Thursday, December 17, 2009

Forex Money And Risk Management

Most people give very little attention to money & risk management aspects when it comes to stock trading. And to those who do, it is only treated as an after-thought.

In most cases, huge emphasis is given to analysis and techniques of assessing trading opportunities.

The following is a summary of 6 steps money & risk management strategies that have served me well over the years. They had saved me from being poor while at the same time gave me space to fine-tune and modify my trading approaches and got back what I’ve lost in the market. Now I’m not saying they are the only ones available in the market. It’s just that they are the ones that have been useful and profitable to me. And just what are the 6 STEPS? Well, read on!


No money, no trade! No argument there! You need to set aside some money just for trading purposes. Just like what you would do when you set aside your money for children’s education, emergency fund, etc. You should not, must not, borrow money from anybody (banks included!) just because you have that burning ambition to bring in huge rewards from trading.
Don’t have enough money? Start saving. If you cannot even do this, then you’re not ready for trading. Period.
Never do a Hail Mary and dump everything that you have in one single trade, no matter how much you love THAT stock! Don’t be a Rambo in the stock market! Those who do not bother about money management are the ones who would dump all their money in one single trade. Don’t put all your eggs in one basket.

Trading success depends on how you manage risk. It’s NOT based on how you choose your stock.

Every Tom, Dick & Harry talks about risk control. But most of them still lose money! Good trading means you lose only a small amount of money.

First and foremost, you need to know your risk tolerance. In other words, you must identify where your stress point is. How much money can you afford to lose without losing your sleep? How much money are you willing to lose in a single trade? These are some of the questions that you need to ask yourself in order to determine your risk threshold.

Risk can be controlled and minimized to a level that is comfortable to you.


When do you jump into a trade? The simple answer is that it depends on the trading plan that you follow. There is no right or wrong answer. Whether or not you make money out of it will only be known after you have sold your shares. It is not uncommon that a sell signal to me may be a buy signal for you and we both still earn profits from our own trading systems. Anytime is a good time to buy as long as the conditions are in accordance with your trading system.

There are as many trading systems or plans as there are the traders themselves. Within the technical analysis fraternity alone, there are the trend followers, breakout traders, momentum chasing players, day traders etc. Some traders would buy on price weaknesses, uptrend breakouts and rebounds. The trend followers would join in when they feel it is safe to hop on-board the moving trend train.

Many traders spend considerable amount of time in deciding when to enter a trade. My view is that setting exit conditions is MORE IMPORTANT than entry conditions! Why? It’s the exit price that determines your overall risk and profit! It is for this reason that I spend more time defining the exit conditions for each of the trade that I intend to take rather than the entry conditions.


In property, the most important thing to remember is location, location, and location. In the stock market, its stop loss, stop loss & stop loss! Identify stop loss conditions before you enter trade. This is your insurance if you’re wrong about the trade.

The ultimate role of stop loss is to protect capital and later, to protect profit as the trade progresses.

Not cutting losses is actually one of the biggest mistakes that traders make. Coming a close second is the mistake of not letting your profits run.

Stocks do their own thing, not what we think they should do.

Suppress the urge to be “right” – focus on the need to be disciplined when executing your trading plan. Lose your opinion – not your money!

Most importantly, choose a stop that you would definitely act on!


It’s inevitable that you’re going to lose money from time to time in this business. Everybody does! But what separates the pros from the boys is that the pros minimize their losses and maximize their profits. The retail crowd would do exactly the opposite – let the losses run and cut their profits short!

If you’re still new in the stock market and lack trading experience, it is absolutely important for you to know how to control and minimize risk effectively whilst you go over the learning curve.

And just how do you minimize the risk? One way is by simply reducing your position size, which is the number of shares that you intend to buy. Don’t bite more than you can chew. Fact is, the traders who win are those who minimize risk. And those who don’t? They pay the price and get wiped out.

In fact, it’s a good idea to trade in small position sizes when you’re new in trading. I also keep my position size small whenever I want to test out a new trading approach. If it bombs out, that’s OK as I’ve already planned for it. I consider that as “service charge” by Mr. Market for giving me such “advisory” service!

Ultimately, your intended or actual position size would depend on the level of risk that you’re prepared to take.


The purpose of using risk reward ratio is to assess whether the intended trade is worth taking the risk. This analysis tool is useful when you have already identified a sell price target for a particular stock that you want to trade.

Let’s use an example to calculate the risk reward ratio. Suppose you have set your entry price at $7.00. Your stop loss is set at $6.34. And you have made up your mind that you want to sell this stock once it hits $10.00 (your sell price target). The calculation of the risk reward ratio would be as follows:

Risk Reward Ratio = (Sell Price – Entry Price)/(Entry Price – Stop Loss)
= (10 – 7)/(7 –6.34) = 4.55

Stocks that have ratios greater than 2 are potential trading candidates. Better trading candidates are those that have ratios greater than 3.

Risk reward ratio can also be used as screening criteria for trading candidates.

The Most Popular Forex Entry Strategies

The Forex markets move. In a market with significant and consistent movement, using a breakout strategy is very appropriate. As with any strategy, there is a right way to understand and use a strategy and a wrong way. In this piece, I will discuss the two most popular breakout entry methods – the Support and Resistance Breakout and Trend Line Breakout.
Support and Resistance Breakout
Once in a while, I hear someone say that breakout trading worked best in the late 1990s in the stock market. Well, someone who learned to trade in the late ‘90s and who does not understand breakout trading might say that. In those days, you could buy anything at almost any time or price and make money. Today, breakout trading is where you see most of the money being made in Forex trading by those who truly understand the structure behind a true breakout.

Recently, my articles have been focused on various strategies I have seen traders using and finding success with. In this article, we will look at far and away the most popular entry strategy, the “breakout.”

The above chart shows the EUR/USD. Notice the horizontal resistance line on the chart and let's work left to right in our understanding of what is really happening behind the candles in this chart. The first circled pivot high on the left becomes a pivot high because supply in this market exceeded demand at that price level. When price reached the line, some of the sellers making up supply at that price get to sell, but there is still much more supply than demand so price has to fall to a lower level.

The drop from the first circled area was significant, as we would expect. The second time price revisited the resistance level, it declined again but this time, the decline was shallow compared to the first time. This was because each time the resistance level is revisited, more sellers that make up supply get to sell, so the supply and demand equation is becoming more balanced.

The analogy here is ‘chopping down a tree’ (not a great example, I know). With each chop, ‘mass’ is removed from the ‘tree’ and the tree becomes more likely to fall. In trading, the ‘mass’ is ‘supply and demand.’ Moving left to right, price comes back to that level a third time and falls once again, but the decline is shallow suggesting that there are not as many sellers remaining at that price level.

Next, price revisits the price level a fourth time but, instead of declining from that level, it bases sideways suggesting there are no longer more sellers than buyers. This is when you get ready to buy because in Forex trading (and any other market for that matter), price is likely to move higher. One would feel comfortable taking a low risk entry on a breakout here as the objective price action tells us that there are simply few sellers if any left at the resistance price level.

Does every trade work? Of course not – we are talking about trading here! This is why it is so important to understand what is driving the movement of the candles. This helps you understand the structure of a breakout. For a short position, we would just do the opposite of what I am suggesting here. If you want to see an example of a shorting opportunity, print this page out and turn it upside down.

The Trend Line Breakout

Trend line breakouts and breakdowns are a very popular entry strategy in Forex and other markets. Much of the time, this is the only type of entry a student will practice in class all week long because they become comfortable with it as it is simple to understand and can produce some strong moves.

This is another chart of the EUR/USD currency pair. The down trend line is drawn using two points on the chart, which is what is always required when drawing trend lines. Once the two points are evident and the trend line is drawn, simply wait for price to breakout above the line for a long entry. The logic here is that price is trending down because it is at price levels where supply exceeds demand.

We want to buy this market when it reaches a price level where demand exceeds supply (more buyers than sellers). Instead of trying to guess at where this might be, the price action on the chart will tell us where this price level is if we just wait and watch. When price eventually breaks out above that down trend line, it happens because it has reached a price level where there are more willing buyers (demand) than sellers (supply). This is where we would want to take a low risk entry and buy.

While there are many profit taking targets, one logical target for profit is the origin of the decline in price that started the whole downtrend in the first place. This is shown as the dashed red line on the previous chart.

The above chart shows a steep uptrend in the price action and our uptrend line. Instead of guessing as to where this dramatic advance in price might end or at what price level all the supply is resting, draw an uptrend line by connecting the pivot lows and look to sell short on a breakout (breakdown in this case) of that line. As in the last example, a natural target can be the origin of that rally in price as shown by the dashed red horizontal line on the bottom of this chart.

Keep in mind that the most important part of trading is the proper management of risk. The focus of this piece has been to help with market entry as that is the beginning of a good risk-averse strategy. The breakout entries discussed in this article are equally appropriate in any and all markets so do not think this is just for Forex.

Never forget, whether the market candles on a screen represent a chart of stocks, futures, Forex currencies, options, football trading cards, rare coins or anything tradable… they are all just people and price. A breakout in price would be quantified the same way in any and all of these markets. If you are watching the buying and selling of a David Beckham rookie card and see that the last one available at the current price level just sold, what is about to happen to price?

excerpt from

Thursday, December 10, 2009

What Is Day Trading?

We often hear the term ‘day trading’ today but just what is day trading?

In very simple terms a day trader buys and sells with a very short investment horizon which is typically measured in minutes with trading positions being opened and closed within the same trading day. Day trading is particularly suited to high volume, volatile markets such as the Forex but is certainly not limited to currency trading. It is for example very commonly seen in the equity markets, although it tends to be seen on the more volatile exchanges such as the NASDAQ, rather than the NYSE or AMEX.

The principle is simply to spot an opportunity and then profit from it quickly getting in and out of the market with just enough time to make your profit and too little time to risk the market turning against you. For example, you might open a position at 11:00 am and close it out just a few minutes later at 11:07 am to take a small but quick profit and repeat this process as many as a hundred times in a single trading session.

Today this traditional definition has been widened somewhat and we now also refer to the practice of trading from home through an online broker as day trading. And, just to complicate matters, the term ’swing trading’ has also started to appear recently to refer to traders with a slightly longer investment horizon of anywhere from one to five days.

Day trading in its truest form (buying and selling with a very short investment horizon) is a risky business and is not something which you should try unless you know exactly what you are doing as, while it can be very profitable, it can also produce very large losses very quickly.

Although we talk about ‘investment horizons’ it also needs to be understood that day trading is not the same as investing and you will be working to very short time frames during which you will need to be glued to your computer screen jumping onto the wave of a trade as it gains momentum and the jumping off as it crests in order to ride the next wave. Spotting the waves as they roll in and knowing just when to jump on and jump off requires both skill and practice.

For those who enjoy the excitement of the roller coaster ride then day trading can be both exciting and profitable but it is not something for the novice forex trader and should only be contemplated once you have cut your teeth in the world of currency trading and gained a fair amount of experience.

Money Management Principles

Trade With Sufficient Captial

One of the worst blunders that forex traders can make is attempting to trade without sufficient capital.

The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.

Exercise Discipline

Discipline is probably one of the most overused words in forex trading education. However, despite the clich¨¦, discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan.

It¡¯s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you¡¯ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.

Employ Risk-to-Reward Ratios

The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.

Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)

40/20 (2 to 1) = 67%, 40/40 (1 to1) = 50%, 40/60 (1 to 1.5) = 40%,
40/80 (1 to 2) = 33.5%,
60/20 (3 to 1) = 75%,
60/60 (1 to 1) = 50%,
60 /90 (1 to 1.5) = 40%,
60/120 (1 to 2) = 33.5%

Important Note

Never risk more pips on a trade then you plan to make. It doesn¡¯t make sense to risk 100 pips in order to make only 10. Why? See below example.

Profit taking level (pips): 10
Stop used or pips at risk: 100

You win 10 times which makes 100 winning pips. You ONLY lose once and have to give back all profits!!!

This type of trading makes no sense and you will lose on the long term guaranteed!

About the Author
Toby Smitz - Daily Operations Forex Trading with free education

Successful Forex Day Trading Strategies

The majority of Forex Trading Systems that are used by beginner traders are focused towards short term trading strategies, which aim to take small risk and promise to pile up massive profits and regular income. So we will look at how to succeed.

The major challenges that Forex day trader face are the following:

There are millions and millions of individuals will all different views, skills, knowledge, who think very differently so what Forex Trading System can predict reliably what will happen in the next minute, next hour or next day?

Lets be honest not one of them can reliably predict this.

From experience this is simply the silliest way to be trading forex, with all of the differences and variables it is impossible to know what is going to happen in the coming minutes, hours, days, and here is why.

Fact: All volatility in short term time frames is random and you cannot get the odds on your side, you can't win long term it is as simple as that!

Most of the forex day trading strategies, systems that have ever been purchased have ever made any really gains, sometimes random luck will see people profit. Most of them show back tests of the past, this is easy to show positive as you already know the outcome and can adjust the test accordingly.

Most of the systems are just incredibly brilliant sales pitches that work on peoples greed, and create a good story like Mary Poppins.

All is not lost you can win Best Forex Broker, but it is not as simple as turning on computer and putting in a program, it does take some skill and knowledge. You need to get the odds stacked in your favor and one strategy to be able to do this is through swing trading or long term trend following. Remember trend is your friend, so if you follow your system it can mean big profits if you have a great forex system and have the knowledge to be able to do it.

Do not make the mistake of day trading or forex scalping, get the right Forex education and trade long term and you can soon be enjoying currency trading success to get more Free Education feel free to visit the CFD FX REPORT they can provide you with valuable education lessons and help you find the Best Forex Broker in the Market.

Happy Trading

About the Author

Forex Trading Strategy - A Simple Timeless Method For Huge Gains

The Forex trading strategy enclosed can be learned in a few weeks and can make you huge profits in around 30 minutes a day. It's easy to understand and have confidence in so let's take a look at it.

The methodology we are going to look at here is long term trend following with breakouts.

The one constant in Forex markets is they will trend for long periods of time in a sustained direction and as these trends reflect the underlying health of the economy, they will last for weeks months or years. If you can lock into these trends and hold them, with leverage on your side, you can make a lot of money but how do you get in on these trends and ride them?

The best way to get in on any trend is to buy a break of support or resistance, to a new chart high or low. You generally, want a level that has been tested at least twice and the more times the better. What you are looking for is a level which the traders consider important.

If the break is a good one the following will occur:

As soon as the level is penetrated, stops behind the level are hit and push the price further in favour of the breakout, technical buying kicks in and pushes the price further from the breakout point and then as the new trend develops retail buyers want to get on board pushing the trend even further.

It sounds simple and logical and it is but most traders have a problem with taking breakouts and it's rooted in their psychology. When the break occurs they think, I have missed the start of the move, so better wait for a pullback to get in but the really big breakouts don't come back, the trend develops and the trader who waited misses the move.

The trader who simply bought the beak, missed the first bit of the move but he has the odds on his side of a continuation of the trend and stands to make money.

Most traders want to predict and buy tops and bottoms and be perfect but that's impossible, if they focused purely on making money, they would see the logic of breakouts which is simply trade the reality of price change and forget prediction.

When trading breakouts, you need to be patient and wait for the best trading signals. You need to pick levels which have been tested several times and are considered important by traders.

Breakout trading can be done easily, by anyone and doesn't take long to learn. You can put together a simple, breakout strategy together in a week or so and then start enjoying currency trading success.

I know traders who trade just a few times a month, spend 30 minutes a day, on their Forex trading strategy and make triple digit annual gains. Discover breakout trading and you will have a simple, easy to understand and timeless way to make big profits.

About the Author
NEW! 2 X FREE ESSENTIAL TRADER PDFS ESSENTIAL FOREX TRADING COURSE For free 2 x trading Pdf's, with 50 of pages of essential Forex info and more advice on Profitable Forex Trading visit our website at:

Thursday, December 3, 2009

Trading news- Good or Bad

Hi forex traders,

Trading news is one of the dangerous adventure i dont advise forex novice to embark on.Before entry a trade, forex trader should look up for the news that are coming out for the day at one of these forex news site, preferable forex factory. if you in trade and there are very important news that want to come out, you should kindly exit your trade and continue whenever the news as come and gone.

Do not trade the news if you are not expert because the news can wipe away all your hard earn income you have earned. the chart above shows the unemployment claims that came out this afternoon 2:30GMT and the candlestick first came dowm momentarily from 1.51207 to 1.50823 about 38pips for the first three minute and later reverse back to 1.51403. that is whipsaw which can cause havoc on beginners trading capital. I trade the news and make just $300 and within two minute, i exit the trade and added my profit to my capital.

to your success.
David Olushina

Risk Warning

please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone.