Forex Money Management 101: 4x Trading Made Simple
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.
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 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.
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.
First rule of Forex money Management: Don't Lose Money. Never risk more than 2% of your capital. Hedging. - 23204
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 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.
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.
First rule of Forex money Management: Don't Lose Money. Never risk more than 2% of your capital. Hedging. - 23204
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 @ 12:01 PM
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