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 means not losing money. Forget for now all issues of making huge profits. The first rule is all about not 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.
Let me give you an example. Assume I have $10,000 in my account. 2% of $10,000 is $200. If I trade with full lots where 1 pip is worth $10, then I am allowed 20 pips for my stop loss. Sounds fair enough in principle, but I make most of my money in huge rebounds or retracements that happen after a break out on highly volatile days. Meaning, I often trade with 5 lot orders - so 2% of my money is now down to 4 pips for stop losses. If 20 pips is nothing, imagine only being able to to be wrong by less than 4 pips.
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?
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.
While I was shopping, the market dipped to 1.4069 and I was losing $500 on the long position which was balanced out by the $500 profit on the short position. Think about it. The market could do whatever it wanted and I could not lose. The first rule of forex money management was safely in place with the risk of loss limited to the 0.9 pip spread to do the trades. it only took an hour to close out the short position at zero loss and then I was free to let the long position have as much as it wanted.
I closed out with a 20 pip trailing stop at 1.4245 up $8,250 for the day on a $10,000 account. That's 82.5% profit for the day I went shopping.
Hedging people. Learn it, get serious about the first rule of Forex Money Management. DON'T LOSE MONEY, and NEVER risk more than 2%. - 23167
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.
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.
Let me give you an example. Assume I have $10,000 in my account. 2% of $10,000 is $200. If I trade with full lots where 1 pip is worth $10, then I am allowed 20 pips for my stop loss. Sounds fair enough in principle, but I make most of my money in huge rebounds or retracements that happen after a break out on highly volatile days. Meaning, I often trade with 5 lot orders - so 2% of my money is now down to 4 pips for stop losses. If 20 pips is nothing, imagine only being able to to be wrong by less than 4 pips.
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?
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.
While I was shopping, the market dipped to 1.4069 and I was losing $500 on the long position which was balanced out by the $500 profit on the short position. Think about it. The market could do whatever it wanted and I could not lose. The first rule of forex money management was safely in place with the risk of loss limited to the 0.9 pip spread to do the trades. it only took an hour to close out the short position at zero loss and then I was free to let the long position have as much as it wanted.
I closed out with a 20 pip trailing stop at 1.4245 up $8,250 for the day on a $10,000 account. That's 82.5% profit for the day I went shopping.
Hedging people. Learn it, get serious about the first rule of Forex Money Management. DON'T LOSE MONEY, and NEVER risk more than 2%. - 23167
About the Author:
Phil Jarvie is a professional forex trader expert in 4x day trading using fx hedging for forex money management and may wish to visit his website to consider his reviews on trade currencies
posted by X - Men @ 12:03 PM
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