Forex Money Management

Why Money Management?

Best system will fail in long-term if it is without proper money management. On the contrary, bad system can turn profitable if used with a good money management. Currency trading always go through the cyclical ups and downs, where winning and losing are just part of the game. However, with the right money management, you might be able to hold onto your winnings, while minimizing losses during bad times.

Have you ever wondered why you made so much profit so easily only to lose all of it plus your principal in a flash? Then you're trading without a proper money management. You've got to be disciplined, or your winnings are guaranteed to lose sooner or later. Learn these money management techniques today!

2% and 6% Rules

First and foremost, note down your account equity at beginning of the month. Then compute 2% and 6% of the account equity. For example, if your account equity at the beginning of the month was $100,000 then 2% of $100,000 was $2,000, and 6% of it was $6,000. But what are these numbers used for?

Firstly, you should never risk more than the 2% per trade. This will protect you from blowing up your account from just a few bad trades. In this example, the maximum loss of any single trade allowed is $2,000 (the 2% of $100,000). Make sure that you don't expose more than that in any trade. To enforce this rule, you have to set stop loss to limit the loss at $2,000 or less. That is usually a stop loss of at most 200 pips for a 1-lot contract or at most 50 pips for 4-lot contract. Remember that you can always set stop loss less than the 2% or execute multiple trades. Just make sure it is not larger than that.

In addition to the 2% rule, you are allowed to risk a maximum of 6% of equity in one month. In this example, allow yourself to lose not more than $6,000 (the 6% of $100,000). You may open multiple trades running concurrently, but make sure that in total you are not exposing more than $6,000. Any time you see drawdown of current month exceeds $6,000, stop trading until next month. Then in the new month, you'll have another 6% to risk. Always check that if all the open trades are lost, they won't take more than the %6.

Assuming at the start of 'new' month, your account equity is now down to $94,000. The 2% of $94,000 is $1,880 and the 6% is $5,640. In this 'new' month, you may risk a max of $1,880 per trade and a max of $5,640 per month. You have to set stop loss to all trades to make sure that these rules are always enforced. Recalculate the 2% and 6% at the beginning of every month and trade accordingly.

While traders should always note that Forex trading involves a substantial risk of loss, these two rules can help you save your precious money during bad times, while you hopefully grow your money during good times. The 2% and 6% rule can help cut the losses short.

Apply this money management to your trading today, get disciplined and become professional trader.

12 interesting facts about Forex

Forex is an abbreviated name for "foreign exchange." The Forex trading market is an around-the-clock cash market where the currencies of nations are bought and sold, typically via brokers. For many years, the Forex market was dominated by large institutions such as banks and brokerage firms. However, the Forex market has experienced a major change over the past several years, as a growing number of private investors and traders just like you have started to actively participate and trade. The purpose of this article is to reveal 12 interesting facts about the Forex trading market.

1. What is a Forex trading system? According to Howard Abell, "The [Forex] trading system gives the trader the ability to control his or her emotional states rather than allowing them to control him. A [Forex trading] system is a disciplined method for organizing dynamic, ever-changing market phenomena."

2. Forex is the most liquid market in the world, thus making it easy to trade most currencies.

3. Unlike equities or futures trading, you pay no commissions on the Forex deals that you make.

4. According to the Wall Street Journal Europe, the most commonly traded currencies on the Forex market are the U.S. Dollar (USD), the Japanese Yen (JPY), the Euro (EUR), the British Pound (GPB), the Canadian Dollar (CAD), the Australian Dollar (AUD), and the Swiss Franc (CHF).

5. The most commonly traded currency pairs are the U.S. Dollar and the Japanese Yen, the U.S. Dollar and the Euro, and the U.S. Dollar and the Swiss Franc.

6. The U.S. Dollar is involved in nearly 90% of all Forex transactions.

7. Ten financial institutions account for nearly 73% of the total Forex trading market volume. The Top 10 most active traders include Deutsche Bank (17.0%), UBS (12.5%), Citigroup (7.5%), HSBC (6.4%), Barclays (5.9%), Merrill Lynch (5.7%), J. P. Morgan Chase (5.3%), Goldman Sachs (4.4%), ABN AMRO (4.2%), and Morgan Stanley (3.9%).

8. The five major Forex trading centers are London, New York, Tokyo, Sydney, and Frankfurt.

9. The three major Forex trading countries are the United Kingdom (32.4%), the United States (18.2%), and Japan (7.6%).

10. Currency market players typically use "Forex analysis" as a means of predicting currency price movements. Forex analysis is divided into two types: fundamental and technical. A fundamental analysis uses economic and political factors, such as unemployment rates, interest rates, or inflation, as a means of predicting currency movements. A technical analysis uses reliable historical data as a means of forecasting these movements. The technical analyst believes that history repeats itself over and over again.

11. Some Forex traders depend on fundamental analysis while others depend on technical analysis. However, many successful Forex traders use a combination of both strategies. The important point to remember here is that no one strategy or combination of strategies is 100% certain.

12. Margin is referred to as the collateral needed to facilitate the Forex deal. Usually, this is a very small portion of the entire deal, say 1% or 1:100. Please note that margin is a "double-edged sword." Without the proper use of risk management tools (for example, the stop-loss option), you can experience substantial losses as well as gains. We suggest that you take complete advantage of stop-loss and take-profit options in your Forex trading.

7 most common Forex Trading mistakes

When trading currencies online, there seems to be no end to the mistakes a beginning forex trader can make. Beginning traders are always the most susceptible, but experienced traders can often revert back into bad practices as well. Here are some of the most common trading mistakes listed in no particular order, and how to avoid them.

Predicting instead of reacting. Otherwise known as overconfidence. This usually happens after a winning trade or two. The trader starts to think that if he can enter a trade sooner, he will get more pips. He begins to believe he can pick the top or bottom before the market reveals it to him. So instead of reacting to what the market is telling him, he starts to predict what the market will do. He enters a trade and the market continues its move, which is against him. Now, does he admit he was wrong and close his position, or does he add to it?

Adding to losing positions. Here is an extension of predicting instead of reacting. Look, you just entered a trade and the market is going against your position. The market is telling you, you are wrong. Now is the time to close your position, not add to it. If you add to your losing position, you are making at least two incorrect decisions. First, you are predicting the market will turn around. Second, you are hoping the market will prove you right because you are unable to admit you made a losing trade. Losing trades are a fact of life in the forex market. You weren't wrong, simply, your edge didn't play in your favor on this trade. Close your losing position and move onto the next trade.

Insufficient capitalization. Forex trading is already highly leveraged. Insufficient capitalization just magnifies the potential problems you can face. If you read about the famous and big name traders, they never use more than 1% - 2% of their trading capital on a position. Get out a calculator and let's see... 1% of $10,000 is $100. So as a position trader who might have a stop-loss order of 100 pips, you can only trade one mini lot of one currency pair for each $10,000 in your trading account. That is, if you want to trade like the pros. Do you have $10,000 in your account? Why do forex dealers boldly advertise you can start trading with only $250 then? Because they are in business to make money, and if they can convince you to commit trading errors, they stand a much better chance that they will soon have your money.

Overtrading. A close cousin of insufficient capitalization. Knowing that very few currency traders trade with sufficient capital in the first place, they further compound the potential problems by trading too actively and in too many currency pairs. Spreading themselves too thin you might say. Potential problems include loosing focus and margin calls. Getting a margin call is a very irresponsible position for a forex trader to be in and is a direct result of overtrading, over leveraging, and insufficient capitalization. This is as close to the perfect recipe for failure as you can get.

Not using stop-loss orders. There are very few times when not using stop-loss orders is the correct action to take. Large traders with several hundred or more lots don't want to advertise where their stops are placed is one. The other might be scalpers whose stop is only 10-15 pips away. By the time they figure the math and enter it in the system, the price might already be there or even past it. And some forex dealing stations won't let you place stops closer than 15 pips anyway, especially in fast moving situations. Other than those times, you need to put stop-loss orders in on every position. It is in your own best interest to protect yourself. I know, some people whine that their stops are always being run by the dealer. A whole article could be written on stop-loss order management, if not a complete chapter in a book. Let's just say for now, don't put them where everybody else does, and don't put them too close.

Trading as a hobby. Golf is a hobby and it costs you money to play. Horseback riding is a hobby and it costs you money as well. The point is hobbies cost money, business makes money. You need to treat your forex trading as a business if you ever hope to make money on a consistent basis. That means keeping records, keeping a trading journal, and have a written business plan. You wouldn't invest money into a start up business without first seeing a business plan, so why would you invest money into your own trading account without the same thoughtful consideration.

Not having a trading plan. This is one of those catch-all mistakes. If you have a written trading plan, and follow it, you will already have identified and hopefully eliminated all of the above mistakes. If you don't have a written trading plan, you are almost assuredly making some, if not all of the above mistakes. Maybe not all at once, but even occasional mistakes add up quickly. Do yourself a favor and don't put on another trade until you think through and write down the response for all of the above mistakes and any others you can identify, as well as entry and exit rules. Then follow it.

These are just some of the many mistakes you can make as a forex trader. You need to take responsibility for yourself and your money and act in your own best interest. The currency markets are a zero sum game and the many players are out to make a profit. Don't let them profit with your money. Do your best to eliminate the above mistakes, and you will go a long way to ensuring you are the one who profits in the forex market.

Forex Roller Coaster

Lately the Foreign Exchange market has made a roller coaster ride seem boring. Currency pairs stay in 5 hour quiet lulls, and then either blast off, or drops off a cliff. Economic news, commodity prices, or Central Banker jawboning may cause prices to move at a 90 degree angle and change the global capital flows in mere minutes. I keep trying to write some commentary and by the time I am finished my outline, bigger and broader news hits the market. This week is going to be no different.
Fannie Mae and Freddie Mac, the two government sponsored entities (GSE’s) that back the majority of US home mortgages are currently going thru solvency questions. These two entities provide an enormous amount of liquidity to the mortgage market and without them, mortgage rates would be significantly higher. Over the weekend, the US Federal Reserve and the Treasury Department assured investors that the US Government is backing the two GSE’s and stands ready to even buy equity stakes in Freddie Mac and Fannie Mae!!! At what point does the US Government exhaust its ability to help the ailing mortgage companies, and other financial institutions? Lets think of the currency implications for all the “bailing out” that the Fed and Treasury have done lately………
Every time the US Fed announces that they will “open up the window” to another type of financial institution, what the Fed is really saying is, “We will take on your securities and lend you cash that you can then use to continue your business activities.” The Fed is effectively both printing money (a job formally reserved for the US Mint), and spending your tax dollars on securities that the big financial institutions do not want to hold anymore. What happens when you print too much money? You get two effects: 1) a devaluation of the currency (falling US Dollar), and 2) Inflation.
The Federal Government needs to clarify their supposed strong dollar policy with real obtainable goals, not just their usual stance of jawboning and looking like a paper tiger. Unfortunately, we do not see this coming in the near future, just more verbal confirmation of a “strong dollar policy”. That being said, all is not lost for the US Dollar…..
For many years, most EUR bulls have used the prospects of higher interest rates to justify the currency’s rally. We believe this is coming to an end!!! The slowdown in the Eurozone economies will cause the interest rate differential between the US and Eurozone to close in the coming year thru expected ECB rate cuts. Our opinion is going against prevailing market sentiment which is aligned with the ECB’s Trichet continued hawkish stance on inflation. But we believe that the Euro currency does not have too much higher to climb verse the US dollar. We are hoping to see some sign of US Dollar bulls capitulation in coming weeks as our market sentiment signal that it is time to put on our long-term short EUR/USD position. Note we do not have a hard target level, just searching for signs of capitulation in the market
Our trading advise for the week of July 15—20 is to stay nimble. If you find yourself in a trade and see the light at the end of the tunnel, that’s probably not the end, it’s a freight train coming at you. I have mentioned many times before, this market is not taking prisoners. There is an enormous amount of economic data releases coming this week. Get in, keep your stops tight, and do not forget to take profits.

Live Currency Rates

Symbol	Bid	Ask	Open	High	Low
AUD/CAD	0.9001	0.9011	0.9001	0.9001	0.9001
AUD/CHF	0.8926	0.8934	0.8926	0.8926	0.8926
AUD/JPY	79.1100	79.1600	79.1100	79.1100	79.1100
AUD/NZD	1.2624	1.2640	1.2624	1.2624	1.2624
AUD/USD	0.8357	0.8361	0.8357	0.8357	0.8357
CAD/CHF	0.9912	0.9920	0.9912	0.9912	0.9912
CAD/JPY	87.8300	87.9000	87.8300	87.8300	87.8300
CHF/JPY	88.60	88.65	88.60	88.60	88.60
EUR/AUD	1.7054	1.7064	1.7054	1.7054	1.7054
EUR/CAD	1.5361	1.5369	1.5361	1.5361	1.5361
EUR/CHF	1.5231	1.5235	1.5231	1.5231	1.5231
EUR/GBP	0.8529	0.8532	0.8529	0.8529	0.8529
EUR/JPY	134.97	135.01	134.97	134.97	134.97
EUR/NZD	2.1541	2.1553	2.1541	2.1541	2.1541
EUR/USD	1.4256	1.4259	1.4256	1.4256	1.4256
GBP/AUD	1.9992	2.0004	1.9992	1.9992	1.9992
GBP/CAD	1.8005	1.8020	1.8005	1.8005	1.8005
GBP/CHF	1.7854	1.7862	1.7854	1.7854	1.7854
GBP/JPY	158.2100	158.2900	158.2100	158.2100	158.2100
GBP/NZD	2.5247	2.5272	2.5247	2.5247	2.5247
GBP/USD	1.6713	1.6717	1.6713	1.6713	1.6713
NZD/CAD	0.7126	0.7136	0.7126	0.7126	0.7126
NZD/USD	0.6615	0.6620	0.6615	0.6615	0.6615
USD/CAD	1.0773	1.0778	1.0773	1.0773	1.0773
USD/CHF	1.0682	1.0686	1.0682	1.0682	1.0682
USD/JPY	94.67	94.70	94.67	94.67	94.67

When the Crisis is Over, Are People Going to Invest in Forex???

The blows that have suffered major economies of the world in recent months hurt those who do have an investment in forex. What happens is that the volatility in the markets provides an extreme sensitivity to any asset and the risk increases as the days pass.

If we are to make an investment in forex we must take into account that in this market, 80% of transactions are conducted with the so-called major currencies. These currencies are backed up by the strongest economies in the world providing the security that the investor needs.

The euro has become a safe trade currency, and this has led many countries to be saving or investing in that currency, even in many cases is to prefer the euro against the dollar. The dollar has depreciated against the euro, which is why many countries are investing in this currency. This has also contributed to this phenomenon, the differential between the official rates of the major hard currencies and some of the country’s most affected by the crisis (United Kingdom). The United States on official rates are currently at 0.25%, 0.50% in the United Kingdom, 0.25% in Canada and 0.1% in Japan. All this contributes to a strong euro is continuing to act as a refuge.

The substantial difference between the two powers is that U.S. lowered their interest rates and the results were not expected, and in Europe they are reluctant to lower the cost of money to prevent the fall of the euro, although in recent days has suffered a slightly low rate cut.

The banks have followed the policy of the Fed for example the Bank of England who reduced its interest rate to protect the British economy from the global crisis. While the measure is too recent to be seen whether the British pound suffered a fall, so it continues to be a good option to invest in the forex market.
In these cases it is advisable to invest in the forex market, but betting on currencies that might not have a performance as profitable as the dollar, the euro or sterling, but they provide confidence to investors.

Diversifying is the key and foreign exchange is a good option to make such moves. The dollar is a currency that has devalued and one of the reasons is that oil had change in short range of time and that enhances competitiveness.

Anyone who invests in foreign currency should analyze what are the economies most affected by the global crisis, and from there, to deduce which are the currencies that are devalued, and which benefit from this situation.

Actually the current situation is not favorable for those with a negative attitude, but for those who see an opportunity where none exist are those that can grow. We can learn that in forex there is always an opportunity, but each investor must believe in it and see in detail where you can take advantage of every opportunity. Today the psychology of the operator is essential to survive.

How does the Economical Crisis affects Forex

The economic crisis we are experiencing stronger than ever these days not only affect our economy, but as always happens when the world is mobilized by an important fact, also our mental health at risk. Stress, depression, among other mental disorders is leading to the economic crisis raging for months to markets, and that affects our decisions every day. Therefore, we must understand that our emotions precede our attitudes, changing our thinking is a key fundamental.

You may think that a lot of rich attitude you may have is not enough, if you don’t have capital you’re out; you will not cross the line of a poor with aspirations. Investing in Forex is a real and effective solution. Doesn’t produce great opportunities the crisis in Forex? Perhaps this is one of its greatest attractions.

We are in crisis and this is no longer questioned anymore. Now we wonder what kind of crisis we are suffering. There is talk of a global crisis, or more chain-crisis, value crisis, environmental crisis, financial crisis, a crisis of production, economic crisis, real estate crisis, etc.

Most of us were resigned and think that the cycle of crisis will be about for two years as the experts say. Others look for opportunities. Every crisis creates an enormous opportunity for anyone who is willing to take the risk. We can stay looking as prices go up and how that affects our accounts or we can risk and pursue new business and investment by taking advantage of the bear market. This is what forex is creating, opportunities.

Does The Current Crisis Affect the Forex Market?
Yes, the fall of the stock market and the global financial crisis, affects forex as well. However, as speculation on world currencies we do in forex, there will always be currencies that are better than others. So, we trade the strongest by buying and sell the weakest.

Psychology of Trading: Attributes of a Successful Trader

The successful trading is 80% psychological and 20% methodological. That is why; self-knowledge and study of its own patterns of behavior is the key to success.

We all know that the forex market is highly volatile and often decisions must be taken in very short periods of time. Uncertainties are on all things, and even today we have the help of many tools and techniques, no one really knows what will happen with the market prices. Faced with a downward transaction, no one knows exactly how low will prices fall or how high they will rise, the question is how much will I risk. All this creates great anxiety and nervousness in forex operators, which often end up losing their money by making hasty decisions.

Control over your emotions and stress management

Given that everyone has access to the same information, the same news, the same numbers, indicators, statistics, etc… What makes the difference between winning and losing trad? The answer is that the former remain emotionally stable at all times. They can handle the pressure of risk and can control their emotions. They also understand that losing is part of the business. Trust in its methods and systems, giving them the peace of mind that losses are only small setbacks that will last a certain time and then be recovered.

The most important thing is to enter calmly and with confidence knowing that everything will turn out right. Planning in advance our strategies to operate on them will give us greater sense of security.

Controlling your emotions can be achieved through: Trust in the probabilistic model, to be psychologically prepared to lose, to operate without fear and self-criticism. We must not be satisfied with the way we trade, but we must investigate our errors and design techniques to overcome them. Keeping a log of errors is quite useful to shed bad habits and avoid falling back into them. All this as a whole guide will provide greater security and peace of mind in difficult times.

The question among the rookie traders is: When are you ready? That is, when you have enough knowledge (of both the market and ourselves), and when it becomes aware of what they learned and the sense of one’s own emotions into effect. That is, when there is awareness of one’s own inner states, resources and intuitions, and when you make a correct assessment of your own strengths and weaknesses as Traders. All this ends in one thing: confidence in oneself, valuing our skills and emotional.

Fear and greed: Two sides of a coin

Both can lead to losses even if the reasons are different.

FEAR: There is fear usually when there are down trending markets and traders can be carried away by despair. The impulse response in this case is to close all positions quickly to avoid further losses. The point here is that these movements are often market peaks that eventually reverse. The trader that acts calmly and beforehand verifies indicators and trends is more likely to take advantage of changes in the market and avoid losses. That’s why the best in these cases is to set a “stop loss” and respect it, because in “difficult” times you will not be thinking with total objectivity and reasoning.

GREED: This is contrary to the case of fear. Greed occurs when the gains are increased and the operator fails to distinguish a time when to get out of a position, always waiting to “get something closer to the market.” Of course this also has its peak before starting to fall, which in the best case scenario achieves minor gains and at worst … could even lose money.

To avoid falling prey to these emotions, the important thing here is to understand that both parameters, Stop Loss and Limit to be set before each transaction based on the fundamental and technical analysis of it, and then they must be RESPECTED.

Remember:
Stop Loss: how much am I willing to lose.

Limit: How much am I willing to earn.