Tag Archives: risk

Forex Trading For Beginners – Risk And Benefits #4

In every investment, there is always a risk involved. In this article, we will take a look at some of the risks associated with the Forex market as well as the benefits it has to offer. Also, we will differentiate the Forex market from the Equity Market so that we will fully understand how Forex works in order to learn to trade Forex.

Read more about Forex Trading Strategy: Price Action Trading Patterns

We have already discussed some of the important factors (size, volatility, structure among other things) about the Forex market, that contributed to its successful and growing state. In terms of liquidity, the Forex market is highly liquid in nature where in a trader could invest huge amounts of money without affecting any given exchange rate. This is made possible by the low margin being required by most Forex brokers. For example, it is possible for a trader to invest US $1,000 for a position of US $100,000, a 100:1 leverage. This amount of leverage acts as a double-edged sword because investors could either rip large gains or run the risk of a massive loss when movements aren’t favorable. Because of the leverage that the Forex market could offer, it attracts many speculators in the midst of many foreign exchange risks.

Read more about Forex Trading Strategy Made Very Simple – Price Action

Not only that the Forex market is highly liquid but also it is mostly open 24 hours a day, which is favorable for traders who have a tight schedule. In the chart below shows the major trading hubs and their trading hours.

Time Zone Time (ET)
Tokyo Open 7:00 pm
Tokyo Close 4:00 am
London Open 3:00 am
London Close 12:00 pm
New York Open 8:00 am
New York Close 5:00 pm

With the high leverage of the Forex market, it poses a higher risk in comparison to trading equities. It is important to understand that because of the large amount of money involved and some of the impulsive moves made by traders, it will lead to a sharp change in the price of a currency pair. Though currencies don’t tend to move as sharply as equities on a percentage basis, it is the leverage that creates the volatility. For example, in a 100:1 leverage, if you put US $100,000 into a currency and the currency’s price moves 1$ against you, the value of the capital will have decreased to US $99,000, which means a loss of US $1,000 (a 100% loss). On the other hand, in the equity market, there is no leverage being used most of the time, so if there is a 1% loss in stock’s value on a US $1,000 investment, it will only give you a US $10 loss.

Read more about Forex Trading Strategy – Buy The Rumor Sell The Fact In Price Action

To go deeper regarding the difference between the Forex Market and  Equity Market, let’s look at the number of traded instruments. The Forex market has only a few in comparison to the Equity Market. There are only seven different currency pairs and the four major includes: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Also, there are three commodity pairs USD/CAD, AUD/USD, and NZD/USD. All other pairs are just different combinations of the same currencies – called cross currencies. It makes it easier to choose and monitor the instruments in the Forex market compared to trading in equity that you have to carefully pick thousands of stocks of the best value.

In trading equity, it is difficult to open and close positions because of the shrinking volumes and activities of the stock. Furthermore, one could make a profit in a declining equity market only while one could make profit both in the rising and declining Forex market. It is a simultaneous buying and selling and even short-selling. In addition, since the Forex market is so liquid, waiting is not required for an uptick (A transaction occurring at a price above the previous transaction) before they can enter into a position as they are required in the equity market. Furthermore, not only that the Forex market offers a low margin, it also has a lesser commission fee compared to in the equity market.

Read more about Forex Trading Strategy – Price Action For Dummies

By now you already have a good grasp of the risk and benefits that a Forex market contains. In the next chapters, we will be tackling about fundamental analysis, trading strategies, technical analysis and technical indicators. Keep on reading about Forex trading strategies and Forex trading for beginners to learn to trade Forex. Understanding Forex Trading is not a quick and easy process but it requires utmost patience and determination to be able to Learn the Market and eventually Learn How to Trade Currencies. With this continuous effort to gather Best Forex Trading Strategies in order to come up with a step by step Forex Course: Learning Forex Trading for Beginner for everyone all for FREE. Once again, keep learning and happy investing!

Source:

  • Forex Tutorial: Foreign Exchange Risk and Benefits. Retrieved April 13, 2013. http://www.investopedia.com/university/forexmarket/forex3.asp

FOREX TRADING FOR BEGINNERS:

  1. Introduction to Forex Market
  2. History Of Forex Market
  3. Common Used Forex Terms
  4. Risk And Benefits

Developing Your Risk Management Plan

New Equity Management Plan Video and Article you need to read here

I get emailed daily from traders who pour their hearts out to me about their struggles with Forex trading. And they always ask me the same thing. “Teach me how to trade Forex…Teach me where to buy and sell.” And yes, you absolutely need to understand the basics of support and resistance, price action, candlestick formations and understanding trends. And it is vitally important to know how to choose your entry and exit points. But the #1 reason why 90% of all traders fail in Forex is because they do not have a solid equity and risk management plan.

I recently received one of these emails for help from a gentleman with an attached screenshot of his MetaTrader 4 account. He had an account balance of $1,500 and had just bought the EUR/USD. He bought about 12 positions over a 1 hour period and their account was hovering a loss of $450. THAT…is bad equity and risk management.

So let’s talk about what I feel is the most critical step in your Forex trading….Developing an equity and risk management plan.

The first step is to make sure your mindset is right. I often see traders with a $200 account risk 50% or more of their account balance on 1 trade and wonder why keep blowing their Forex accounts. That is gambling. And if you come to the Forex market, where 90% of traders are losing and the other top 10% are taking all of the money from the  90%, you are going to have your butt handed to you.

So the first step is to STOP GAMLBING. To be successful in Forex you need to think like a professional Forex hedge fund manager. You have to think long-term about what returns you would like to see at the end of the year. 5% to 12% a month is very achievable in Forex. But if you expect to take your $500 account and turn it into $20,000 by the end of the year, it is not going to happen.

The second step is for you to understand your risk tolerance. How much could you lose on a trade without it affecting you emotionally? Based on your current strategy can you lose 10 trades in a row and still be in business? I would suggest that you trade no more than 2% of your account balance on any given trade and never risk more than 5% of your account on all of your trades at one time. I personally never risk more than 1%. Because when you risk too much on 1 trade and that trade loses, the emotional response that you have is usually one of revenge and  thoughts of “I have to make this back.” And when you have that mindset you are geared to lose. You MUST be able to trade without your emotions taking over. You will lose trades. But it is a part of business and if you have the right risk management protocol in place it will not bother you when you lose a trade.

So let’s get into developing your equity management plan.

Let’s say you decided that if you lose a trade and lost 2% of your total account balance on a trade that you would be very comfortable and non-emotional about the loss. You have already done your top down analysis and you feel you have found a potential trade. Before you enter the trade you need to know where you will place your stops and where you will pull your profits.You already have a picture either on your charts on in your mind exactly how you are going to trade this trade.

The example below shows a screenshot of the AUD/JPY 1 hour chart. We are only using this for the purpose of laying out your stops and profit targets in advance. But you will notice that we had a swing high, a swing low and then price came up to the 61.2% Fibonacci retracement (our entry level) where we are selling this pair. In this trade example you are going to need a 50 pip stop. And let’s say you have a $5,000 trading account. You first need to determine your maximum risk. 2% of $5,000 is $100. Now you have to divide that $100 between those 50 pips. And the number is 2 which means you are willing to risk $2 per pip for 50 pips. If you take this trade and you get stopped out, you are only out $100 which is 2% of your account balance. Are you with me?

 

So looking at the example above it also looks like the profit target, which is where we want to close our profit is also 50 pips. which means if price move in your favor that you will make $100 or 2% return on your account. Do you understand how to calculate this?

Now, the question is “Josh, would you take this trade?” And my answer? No. Why? Because the Risk/Reward ratio is too low. In this example I am risking 2% to make 2%. This is s 1:1 Risk/Reward ratio. Now, if you are scalping the market 1:1 is about all you are going to get. But other than that, I never like to take a trade unless the Risk/Reward is at least 1:2. Which means, using this example, that if I am risking 50 pips and 2% that I need to feel that the trade will give me 100 pips and 4%. If you trade this way you can actually lose 50% of your trades and still be profitable.

So tighten up your equity and risk management protocol, commit in advance that your maximum risk exposure per trade and the minimum acceptable Risk/Reward and you have the beginnings of your very own equity and risk management plan. In the near future I will put together more info on this. In the mean time watch the videos below on equity and risk management…Happy Trading.