4x Currency Trading: Forex Money Management Basics
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:
Rule 1 of Forex Money Management is Do Not Lose Money! Forget the holy grail of profits, just protect yourself from losing money.
There is no such thing as a forex robot, super computer or the Albert Einstein of 4x trading. We cannot catch every market high to sell, nor every market low to buy. We WILL miss 4x trading opportunities. Get over it! But opportunity cost is not the same as money cost. If I miss a trade through caution or being asleep in bed, that is not the same as getting on a 4x trade and losing on it.
Forex Money Management comes down to a simple rule of never risking more than 2% on a trade.
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.
To get on board a long position by following the news is what would have happened for many smart 4x traders. But I was lucky enough to already be on long from a few hours earlier when I picked up the trade on a dip at 1.4080. It was a wild day. Was I lucky or stupid to be ridding 5 lots with a 4 pip stop loss while I went shopping?
To me, the market looked ripe for a rise in the Euro. And my trading signals were confirming this. And so that I was free to go shopping with the girlfriend, I entered 2 pending orders for 5 lots, each hedging the other. That is, 5 lots buy limit at 1.4080 was matched equally by 5 lots of pending sell short order at 1.4080. If the market dipped to pick up these orders, then whatever happened, each would balance the other trade.
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. - 23218
Rule 1 of Forex Money Management is Do Not Lose Money! Forget the holy grail of profits, just protect yourself from losing money.
There is no such thing as a forex robot, super computer or the Albert Einstein of 4x trading. We cannot catch every market high to sell, nor every market low to buy. We WILL miss 4x trading opportunities. Get over it! But opportunity cost is not the same as money cost. If I miss a trade through caution or being asleep in bed, that is not the same as getting on a 4x trade and losing on it.
Forex Money Management comes down to a simple rule of never risking more than 2% on a trade.
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.
To get on board a long position by following the news is what would have happened for many smart 4x traders. But I was lucky enough to already be on long from a few hours earlier when I picked up the trade on a dip at 1.4080. It was a wild day. Was I lucky or stupid to be ridding 5 lots with a 4 pip stop loss while I went shopping?
To me, the market looked ripe for a rise in the Euro. And my trading signals were confirming this. And so that I was free to go shopping with the girlfriend, I entered 2 pending orders for 5 lots, each hedging the other. That is, 5 lots buy limit at 1.4080 was matched equally by 5 lots of pending sell short order at 1.4080. If the market dipped to pick up these orders, then whatever happened, each would balance the other trade.
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. - 23218
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 @ 12:11 PM
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