not a mini-lot account. Ouch. Many new traders at this point give up and go back to their day jobs. Maybe I was smart, maybe it was dumb of me to stick with it but I did and I’m glad every day that I did. I went back to my demo account and figured out some trading systems that worked for all occasions. I read some books, took some online classes and kept plugging away at the demo account. After I felt confident enough that I knew what I was doing I started slowly trading real lots again. And I started winning. Occasionally I still will go back to demo accounts every once in awhile if I suffer too many losses and I lose confidence. Usually though I just keeping using the same systems I know to be profitable in the long-term and it works! That being said, below are some things I’ve learned along the way that have helped me go from a horrible trader to a consistently profitable one. If you can master these I think you can make it in the currency exchange world too: 1) Use a demo account - and go back to a demo account every time you start to lose confidence or a significant portion of your equity - you should use a demo account until you’ve got your trades down to a science. You should get your trading style down to a consistent, systematic approach. Do the same thing every time. The hardest thing about trading real money is the emotions. When using demo account it is no problem to trade 2 lots with a 50 pip stop - the setup and risk/reward looks good right? When you start trading real money all you can think of is that you have 2 50-pip stops (or $1000) at risk that you don’t want to lose. Practicing over and over with the demo account gives you the confidence to say: “I’ve seen this chart setup over and over, I know that it will probably move in my favor. If it doesn’t and I take a loss I know that this trading technique is solid enough that over time it will be profitable.” 2) Keep a journal of every trade - and review them once a month or once a week. Preferably take a screen shot of the chart when you make the trade so that when you go back to review them you can see what you were looking at when you made the trade. Write about what was good about the trade and what was bad. If you keep doing this you will find that you start making less bad trades and more good trades. You will also hone what techniques you like and what works for you. 3) Take a loss as a learning experience. Write about in your journal what went wrong and what was right. Start making less bad trades and more of what you know to be a good trade. Remember that failure, if analyzed and learned from, is just a stepping stone to greater success. 4) Always use stop-losses. Every trade you enter you should have a stop loss. You should also at a minimum know what your goals (limits) are. If you are a beginner you should have both a predefined stop-loss and limits. Don’t be sorry if you miss out on some pips because of it. Write it down in your journal as far as what went right and what you could have done better. Remember this too: if you stop at at 40 pips and the currency continues to go against your prediction for a total of 80 pips you can always buy or sell then and skip the whole being 80 pips in the hole. Now you are only 40 pips in the hole! Only do this though if your original and follow-up analysis still hold true (for example, that the trend you were trading with has not been broken). 5) Educate yourself. Read some books. Take some online classes. One of my favorite books is “Forex Patterns and Probabilities:Trading Strategies for Trending & Range-Bound markets” by Ed Ponsi. I keep this one on my desk at all times in case I need to consult it. 6) Win at least 2:1 pips than you lose. Not in terms of number of trades (some great traders lose more than 50% of trades) but in terms of pips. This is called money management. If your wins are twice as big as your losses you will be profitable winning just 50% of your trades. If you in a setup you can’t win twice as much as you are risking don’t trade it. There are always other opportunities. For example, if you make 4 trades and only two of them are successful that is a 50% win rate and doesn’t sound great. But if you earn 100 pips on the wins and lose only 50 on the losses then you just netted yourself 100 pips profit (100+100-50-50=100)! 7) Rinse and repeat. Keep at it! If you lose confidence, go back to demo trading until you feel confident in what you are doing. Keep journaling every trade so that you can keep learning and improving. Keep reading books and other people’s analysis. Try to see the charts how I am looking at them and understand support/resistance and candlesticks. Come to your own conclusions about chart setups and try them out on your demo account. __________________
3/31/09
More stuff from my files: 45 WAYS TO AVOID LOSING MONEY TRADING FOREXby Jimmy Young, CTA Who is Jimmy Young? Retired proven professional Bank FOREX trader with over 20 years of hands-on FOREX trading experience. 1) Knowledge Deficiency – Most new FOREX traders don’t take the time to learn what drives currency rates (primarily fundamentals). 2) Overtrading - Trading often with tight stops and tiny profit targets will only make the broker rich. The desire to “just” make a few hundred dollars a day by locking in tiny profits whenever possible is a losing strategy. 3) Over leveraged - Leverage is a two way street. The brokers want you to use high leverage because that means more spread income because your position size determines the amount of spread income; the bigger the position the more spread income the broker earns. 4) Relying on Others – Real traders play a lone hand; they make their own decisions and don’t rely on others to make their trading decisions for them; there is no halfway; either trade for yourself or have someone else trade for you. 5) Stop Losses – Putting tight stop losses with retail brokers is a recipe for disaster. When you put on a trade commit to a reasonable stop loss limit that allows your trade a fair chance to develop. 6) Demo Accounts – Broker demo accounts are a shill game of sorts; they’re not as time sensitive as real accounts and therefore give the impression that time sensitive trading systems, such as short-term moving average crossovers can be consistently profitably traded; once you start dealing with real money, reality is quick to set in. 7) Trading During Off Hours – Bank FX traders, option traders, and hedge funds have a huge advantage during off hours; they can push the currencies around when no volume is going through and the end game is new traders get fleeced trying to trade signals. There is only one signal during off hours – stay out. 8) Trading a Currency, Not a Pair – Being right about a currency is half a trade; success or failure depends upon being right about the second currency that makes up the pair. 9) No Trading Plan - 'Make money' is not a trading plan. A trading plan is a blueprint for trading success; it spells out what you see your edge as being; if you don’t have an edge, you don’t have a plan, and likely you’ll wind up a statistic (part of the 95% of new traders that lose and quit). 10) Trading Against Prevailing Trend – There is a huge difference between buying cheaply on the way down and buying cheaply. What was a low price quickly becomes a high price when you’re trading against the trend. 11) Exiting Trades Poorly – If you put on a trade and it’s not working make sure you exit properly; don’t compound the damage. If you’re in a winning trade, don’t talk yourself out of the position because you’re bored or want to relieve stress; stress is a natural part of trading; get used to it. 12) Trading Too Short-term – If your profit target is less than 20 points don’t do the trade; the spread you pay to enter the trade makes the odds way against you when you go for these tiny profits. 13) Picking Tops and Bottoms - Looking for bargains works well at the supermarket but not trading foreign exchange; try to trade in the direction the price is going and your results will improve. 14) Being Too Smart – The most successful traders I know are high school graduates. They keep it simple and don’t look beyond the obvious; their results are excellent. 15) Not Trading Around News Time – Most of the big moves occur around news time. The volume is high and the moves are real; there is no better time to trade fundamentally or technically than when news is released; this is when the real money adjusts their positions and as a result the price changes reflect serious currency flow (compared to quiet times when Bank traders rule the market with their customer order flow). 16) Ignore Technical Condition – Determining whether the market is over-extended long or over-extended short is a key determinant of near time price action. Spike moves often occur when the market is all one way. 17) Emotional Trading – When you don’t pre-plan your trades essentially it’s a thought and not an idea; thoughts are emotions and a very poor basis for doing trades. Do people generally say intelligent things when they are upset and emotional? I don’t think so. 18) Lack of Confidence – Confidence only comes from successful trading. If you lose money early in your trading career it’s very difficult to gain true confidence. The trick is don’t go off half-cocked. Learn the business before you trade. 19) Lack of Courage to Take a Loss – There is nothing macho or gutsy about riding a loss, just stupidity and cowardice. It takes guts to accept your loss and wait for tomorrow to try again. Getting married to a bad position ruins lots of traders. The thing to remember is the market does crazy things often, so don’t get married to any one trade. It’s just a trade. One good trade will not make you a trading success; rather it’s monthly and annual performance that defines a good trader. 20) Not Focusing on the Trade at Hand– There is no room for fantasizing in successful trading. Counting up and mentally spending profits you haven’t made yet is mental masturbation and does you no good. Same with worrying about a loss that hasn’t happened yet. Focus on your position and have a reasonable stop loss in place at the time you do the trade. Then be like an astronaut – sit back and enjoy the ride. No sense worrying because you have no real control. The market will do what it wants to do. 21) Interpreting FOREX News Incorrectly – Fact is the press only has a very superficial understanding of the news they are reporting and tend to focus on one element and miss the point. Learn to read the source documents and understand it for real. 22) Lucky or Good – Your account balance changes don’t tell you the whole story about your trading. Fact is if you are taking a lot of risk and making money you will eventually crash and burn. Look at the individual trade details. Focus on your big loses and losing streaks. Ask yourself this, "If I had a couple of consecutive losing streaks or a couple of consecutive big losses, how would my account balance look?" Generally, traders making money without big daily losses have the best chance of sustaining positive performance. The others are accidents waiting to happen. 23) Too Many Charity Trades – When you make money on a well thought out trade don’t give back half on a whim. Invest your profits from good trades on the next good trade. 24) Courage Under Fire – When a policeman breaks down the door to a drug dealer's apartment he is scared but he does it anyway. When a fireman climbs onto the roof of a burning building he is scared but does it anyway, and gets the job done. Same with trading. It’s ok to be scared but you have to pull the trigger. No trigger – no trades – no profits – no trader. 25) Quality Trading Time – I suggest 3 hours a day of quality, focused trading time. That’s about all your brain allows. When you are trading, be 100% focused. Half way is bullshit - it doesn’t work. Don’t even think that time spent in front of the computer watching the rates has any correlation to profitability - it doesn’t. Spend less time but when you're trading, be 100% focused on trading. 26) Rationalizing – Killer. Absolute Killer. Put your trade on and let it run. If it hits your reasonable pre-determined stop, you're out. Think of yourself as a prizefighter. You just got knocked out. Moving your stop is like getting up after being crushed with a knockout blow. It’s pointless. Things will only get worse. Don’t ignore the obvious. You're wrong – get out. Come back the next day and try again. A small loss will not hurt you - a catastrophic loss will. 27) Mixing Apples and Oranges – Have you ever done this? You see the EURUSD trading higher so you buy GBPUSD because it “hasn’t moved yet”. That’s a mistake. Most of the time the reason the GBPUSD hasn’t moved yet is because it's already overbought or some 4:30am UK news was bearish. Don’t mix apples and oranges. If EURUSD looks bid, buy EURUSD. 28) Avoiding the Hard Trades – Bank FX traders have an axiom "the harder the trade is to do the better the trade". This I learned from experience. When I needed to buy EURUSD and it was hard to get them, that’s when it’s necessary to pay up and get the business done. When it’s easy to get them, then sit back and wait for better levels. So if you are trying to get into a trade, or more importantly get out of a trade, don’t putz around for a few points - get your business done. 29) Too Much Detail – If your trading more than 2 indicators then you need to clean house. Having many indicators stifles trading and finds reasons not to trade. A setup and a trigger is all you need. 30) Giving Up Too Easy – Your first trade of the day may not be your best but certainly it’s no reason to quit. I have a preset daily trading limit and I use it. You can’t make money by making excuses. Getting trades wrong is natural and should be expected. 31) Jumping the Gun – Don’t be penny wise and dollar foolish. Wait for your trade signal to be clear. Put on your trade and give it a decent size stop loss so that you don’t get knocked out by random noise. 32) Afraid to Take a Loss - trading is not personal, it’s business. Don’t think that a poor trade is a reflection on you. It could be you're just ahead of your time or a commercial order hits the market and temporarily creates a small unexpected move. Again, place your stop beforehand and NEVER increase your pre-determined risk. If it’s going bad, it will probably get worse. I think that’s Newton's “body in motion tends to stay in motion…” 33) Over-Relying on Risk Reward – There is zero advantage in risk reward. If you put a 20 point stop and a 60 point profit your chances are probably 3-1 that you will lose. Actually with the spread its more like 4 to 1 (from entry point if it goes down 17 points you lose, or up 63 - you win; 17/63 is close to 4-1). 34) Trading for Wrong Reasons – Because the EURUSD is going up is not in itself a reason to buy. Buying EURUSD because it's not moving much is even worse. You’re paying the toll (spread) without even a hint that you will get a directional move. If you are bored, don’t trade; the reason you're bored is there is no trade to do in the first place. 35) Rumors – Rumors are rumors almost 100% of the time. Think about where in the motion you heard the rumor. If EURUSD is up 50 points in last 15 minutes and the rumor is dollar negative, well - then you missed it. Whenever you in motion with the trade, determine where you are entering. 36) Trading Short-term Moving Average Crossovers – This is the money sucker of the century. When the shorter term moving average cross the longer term moving average, it only means that the average price in the short run is equal to the average price in the longer run. For the life of me, I cannot understand why this is bullish or bearish. Easy to set up on software, complete with lights, bells and whistles, and good for the seller getting thousands for the software but in terms of creating profit - it’s a zero. 37) Stochastic – Another money sucker. Personally I think this indicator is used backwards. When it first signals an overdone condition, that’s when I think the big spike in the “overdone” currency pair occurs. To be overbought means strong and oversold means weak. Try buying on the first sign of overbought and selling on the first sign of oversold. You’ll be with the trend and likely have identified a move with plenty of juice left. 38) Wrong Broker – A lot of FOREX brokers are horrible. Get a good one. Read forums and chats in several different places to get an unbiased opinion. 39) Simulated Results – Watch out for “black box” systems. These are trading systems that don’t divulge how the trade signals are generated. Great majority of them are absolute garbage. They show you a track record of extraordinary results but think about it. If you could build a trading system with half a dozen filters using the benefit of hindsight, couldn’t you too come up with a great system. Of course going forward is an entirely different story. High-speed number crunching capabilities allows for building great hindsight trading systems, so BEWARE. 40) Inconsistency – Every business (FOREX trading included) requires a business plan (trading plan). Unless you have taken the time to write down a set of rules that you can and will follow, it’s likely your trading will remain unfocused and directionless. Make a plan, have rules, follow them. Set goals that are realistic and you will achieve them. 41) Master of None – Focus on one currency for technical trading. Each currency has a unique way of trading and unless you get intimate with it, you will never truly understand its underlying idiosyncrasies. Don’t spread yourself too thin – focus, master one currency at a time. 42) Thinking Long Term – Don’t do it. Stay in the moment. Especially if you’re a day trader. It doesn’t matter what happens next week or next month. If you are trading with 30 to 50 point stops, restrict your thought process to what’s happening right now. That is not to stay the long-term trend is not important. It is to say the long-term trend will not always help you when your trading a significantly shorter time frame. 43) Overconfidence – Trading is simple but not easy. Statistics show 95% failure rate of those attempting to become traders. If you're doing well, don’t take your success for granted. Always be on the lookout for ways to improve what you are already doing. 44) Getting Pumped Up – The trick is to maintain an even keel. When you are in a trade, you want to think exactly as you would if you didn’t have a trade on. To do this requires a relaxed disposition. This is not a football game. Don’t get psyched up. Relax and try to enjoy it. 45) Staying in the Game– I don’t recommend demo trading because traders learn bad habits when trading with play money. I also don’t think “letting it all hang out” right away is wise either. Start off doing trades and taking risk that is relatively small but still makes a difference to you if you win or lose. About a quarter to a third of what you expect to reach as your trading matures is reasonable. 3/31/09 Best Times To Trade Currencies Forex is a 24 hour market and there will be good setups for profitable trades in the Asian, European and US sessions. It pays to look at historical price data on forex charts to see what time of the day you could be watching the market and what time you could be doing something else. The aim is to trade when the average trading range is worthwhile and stay out of the market when price is in a narrow sideways range. The Major Trading Sessions in the Forex Market The FX market is active 24 hours a day - it is important for the active forex trader to identify the times where there is the most volatility and largest trading ranges. TOKYO 7PM-4AM EST Tokyo is one of the principle dealing centers in Asia and is the first major Asian market to open. USD/JPY, GBP/CHF and GBP/JPY have large ranges, and offer short term traders opportunity. LONDON 2AM-12PM EST London is the most important dealing center in the world and the majority of forex trading takes place during London hours. For traders looking for volatility GBP/JPY and GBP/CHF provide large daily ranges. NEW YORK 8AM-5PM EST New York is the second largest Forex marketplace. For active traders GBP/USD, USD/CHF, GBP/JPY and GBP/CHF are good choices, with large daily ranges. US EUROPEAN OVERLAP 8AM-12PM EST = 5am – 9am PST This period is the most active - the best period for day traders looking for volatility. London Trading Session London opens at 8 am GMT or 3 am EST. Closes at 4 pm GMT or 11am EST. The most active pairs during this session are EURUSD with 39% of the trading volume, GBPUSD with 23%, USDJPY with 17%, USDCHF with 6% and USDCAD with 5%. European Session Europe opens at 7am GMT or 2 am EST, Closes at 3 pm GMT or 10 am EST. The European session is the most volatile session most of the time. New York Session New York Opens at 1pm GMT or 8 am EST. Closes at 8pm GMT or 3pm EST. New York is the second largest forex market place.The busiest time is 8 am to noon EST. News releases can result in a volatile market. Trading activity usually winds down after the U.S. afternoon trading period. Asian Session The Tokyo session opens at 1am GMT or 8 pm EST and closes at 8am GMT or 3am EST. Sometimes volatility is low and sometimes good moves occur. The USDJPY is the most active pair with 78% of the volume followed by EURUSD with 15% and EURJPY with 5%. 3/31/09
More stuff from my files: From a Professional Floor Trader who goes by the name - Phantom of the Pits PHANTOM OF THE PITS RULES RULE # 1
Assume your position is WRONG until the market proves it to be correct. REMOVE position early if it doesn’t prove correct. Don’t keep a position UNTIL it proves to be correct. Don’t wait for the Stop Loss to take you out. LEARN to be WRONG THINK – When position is correct you have nothing to do. This keeps losses SMALL – may not always be right but will keep you funded and trading. RULE # 2 INCREASE your position CORRECTLY when you are correct. Always start with SMALLER position, THEN add to it – NEVER have your entire position on until the position proves correct. If initial position is 6 contracts, next add 4 contracts, then add 2 contracts. In a WINNING trade, instead of taking profits – ADD positions Most of your profit will come from winning trades which take off QUICKLY. _________________ 4/1/09
Amin, There is a saying "One man's meat is another man's poison" which means what might be good for me, may be bad for you. As you build and develop your style of trading you will try different things until you get to a place where you feel comfortable. As I was developing my style, I tried just about everything I found, so with regard to these rules: Rule #1 Assume your position is wrong - didn't work for me, made me negative Remove position early - not part of my plan Don't keep a position - not part of my plan Don't wait for the SL - not part of my plan Learn to be wrong - made me negative Think - when position is correct...............correct Rule #2 Increase your position - definitely Always start with a smaller position - yes and no If initial position.......yes and no In a WINNING trade - most definitely Most of your profit - depends what type of trader you are __________________ |
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From the Files |