4x Trading Made Simple: Forex Money Management 101
Gambling with 4x trading, God complexes of chasing losses, emotional investing - all the hallmarks of forex losers. The fact is that 4x trading is neither easy or hard. It is simply different to what we find in other parts of life. Most novices and experienced players came from share trading. This has barely any resemblance to 4x trading at all. So, to bring clarity to this different market, rule number 1 of 4x trading is:
Forex Money Management 101. Do not look for a holy grail of trading. Just don't lose money!
It should make sense that with the largest market place in the World - where in one week more money changes hands than the entire USA economy does in a whole year - that there is no such thing as a 4x robot, any super computer or an Albert Einstein of 4x trading. That's OK, this simply means we don't get to ride every blip and pip of movement with profits. We will miss opportunities and that's just fine. I am allowed to sleep, I am allowed to be cautious. But I am NOT allowed to lose money!
Forex Money Management comes down to a simple rule of never risking more than 2% on a trade.
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?
How can I trade 5 lots in a highly volatile trading market and only be able to let the trade breath by 4 pips? Quite easily actually. Follow the 1 hour chart for EURUSD for 19th August, 2009. Go on, open up your trading platform now to see the history for that day or I am wasting my time writing this article. You will see that in 3 hours the USD crashed on bad news with the Euro appreciating from 1.4111 to 1.4265 - all in 3 hours. That's a hefty move.
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?
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.
If the market did not dip and execute these pending orders, nothing was lost. If I returned from shopping to find the market did pick them up, then I would be in profit on one trade to the same amount of the loss on the other trade. So far so good, I came back to find the orders now live trades and it was the long position that was in a loss position. But that was OK, no forex money management rules were broken because the short position was in profit to the same amount. By closing both positions I could only lose the 0.9 pips spread. Within an hour, I closed out the short position at break even, and let the long position continue to stay in profits.
After closing out the short position at break even and with the long position in profits, then the next few hours was all about protecting that profit. I was never at risk of losing my 2%. When it profits were high enough, I set the trade to a 20 pips trailing stop and let the trade play out. $8,250 or 82.5% profit on the day. Never was the forex money management rule ever broken. By using hedging, my account was protected.
Hedging your positions is just one essential technique that a professional trader will use to enforce the forex money management rules. - 23196
Forex Money Management 101. Do not look for a holy grail of trading. Just don't lose money!
It should make sense that with the largest market place in the World - where in one week more money changes hands than the entire USA economy does in a whole year - that there is no such thing as a 4x robot, any super computer or an Albert Einstein of 4x trading. That's OK, this simply means we don't get to ride every blip and pip of movement with profits. We will miss opportunities and that's just fine. I am allowed to sleep, I am allowed to be cautious. But I am NOT allowed to lose money!
Forex Money Management comes down to a simple rule of never risking more than 2% on a trade.
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?
How can I trade 5 lots in a highly volatile trading market and only be able to let the trade breath by 4 pips? Quite easily actually. Follow the 1 hour chart for EURUSD for 19th August, 2009. Go on, open up your trading platform now to see the history for that day or I am wasting my time writing this article. You will see that in 3 hours the USD crashed on bad news with the Euro appreciating from 1.4111 to 1.4265 - all in 3 hours. That's a hefty move.
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?
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.
If the market did not dip and execute these pending orders, nothing was lost. If I returned from shopping to find the market did pick them up, then I would be in profit on one trade to the same amount of the loss on the other trade. So far so good, I came back to find the orders now live trades and it was the long position that was in a loss position. But that was OK, no forex money management rules were broken because the short position was in profit to the same amount. By closing both positions I could only lose the 0.9 pips spread. Within an hour, I closed out the short position at break even, and let the long position continue to stay in profits.
After closing out the short position at break even and with the long position in profits, then the next few hours was all about protecting that profit. I was never at risk of losing my 2%. When it profits were high enough, I set the trade to a 20 pips trailing stop and let the trade play out. $8,250 or 82.5% profit on the day. Never was the forex money management rule ever broken. By using hedging, my account was protected.
Hedging your positions is just one essential technique that a professional trader will use to enforce the forex money management rules. - 23196
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 @ 4:06 AM
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