Currency Trading Systems

Forex Trading  Strategies  : What makes a trading system “good”?

Risk Management : I need to continue the consultation on a way to find the right trading strategy for Forex trading. Formerly , I shared that for any Forex trading technique to be considered, it has got to be a total methodology ( insert link to prior article ) .

Today, I would like to add to that by talking about risk management. This is perhaps the area where 95% of Forex traders mess up and lose money. Managing risk is about reducing your losses AND about protecting trade capital by employing specific strategies to accomplish each of these simultaneously.

What do I mean by that and why is it important?

First, most Forex traders make simple trading mistakes: they take too large of a position and expose themselves to serious and steep losses should the markets move against them. Second, they fail to guard their  Whole  account by permitting ONE trade to put their full account balance at risk.

Here’s a fast and maybe extraordinary example:

Suppose a currency exchange trader  has a ,000 account balance. The foreign exchange trader  takes a five standard lot forex trade on the EUR/USD pair.  The forex trader now has at least ,000 ‘margin’ at risk (or 50% or more of the forex trader’s account balance).

For every 1 point that this forex trade moves against the forex trader, the trader loses  1/2% of the total account balance. For additional read my Forex Income Engine 2.0. At first  peek, that might not seem to be a steep loss. However, should the Forex trade move a total of fifty pips against the Forex trader , and the trader  afterwards exits the position, the currency exchange trader ‘s total loss would be an  Superb  ,500!  ( 25% of the trader ‘s account balance ). This is poor risk management and it frequently leads to complete wipeouts of Forex trading accounts.

How did we calculate that loss? 1 pip for the EUR/USD pair is equal to (on a standard lot trade). A 50 pip loss equals a loss of 0 ; and remember our example currency exchange trader  had traded five standard lots — for a gigantic loss of ,500!

Instead, any trading system should teach you very particular rules for incorporating cash management and risk management into each currency exchange trade you take. Find out more see my Forex Income Engine 2 Review.

Money  Management should involve the distribution of a currency exchange account among the assorted trades a foreign exchange trader  takes. As an example, forex traders should never trade their complete account on a single trade, and should barely have more than some open positions. By using multiple positions, the foreign exchange trader distributes the chance among every one of the foreign exchange trades they have taken.

Risk management should involve the maximum risk in any SINGLE Forex trade, and should limit the impact of a losing Forex trade on the trader ‘s account balance.

Here are 2 fast examples:

Money Management : A unproven foreign exchange trader takes four separate one lot trades on 4 separate pairs. Assuming here that each of the pairs have a pip value of on a standard lot, then the total amount of the account being margined across all four trades is about 40% (it may be higher depending upon the actual pairs traded. With proper stop loss management, however, in conjunction with risk management, it is UNLIKELY that the forex trader would incur a complete 40% loss.

Carrying forward to risk management: In each of the theoretical forex trades above, the forex trader risks no more than 2% of the trader’s total account balance on each forex trade. That means a maximum loss of 0 per forex pair traded if ALL FOUR trades are stopped out. Total loss in this situation would be 0 — a way more recoverable eventuality than the 00 in the 1st currency exchange trade example.

Furthermore, Risk Management has the capacity to make loss recovery less complicated. As an example, in the 1st case, where the Forex trader  lost 00, the trader  would need a virtually 250% gain on their next trade to recover the lost value on the 1st trade.

In the 2nd example   the foreign exchange trader  would need only an 8% gain.

A 2nd part of Risk Management not generally debated in poor trading strategies is defending gains. Though   this starts as a consultation on Exit  Technique  rules, it’s also a factor of risk management. Once a foreign exchange trade turns profitable, it is urgent the foreign exchange trader  manage the gains with smart stop loss management. The worst thing a foreign exchange trader  can do is permit a lucrative position to reverse and become a losing position. Therefore , handling risk extends to the protection of gains on a currency exchange trade, just as it does shielding against deep losses on a currency exchange trade.

Therefore, in considering any trading system for use in your Forex trading, you have to make sure that risk management is not just debated, but obviously explained together with the use of the trading methodology. If risk management isn’t present, misleading, or not express to the trading methodology, you’ve got to avoid using that trading method. For additional see my Forex Income Engine 2.0 Review.