4x Currency Trading: Forex Money Management Basics
is 4x trading easy? Or is it hard? It really is neither. 4x trading is just different. It is nothing like trading stocks, bonds, shares, options or warrants. It is 4x trading. It is the home to emotional investing, 4x gambling losers. So, to protect yourself you need to understand the rules of Forex Money Management, and the first rule is:
Forex Money Management means not losing money. Forget for now all issues of making huge profits. The first rule is all about not losing 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.
But let's get creative with our highly leveraged 4x trading and our forex money management rule. I have a $10,000 trading account. That means I am only allowed to risk $200 of my account on any trade. If I am trading full lots, that means I must set my stop losses at 20 pips. But on extra wildly fluctuating days, I like to trade 5 lots. That means I must set my stops at 4 pips to follow the forex money management rules. How to give the trade room to breath?
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?
Fact is I was going out shopping with the girlfriend and I had trading signal software telling me I should be long. So I had placed 2 pending orders. The first was a 5 lots pending buy limit order at 1.4080 (in case of a dip in my favor), and to cover this potential and to obey forex money management rules, I also placed a 5 lots pending sell short order - one cancels the other out should they get executed.
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.
First rule of Forex money Management: Don't Lose Money. Never risk more than 2% of your capital. Hedging. - 23217
Forex Money Management means not losing money. Forget for now all issues of making huge profits. The first rule is all about not losing 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.
But let's get creative with our highly leveraged 4x trading and our forex money management rule. I have a $10,000 trading account. That means I am only allowed to risk $200 of my account on any trade. If I am trading full lots, that means I must set my stop losses at 20 pips. But on extra wildly fluctuating days, I like to trade 5 lots. That means I must set my stops at 4 pips to follow the forex money management rules. How to give the trade room to breath?
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?
Fact is I was going out shopping with the girlfriend and I had trading signal software telling me I should be long. So I had placed 2 pending orders. The first was a 5 lots pending buy limit order at 1.4080 (in case of a dip in my favor), and to cover this potential and to obey forex money management rules, I also placed a 5 lots pending sell short order - one cancels the other out should they get executed.
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.
First rule of Forex money Management: Don't Lose Money. Never risk more than 2% of your capital. Hedging. - 23217
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 trade foreign currency
posted by X - Men @ 12:09 PM
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