It depends
on what you mean by getting rich. Being
rich will mean different things for different people. Yes, you can make money trading forex. The amount you can make will depend on your
skills as a forex trader.
To make money and grow your wealth in forex you first must have a winning strategy that will allow you to make consistent profit. A winning strategy is like having your own personal cash machine, in which you can get involved in the forex market and extract cash each day. When we talk about a winning strategy we mean that you have more winning trades than losing trade.
For example,
if you place 20 trades then you would want at least 11 out of these trades to
be winning trades. You will also want to
make sure that you have a win loss ratio of at least 3:1 to make money in forex.
If you are
trading a small account say $100 then it would take a long time to grow this
account. The risk you would use on this
account will be higher as well.
Let’s look
at an example. Let say you want to place
a trade that gives $1 per pip. Normally
professional traders only risk 1 – 2% of their account.
In this
case a 2% risk on $100 will be $2 ($100 x2%).
Based on your risk of $2 you would not be able to place a trade which
will give you $1 per pip and stay with your risk management guidelines unless you
have a large leverage on your account.
If not, you will have to increase your risk to
about 10% in order to place a trade that gives you $1 per point. I would not encourage you to increase your
risk to this amount, what I would encourage you to do is to reduce your
position size.
That is,
instead of you wanting to gain $1 per pip then you would change this to gain
.10 cents per pip.
If you place a trade which gives you .10 cents
per point then if the trade moves in your direction by 60 point you will only
make $6.
At this
rate you will not be making a lot of money is forex.
Let look at
an example of using a larger account say $50,000. A 2% risk on $50,000 is $1,000 ($50,000×2%). After you analyse your trader you realise
that if the trade does not go in your favour you will lose 10 pips/points.
Giving the
fact that your 2% risk is $1,000 you
could place a trader that each point it moves you will make or loss $100 that
is $1,000/10pips/points)
If this trade moves in your favour and you get the 60 pip/points that you are targeting and you now know that each point the trade move will give you $100 as calculated above, then you would make a total of $6,000 on this one trade, that is (60 pips/point x $100).
If you are able to find trade which will make consistent profit then if you place 10 trades of this nature you could make $60,000.
Therefore, the key to making money in forex is for you to learn a forex strategy that will allow you to make consistent profit, this does not mean that every trade you place will be a winner, as that is not possible in forex. You will have some loser but your loser will be within your risk management guidelines.
What you will notice from the example above is that if you win this will 6 times more that if you lose, which mean that when you make one winning trade, you would have to lose 6 times before all your winnings is taken away.
Take some time and first learn the basic, then learn a forex strategy that can give you consistent profit. When you are comfortable with your strategy then you can get a funded account, that is, you will be trading using other people money and not risking your own.
You have access to everything that you need to become a forex trader. The question is, do you have what it takes? You will never know less you get involved in this ever growing market.
How much do forex traders make a
day? Can I start forex with $100?
This will depend on the trader; the account size that they are trading; their risk management strategy; their win loss ratio; etc. If you are trading a $50,000 account and you place 5 trades a week and you lose 2 of these trades and win 3 trades.
Also let us assume that your loss in pips is 10 pips/points and your target is 30 pips or points, this give you a win loss ratio of 3:1 (30 pips/10 pips). On a £50,000 account with a 2% risk you can risk up to $1,000.
With your lost at 10 pips/points you can place a trade that give $100 per pip/point. Again, this will based on the currency pair you are trading. On the other hand if you win you will earn $3,000 per trade.
Using the details above in which you place 5 trades for the week and you win 3 and lose 2. Your winning trades will give you $9,000 ($3,000 x 3) and your losing trades will be $2,000 ($1,000 x 2). At the end of the week your net position will be $7,000.
What if you had an account size of £500,000, then you can work out how much you can make in a day. Again, without a winning strategy you will not make any money you will lose money. Therefore, as a beginner, you starting point is to take the time learn a forex strategy that will allow you to win most of the time.
Is forex trading really profitable?
Yes, forex trading can be profitable if you have a winning forex strategy. It is also risky and you can lose your money but you can manage your risk, by setting a daily loss, setting a loss per trade, etc, you can find more information on managing forex risk here.
If you are trading a large account say $1million with a 1% risk than means you can risk $10,000. If your loss in pips is 20 pips/points this means you can place trade that will give you $500 for every pip/point is moves in your direction based on the currency pair your are trading.
If your risk is 20 pips/points you will want to have a target of 3:1 that means that your target will 60 pips/points. Therefore, if you make one winning trade you will earn $30,000 ($500×60).
On the other hand if you lose one trade you would lose $10,000 ($500×20). As you can see for this example above if you have a winning strategy with at least 3:1 reward risk ratio and you manage your risk then forex trading will be profitable for you.
Can I
make a living trading forex?
Yes, you can make a living trading forex. You can also lose a lot of money trading forex. To make a living you need to learn and master a winning strategy. A winning strategy means that you win more than how you lose.
For example, every 10 trades you place you win 6 out of the 10. If you have a win loss ratio of 3:1 or more then in this case you will constantly be making money in forex.
How much
do you need to start trading forex?
If you have a winning strategy you don’t need any of your own money to start trading forex as a lot of investors will give you funds to trade.
Get information on how you can get funded to trade forex. There are a lot of different options available. If you do want to go down the funded account route then you need at least $25,000 to start with. You can start will smaller account and grow your account but this will take some time.
You are more likely to break your risk management rules with a smaller account. Professional traders usually risk between 1 and 2% of their account balance. On a $25,000 account, then will risking between $250- $500.
If you are trading on a 60 mins chart with an average risk of 20 pips/point. This means you can place traders that will give you between 12.5 to 25 pips per point. This will be based on the leverage you have on that account and also the currency pair you are trading.
As investors find creative ways to grow their wealth; a growing trend that will continue to grow is that of FUNDED ACCOUNTS provided for the forex trader and other traders. This is a WIN-WIN situation for both the investor and the forex traders.
The investor is spreading their risk by having a number of traders trading for them instead of having all their money in one place.
HOW CAN YOU BENEFIT FROM THIS??
For the forex trader, we have the best of both worlds. We don’t have to risk our own money and we get a share of the profits and all the
loss is accepted by the investor. What
more could we ask for!!!!! If money
was your problem that was preventing you from getting involved in this
lucrative market then you no longer have any excuse to get involved. There is a lot of money available that you
can access.
In our opinion, we think you will find a lot more investors getting involved in funded accounts. we think it’s much better than keeping their money in the bank at the moment.
WHAT YOU NEED TO DO RIGHT NOW……
If you have a forex strategy that you can use, then don’t delay, check out the available funding streams below.
If you don’t have a strategy to benefit from the market, then take a look at this FREE TRADING SYSTEM.
Some new traders like to be mentored and be a part of a community which I think is a excellent way of learning forex – if you are a new trader who would prefer this approach then you can get more information here.
Note – there a lot of different strategies to trade the forex market and not every strategy you come across will fit with your trading psychology, that is, why I am pointing you in the direction of a range of strategies that you can check out to see if it fits your trading psychology before you choose. You can find additional strategies here.
It don’t make any sense for you to get access to funds at this stage if you do not have a forex strategy that works. You are just wasting your time. Therefore take the time to learn a forex strategy.
Most new traders like to explore the internet searching for strategies. One thing I can assure you is that you will come across a lot of information which will result in information overload and therefore you become confused.
Why? The fact that you are new mean in most cases you don’t know what you are looking for when it comes to forex trading and this is the reason of the confusion. I have been in your shoes, so I am talking from experience. So I just ask you to take five mins out of your busy schedule to read this first before you proceed.
WHAT FUNDING IS AVAILABLE TO YOU….
Here at Forex for Beginners, we classify funded accounts in two broad categories.
Direct Access Funded Accounts
Evaluation Funded Accounts – Prove yourself first before you get access to funds to trade thier capital.
DIRECT ACCESS FUNDED
ACCOUNTS
These types of funded accounts are accounts in which you pay a monthly subscription and then you gain access to money in which you can start to trade straight away but you need to have a forex strategy for you to really benefit from this.
Below are companies that offer you direct access funded accounts.
First you have to pass a practical assessment before you get funded. That is, you need to prove that you can reach their profit targets without breaking any of their rules. There is no time limit to pass the practical assessment. Click any of the links for more information.
Profit share starts at 50/50 and goes up to
80/20 as you grow your account. The 80%
is for you the trader.
You sign up to start the practical
assessment. There are three accounts to
choose from in you which you pay a ONE
OFF PAYMENT, NO MONTHLY SUBSCRIPTION. The three accounts are as follows:
1) There is a US$25,000 in which the one off
payment is US$199.
2)There is a UD$50,000 in which the
ONE OFF PAYMENT IS US$250
3) There is a US$100,000 account in which the
ONE OFF PAYMENT IS US$350.
The profit targets that you have to meet is as
follows:
For the US$25,000 the profit target is US$3,000
For the US$50,000 the profit target is US$6,000
For the US$100,000 the profit target is
US$12,000
The weekly loss targets that you have to meet is
as follows:
For the US$25,000 the weekly loss target is
US$500
For the US$50,000 the weekly loss target is
US$1,000
For the US$100,000 the weekly loss target is
US$2,000
The maximum loss targets that you have to meet is as follows:
For the US$25,000 the maximum loss target is US$1,000
For the US$50,000 the maximum loss target is US$2,000
For the US$100,000 the maximum loss target is US$4,000
The maximum lot/position size that you must not exceed is as follows:
For the US$25,000 the maximum lot/position size is 2.5 lots
For the US$50,000 the maximum lot/position size is 5 lots
For the US$100,000 the maximum lot/position size is 10 lots
NOTE – In
addition to the ONE OFF PAYMENT, if you break any of the rules above you need
to reset your account. This will cost
you US$199 every time you have to reset your account.
You will need to reset your account if:-
You exceed weekly loss limit
You exceed maximum loss limit
You exceed maximum lot size
You do not use a stop loss on you open position
or pending orders
Hold open position over the weekend.
|
The company will accept all the loss, therefore NO RISK TO YOU.
FTMO has two stages before you get funded. They also have two risk levels, that it normal or aggressive that you can choose from based on the type of trader you
are. Once you qualify you
get 70% of the profit share.
Prove you can trade using a 30 days simulated account by:-
Hitting their profit target of 10% for normal risk and 20%
for aggressive risk
Stay within the maximum daily loss of initial capital
balance. The loss targets are
5% normal risk and 10% aggressive risk.
Stay within
their maximum loss targets. The maximum loss targets are 10% normal risk and 20%
aggressive risk. The targets are based
on the initial capital amount.
50%
of your trading days should be positive, that is, is you trade for 20 days, 10
out of the 20 day you must be positive – meaning you make money during those 10
days.
You have to choose a currency when opening an account. You can choose the $US or the EURO. The fee mentioned below is for the $US
dollar account. The fee varies based on
the risk level you choose.
Trading capital of $US10,000 you
pay $US155 for normal risk and $US250 for aggressive risk
Trading capital of $US25,000 you
pay $US250 for normal risk and $US345 for aggressive risk
Trading capital of $US50,000 you
pay $US345 for normal risk and $US540 for aggressive risk
Account growth is
possible. Your account will increase by 25% of your initial balance if you are
able to meet a profit target of 10% within 4 months. Two out of the 4 months must be positive
that is you must make money in those 2 months.
FEES PAID IS REFUNDABLE ON YOUR FIRST
PROFIT WITHDRAWAL
This stage is to check if you have a consistent
strategy. This is one of the key component to making
money in the forex market.
In this stage your profit
targets are reduced by 50% but your
trading days now increase from 30days
to 60 days. As I have mentioned
before, this stage is just to check that
you have a consistent strategy.
During this stage you have to trade a minimum of 10 trading days and 50%
of these day you should make money in order to get funded and become and FTMO trader.
After you pass both stages the only thing that you need to
comply with are as follows:
Maximum Daily Loss
Maximum Loss
Minimum Trading Days
There is NO PROFIT TARGETS
to achieve once you quality, but you need to make profit so you can withdraw
money and have a good time.
If you are new to trading and you are thinking of getting involved into the Foreign Exchange Market, it can be difficult to know where to start or who to trust as there is so much information available about the foreign exchange market. Foreign exchange trading is also know as FOREX or FX.
Bear in mind that there are a lot of marketing experts
who are also involved in this industry as well.
You may have a lot of question at this stage, similar to what I had when I just started, that you would like to be answered. The information you find on this site will answer some of them as I have been there. I researched a lot of information, purchase software, books, attended webinars, etc. Most of the information was useful, but not relevant to my goal of becoming a technical trader. A trader that uses candlestick patterns, price action, etc. to trade. In other words, technical trading is mostly visual, that is, you will be looking for a picture/pattern to form on a chart at the right location that will result in winning trades most of the time.
My aim on this site is to provide you with information
and explanation of the jargons used in the forex market and to keep you focused
on relevant areas that will assist you on your journey of becoming a technical
trader and let you know what must be included in a Forex Strategy.
To be frank with you there are three main areas that you will need to master to be a successful technical trader. The three main areas are as follows:
You need to learn about the Forex Trading Platform that you will be using to execute your Strategy.
After you have mastered a winning strategy and know how to execute it on your trading platform, the third and most important is your Trading psychology.
In order to help you achieve the main areas mentioned above, you need to have an understanding of the basic information and jargons listed below that you will hear all the time as your learn.
The Foreign Exchange Market also know as FOREX or FX
is just like any other market which involves buying and selling, but instead of
the buying and selling of goods or services, this market is involved in the
buying and selling of currencies.
The forex market is a decentralized or over the counter (OTC) market and is the largest market in the world by trading volume with an estimated trading per day exceeding $5trillion. Unlike other markets, the FOREX market is open 24 hours per day apart from weekends. It opens 10pm GMT on Sundays and closes 10pm GMT on Fridays.
On a daily basis individuals or companies all over the world are trading with each other. As a result they will need to convert their currencies into the currency of the country they are buying from in order to pay for goods and services. This will cause the demand for that currency to increase and will result in a movement in the price of that currency.
For example, if a company in Australia is buying goods
from a company in the US, the Australian company will have to covert its
currency into US dollars to pay for these goods. This will cause an increase in
the demand for US dollars which will affect its price.
As a FOREX trader your aim is to benefit from this price movement as it happens.
Undoubtedly, you have a lot of players in the FOREX
market all over the world such as central banks, investment banks, commercial
banks, hedge funds, market makers, commercial companies and retail forex
exchange traders to name a few. All these players in the market will cause the
price of a currency to fluctuate significantly.
What is a Bull Market
or Uptrend?
A Bull Market is a financial market that is going up.
This move up is called an uptrend. A bull market or uptrend is one inwhich the forex market is going up and keeps on
going up by making higher pivot highs
and higher pivot lows..
Diagram 1 below shows a candle stick chart without any labels on it so you can visualize what an uptrend looks like. Diagram 2 points out to you where the pivot highs and pivot lows are located. This is just for you to visualise that each pivot high that is formed is higher than the previous one and each pivot low that if formed is higher that the previous pivot low.
As of result of this
price behaviour a bull market or uptrend if formed. Remember technical
trading is mostly visual, not theoretical, therefore you should spend time
looking at different charts. You may also hear the term “the market is
bullish” meaning it’s in an uptrend.
Diagram 1
Diagram 2
What is causing the market to move higher and higher?
This happens as a result of the market having more buyers placing buy orders than sellers who are placing sell orders at that time or over a period of time. Remember that the forex market is just like any other market in which you have buyers and sellers. For example, if you were selling a product and you have a lot of people wanting to buy this product, what would you do?
You would want to achieve the highest price possible for this product, therefore you would let the market decide what price you will sell this product for. You will gather all the buyers into one location and let them bid for this product in order to get the highest price possible. As a result of the bidding process, the price for your product will increase. As the price increase some buyers will no longer be interested until you reach a price in which you are prepared to sell. It’s the same thing that is happening in a bull market.
What is a
Bear Market or a Downtrend?
A Bear Market on the other hand is a financial market that is going down. This move down is called a downtrend. A bear market or downtrend is one in which the Forex market is going down and keeps on going down by making lower pivot highs and lower pivot lows.
Diagram 3 below shows a candle stick chart without any labels on it so you can visualize what a downtrend looks like. Diagram 4 points out to you where the pivot highs and pivot lows are located. This is just for you to visualise that each pivot high that is formed is lower than the previous one and each pivot low that if formed is lower than the previous pivot low.
As of result of this
price behaviour a bear market or downtrend is formed. AgainRemember
technical trading is mostly visual, not theoretical, therefore you should
spend time looking at different charts. You may also hear the term “the market is
bearish” meaning it’s in a downtrend.
Diagram 3
Diagram 4
What is causing the
market to move lower and lower?
This happens as a result of the market having more sellers placing sell orders than buyers who are placing buy orders at that time or over a period of time. At some point this move down will come to an end, pause for a while and will either continue down or change direction and move up. This pause is what is called consolidation.
What is
Consolidation?
When you look at the charts you will come across areas on the chart in which the market is not in an uptrend or downtrend. When this is happening the market is in consolidation, that is, a period of time in which you have the same amount of buy orders and sell orders at that price in the market. This is also described as the market is moving sideways. See the diagram below that shows you what consolidation or a sideways market looks like. Again remember technical trading is mostly visual, I am sure you get this point now. With practice you will be able to spot these on any chart.
A consolidation can also come in the form of a trading range in that the price will move up to the previous high and then falls and then move down to the previous low and then bounce form that low. See diagram below that shows what a trading range looks like. You can see that every-time the price come to a pivot high (H) it falls from that point and every-time price goes down to a pivot low (L) it bounces from that point – thus forming a trading range.
BEAR IN MIND – as you will realize from the diagrams above, the market can only do one of three things, that is, move up, move down or consolidate/move sideways.
These market behaviour demonstrates how price behaves over a period of time in different markets. In other words, these charts show the price action of the different markets.
In the charts above the price action of a currency is demonstrated visually by what is called a candlestick.. Price action can also be demonstrated visually using a bar chart as well. The charts shown on this website will consist of candlestick candles..
Let talk some more about candlestick and what each point represents. I am not going into the history of candlestick here. You just need to know what the difference area represents. This will tell you who is in control at that time, that is either buyers or sellers.
A candlestick is a chart that represent price movement or price action over a given period of time. Every candle stick will show the opening price, closing price, the low price and high price for that period of time which can either be a 2mins, 5 mins, one hour, 2hours, a day, a week, a month etc.
Let examine a candlestick more closely. The wide section of a candlestick is know as the body and the ends are known as wicks. See an example of a candlestick below.
Bull Candlestick or Bull Candle
If the closing price of a candlestick is above that of the opening price then this candlestick is called a bull candle, see example of a bull candlestick or bull candle below. This candlestick indicates that there were more (buy orders) buyers in the market than sell orders(sellers) for that time period and as a result the price rose and close above the opening price. Remember as long as the closing price in above the opening price then there is no question to be asked, that candle is a bull candle.
Note – don’t think that all bull candle are blue in colour. This is just the default colour in the platform I am using. You will be able to choose the colour to represent bull candle in the forex trading platform that you will be using. If you don’t want to change the colour you can use the default that is in the forex trading platform. In addition, as long as the candle close above the opening price that candle will have a body. the body may be short or long depending on the distance the between the opening and closing price.
Bear Candlestick or Bear Candle
If the closing price of a candlestick is below that of the opening price then this candlestick is called a bear candle. This candlestick indicates that there are more (sell orders) sellers in the market than (buy orders)buyers and as a result the price is falling , see and example of a bear candlestick below.
Neutral Candlestick
If the closing price of a candlestick is the same as the opening price then this candle stick is called a neutral candlestick, it lacks direction. This candlestick indicates that there are equal amount of buy order (buyers) and sell orders (seller) which results in the closing and opening price remaining the same. See an example below.
The high price will always be at the top of
the candle and the low price will always be at the bottom of the candle
irrespective of which candlestick is
formed.
Having and understanding of what the candlestick or candlestick formations is telling you as a trader is VERY, VERY, VERY important for a technical trader. It is these formations that dictates where to place your stop loss order, when to enter or exit a trade in the forex market which you will learn in a forex strategy.
Let’s talk about
support and resistance. These are
possible areas on a chart in which the price will turn and go in the
other direction.
What is Support?
Imagine you are in a room with a tennis ball and you through the ball on the floor and it bounces off the floor. The floor becomes the support for the ball to bounce off. If forex, support is an area similar to the floor I just described, that is, when price comes down into this area of support it will bounce off and go in the other direction. Bear in mind that these are just areas on a chart that will form support for the price to bounce off. New support areas will form as price moves.
For example, a previous pivot high in an uptrend can form an area of support, take a look on the example below that shows this. As you will see the chart move up over the pivot highs and then comes back to that area and bounce off that area as denoted by the arrows labeled “bouncing off previous highs.”
A trend-line below the candlestick in an uptrend can be an area of support as well. See example below. The black line in the diagram is the trend-line, you will observe that as price comes back to the trend-line it bonces off it, that means the trend-line is acting a an area of support (floor).
Consolidation and moving averages can also act as areas of support as well.
Based on the diagrams above you should have noticed that a support (floor) is an area in which price is likely to turn(reverse) and go up when this area is reached or hit. Note, not all areas of support will cause the price to bounce (reverse) as some areas of support have a high probability than others. If this was possible then price would always be going higher and higher and you would not have a downtrend. Current price action will have to be assess when price come into support areas.
What is Resistance?
On the other hand if
you throw the tennis ball into the air it will hit the ceiling and fall. Resistance is similar to the ceiling, that
is, it’s an area on the chart where price will hit then falls from that area.
Bear in mind that there are different areas on a chart that can form resistance for the price to fall and new resistance areas will constantly be formed as price moves.
For example a previous pivot low in a downtrend can be an area of resistance. Notice the diagram below, point A shows the previous lows. You will notice that the price move further down below point “A” and then comes back up and fall as shown by the point “B”
A trend-line above
the candlesticks in a downtrend can be an area of resistance as demonstrated by
the black line in the diagram below. As
price come back to the trend-line it falls, therefore the trend-line is acting
as an area of resistance here.
An area of consolidation or moving average line can also act as areas of resistance as well in a downtrend.
Based on the diagrams above you should have noticed that a resistance area (ceiling) is an area in which price is likely to turn(reverse) and go down when this area (ceiling) is reached or hit. Note, not all areas of resistance will cause the price to turn (reverse) as some areas of resistance have a high probability than others. If this was possible then price would always be going lower and lower and you would not have an uptrend.
Demand and Supply
What is Demand?
This is amount of
people wanting to buy a particular product, service or currency. For example, if you have one product to sell
eg. A piece of rock from the moon and you have
1000 buyer wanting this product, you would want to sell this for the
highest price possible because the demand is high. Therefore you can see that when you have a
high demand for something the price is likely to go up.
If forex in you have a lot of buy
orders (buyers) for a currency that exceeds the number of sell orders (sellers)
the price will rise.
What is Supply?
This represent the amount of
product that is available on the market to sell. If you have a lot
to sell and not many people to
buy, then you will have to reduce your price to make it attractive
for people to buy. Therefore, you
see that excess supply is likely to cause prices to fall.
In forex, if sell orders exceeds
buy orders then the price of the currency will fall.
A time-frame is a period of time in which something occurs or is planned to take place. In forex you will be able to chose the time frame that you want to use, normally the one that you think is best for your trading style. You can choose the 2 mins time-frame, 5 mins, 1 hour, 4 hours, daily, weekly, etc. What this means is that the price which is captured and demonstrated via a candlestick chart is done within that time. For example, if you are looking at a 5 mins time-frame the open, high, low and closing price of that candlestick was captured within 5 mins. Each candle stick captures the price within block of 5 mins and the price relating to the time frame will vary until it is closed and then another 5 mins candle will start.
Note – with a good
trading strategy you should be able to use it on any time frame.
What is a Currency
Pair?
According to the oxford dictionary, “a currency is a system of money in general use in a particular country.” As the forex market is involved with the buying and selling of currencies, this means that you will need to exchange one currency for another. Therefore, a currency pair is a quotation of one currency in relation to another.
Below is a list of some of the symbols used for the
currency of different countries.
Country
Currency
Symbol
England
Great British Pound/Cable
GBP
Unites States of America
US Dollar
USD
New Zealand
New Zealand Dollar
NZD
Australia
Australian Dollar
AUD
European Union Member
Euro
EUR
Japan
Japanese Yen
JPY
South Africa
South African Rand
ZAR
Canada
Canadian Dollar
CAD
Let’s look at an example of a
currency pair in which the rate of the GBP/USD is 1.3529. The first currency in the currency pair (GBP)
is called the base currency and the second currency (USD) in the
currency pair is called the quote currency. In other words the price quoted in this
example (1.3529) indicates how much of the second currency/quote currency (USD)
is needed to purchase one unit of the first currency/base currency
(GBP). Therefore it takes $1.3529 US dollar (USD) to purchase one GreatBritish Pound (GBP).
Let’s look at another example in
which the rate of the USD/JPY is 109.10.
This means, it will take 109.10 YEN to purchase one unit of US
Dollar.
You can look at other currency pairs and interpret
them for yourself based on the information above.
Strengthening
and weakening of a currency.
A currency will strengthen and weakens each day as its traded on the Forex market based on the demand and supply of that currency. Using the GBP/USD example above which was at 1.3529. Let say it now takes $1.3626 US dollar to purchase one unit of Great British Pound, then the Great British Pound is getting stronger as it takes more US dollar to purchase one unit of the Great British Pound (GBP).
On the other hand, if it now takes $1.3429 US Dollar
to purchase one unit of Great British Pound, the Great British Pound is getting
weaker meaning it takes less US Dollar to purchase one Great
British Pound (GBP).
What is a
Bid and Ask Price?
Two prices are normally quoted in relation to a
currency pair. The first price in the quote is called the Bid Price and
the second price in the quote is called the Ask Price as shown in the
diagram below..
An ask price or offer price is the minimum price a
seller will accept for a given currency at a given point in time. It’s clear from the table above what is the
ask price for each currency pair. As you
will notice the ask price is the higher of the two prices in the quote.
A bid price is the maximum price a buyer will pay for
a given currency at a given point in time. It’s clear from the table above what is the bid price for
each currency pair. As you will notice
the bid price is the lower of the two prices in the quote.
Some trading platform
makes this easy for you they have a “BUY” and “SELL” button for you to press.
What is a Spread?
A spread is the
difference between the bid price and the ask price of a currency pair. The
price of a currency pair is normally quoted to 4 decimal points, or 2 decimal
points for currency pairs that includes the YEN (JPY). From the table above the prices are quoted
to 5 decimal places, the 5th place is called fractional pip. This make the pricing of the currency paid
more precise.
Let’s calculate the
spread for the AUD/CAD. For ease of
calculation we will only use 4 decimal places.
Therefore, the spread for the AUD/CAD is 3 pip (.9639-.9336). This means that if you have an account in
Canadian dollars, for every trade you place you will have to pay the broker
CAD$3 per pip.
Now you can take the
plunge and calculate the spread for the other currency pairs in the table
above.
A small spread
indicates high liquidity for that currency pair and a wide spread indicates low
liquidity for that currency pair.
As a forex trader, the spread is what you will pay each time you enter the market, therefore you would want to trade currency pairs with small/tight spread.
What is a Forex
Pip?
As a forex trader your aim is to capture as many pips or points as possible during a day, week or month. A PIP stands for Price Interest Point. It is the unit of measurement in a given currency pair. Most currency pairs are normally quoted to 4 decimal places and it is calculated based on the change in these numbers in the currency pair. Currency pairs that are linked to the JPY are quoted to two decimal places. For example if the GBP/USD moves within an hour from 1.3529 to 1.3579 then this currency pair has moved up by 50pips (1.3579 -1.3529).
Let’s look at another example, if the USD/JPY moves down within 5mins from 109.80 to 109.10, then this currency pair has move down by 70 pips (109.80-109.10).
Now that you know what a pip is you also need to know that the amount of money you will make from these moves will depend on the value of each pip for that currency pair. See how to calculate pip value
As you may have heard Forex carries a high risk and that mean you can lose more that what you invest. Forex is the most liquid market in the world and its very volatile. This along with leverage make it very risky. The risk will come about when you have very quick movements in the markets caused by macroeconomic news such as interest rates, inflation rate, GDP and unemployment rate announcements and other political and economic news.. All these announcement have the ability to cause prices to move quickly in a relatively short period of time. This means that if you do not set a stop and these announcement occur and cause the market to move against you then you can lose you entire investment and more. In addition you may set a stop loss and these announcements can cause the markets to go through you stop loss without it being triggered and you are likely to lose money. The converse is also true that if these announcements cause the market to move in your favor you can make a big profit.
How to mitigate the risk?
Set a daily risk level – if this risk level is reached during the course of the day then you stop trading for that day. The amount for this level can be 1-2% depending in the size of your account. If you have a £100k account this the amount that you would risk for the day is £1k to £2k.
Set a risk per trade – a risk level per trade is the amount that you would risk per trade. This could be a £ amount given the fact that you know your risk level for the day. For example you may want to risk a maximum of £200 per trade. Therefore given you daily risk level of £2k then if you have 10 losing trade you would have to stop trading for that day. For the following day you will have to do your calculation based on the balance on your account. If you have £98k left in your account then the 1-2% risk per day would now be £980 to 1,960 for that day ie (98k*1%) and (£98K x 2%)
Set a Stop Loss – a stop loss is a point in which you will exit the market if it goes against you. For example you may set a stop loss say 10 pips from your entry price. Therefore, if the market move against you by 10 pips you will lose £10 pound i the value of your position size is £1 per pip and the market does not move quickly.
Set a guaranteed stop – a guaranteed stop is a price that you will exist the market even if the market goes through your stop. Your broker gives you this guarantee that this is the price they will take your out of the market if the market moves against your. Therefore, what you have done is pass on the risk to your brokers. With these stops the broker usually determine how far from your entry price your stop should be. Not all brokers does this therefore you would have to resort to other means to mitigate your risk.
Reduce your position size– another way to mitigate your risk is to reduce your position size. For example, if you normally risk 10 pips per trade and trade 20 lots per trade then your total risk is pounds would be £200. If your risk per trade is still set at £200 but based on the trade you are about to enter your stop will be 20 pips away, if you are to maintain your £200 risk per trade then you would have to reduce your position size to 10 lots (£200/20 pips).
You may have a situation in which your risk per trade has reduced from £200 to £150 but your stop is 10 pips away in this case you can only trade 15 lots (£150/10 pips)
Limit your exposure in the market – this is basically saying you you should not keep your open trade for a long period of time. For example instead of keeping your open trade open for 4 hours you want to keep it open for an hour, 30 mins or 15 mins, etc. Bear in mind that your exposure to how long you spend in the market will depends on your trading strategy and the time-frame you are using.
What is Leverage in
Forex
Simply
put, leverage is the use of borrowed funds.
In
forex this borrowed fund is provided by the broker.
Example 1
For example, you have a mini account, in order for you to trade one lot you will need to have US$10,000 in your account. If you should deposit all of this money (£10,000) to trade one lot then you would not be trading using leverage.
Instead
of you depositing US$10,000, the broker provides this money for you to trade.
Before the broker gives you this money to control. They will require you to deposit money into your account. This deposit that will allow you to control US$10,000 is called the required margin. It is usually represented as a percentage which can be 2%, 1%, .5%, .25%. etc.
Therefore, if a broker requires a 2% margin before they give you control of US$10,000, you will need to deposit at least US$200 (US$10,000 x 2%) into your account.
If you only need to deposit US$200 to control US$10,000 then your leverage is 50:1 (10,000:200) the broker is putting up 50 times the amount you are depositing. Got it?
Example 2
You
still want a mini account but the broker’s
margin requirement is 1%. How much will you need to deposit and
what would be your leverage?
You
would need to deposit US$100 (US$10,000 x 1%)
Your
leverage would be 100:1, that is (10,000:100)
You
will observe from the examples above that a smaller margin requirement results
in a higher leverage.
Now
you are ready to calculate your deposit and leverage for the following margin requirements
of .5% and .25%.
Your
answer should be as follows:-
For
the margin requirement of .5%, your deposit would be US$50 and leverage is
200:1.
For the margin requirement of .25% your deposit would be US$25 and leverage is 400:1.
Example 3
You
have a mini account in which the margin requirement is 2% which works out to
US$200. You deposit US$600 into your account and place one trade.
After
you open the trade the broker will hold on to US$200 from your account as this
is the margin requirement of the broker. This amount that the broker
holds on to after you open a position is called margin used. You will get this
back after you close your position.
For
ease of calculation, let say you have US$400 left in your account as your
deposit was US$600, The amount left in your account is called free margin or usable margin, meaning
you are able to place more traders using this free margin or usable margin.
if
you go ahead and place another trade, your margin used will increase to US$400 and
your free margin
or usable margin
will reduce to US$200.
Reward/Risk Ratio
Your risk reward ratio is the amount you expect to earn compared with the amount you expect to risk. This can be calculated using the number of pips or using a $ amount.
A normal ratio of 3:1 for short term trades or 5:1 for long term trade is a good benchmark to use. For example if you are risking 10 pips then a 3:1 reward/risk ratio means that you need to be aiming to achieve 30 pips (10 pips *3) , that is 3 time more than your risk. A 5:1 reward/risk ratio mean that you should be aiming to achieve 50 pips that is 5 times more than your risk.
Bear in mind that if you are using the pip method to calculate this, then both reward and risk must be in pips. If you are using the £ method to calculate this then both reward and risk must be in £ before you make the comparison.
There are two types of analysis that can be done on the financial markets. They area Fundamental and/or Technical analysis.
Fundamental analysis is one in which the direction of the market is analyses using financial and economical factors from the Federal Reserve, Central Banks and marco economic news for different countries, such as interest rate, inflation rate, gross domestic products non farm payroll, etc. along with other factors. The analysis take a long term view of the direction of the market. This is normally done by investment banks, hedge funds, etc. Example of economic news that affects the Forex markets are as follows:
Most large financial institution based their trading
using fundamental analysis. Traders who
uses this method of analysis are known as Fundamental Traders.
Technical analysis is one in which the market direction if being analyses based on price movement represented by candlestick on a chart, chart patterns and the use of technical indicators. The need to be aware of when new occur but their focus in not to trade the news announcement. Traders who uses this method to analyse the market are know as Technical Traders and normally take a short term approach. Information on this website is focusing on those who want to be a technical trader. If you would want to learn more about fundamental trading, that trading like an investment bank please sign up below for further information.
Types of
Traders
There are four categories of traders. There are the scalpers, day trader, swing
trader and the position trader.
The
Scalper
The scalper is trader whose aim is to capture a few
pips/points in seconds to minutes through out the course of the day.
The Day
Trader
This traders enter the market many times during the
day but hold on to their trades for a longer period that the scalper. They may hold a trade for a few minutes to a
few hours through the day.
The Swing
Trader
This type of trader will hold a position for a few
days
The
Position Trader
This type of trader will hold a position for a few
weeks or months.
Forex Trading Times UK
The Forex market
opens 24 hours per day except on weekends.
It opens at 10pm GMT on Sundays and closes at 10pm GMT on Fridays.
As this is the most liquid market in the
world, you will have more people trading when market times overlap.
Based on the time difference for the different continent this usually results in an overlap or trading time. An overlap or trading times is where markets in both continent are open at the same time for a period of time.
These times are considered to be the best time to trade as there is a lot of volatility and liquidity in the markets during these time. This does not mean that you cannot trade outside these overlap times.
See diagram below that shows you when markets time overlap. The markets we are talking about is the Asian, Australian, European and the American markets. As you will notice for the diagram below, Sydney/Toyko overlap with London from 7am to 8am. The next overlap period is between London and New York from 12 noon to 4pm. During these time volatility and liquidity can be very high. Volatility and Liquidity is a traders best friend.
FOREX NEWS
There an news about
an economy that will affect the price of that currency and sometimes other
currencies.
Most sites that gives
news information will give you the option or show you which news item have an
low, medium or high volatility on the forex market. New that result in high
volatility can sometimes move the price of a currency by 60-100 or more
pips/points in a few seconds or minutes.
Your forex strategy will give you further information as to what you should do when a major news announcement are pending.
For now, as a new trader when major news are about to be announced, just sit back and watch what happens to prices after the announcements.
Some of the news
items that can have big impact on the price of a currency are:
Most forex platform
will also have information relating to forex news.
What is Trading psychology?
Read very carefully ignore at your own peril!!! Having a good strategy and knowing how to use you platform is very good. But in order for to constantly make money your trading psychology must be correct. Trading psychology has to do with your emotions and subconscious. The ideal trading psychology is that you always follow your trading strategy and be calm and collected when doing so and accept your loss. In other words, there should be no emotion involved in this process. This can be the hardest thing to achieve. If you are doing any of the following listed below, just to name a few, on a regular basis then this is an indications that your trading psychology needs to be improved, if this continues then you are going to BLOW you trading account, so you may need to get help from a professional.
You don’t follow your trading rules
Take profits too early
Set your stop too close or set it too far away
and
In order to execute your Forex Strategy, you will need to to find and sign up with a broker in order to get access to a platform to do so. Irrespective of which platform you sign up to use, you should be able to do the following within that platform.
You should be able to open a BUY position at market
You should be able to open a SELL position at market
But, what does “BUY” and “SELL” means in Forex
You should be able to set orders; both Stop and Limit orders
What is an Entry Order
What is a Market Order
What is a Limit Order
What is a Stop Order
You should be able to choose indicators if your strategy requires it.
You should be able to add stop loss and limit orders to an open position just in case it was not done at the point of placing the order.
You should be aware and know how to calculate the spread, if it is not shown, for a currency pair that you want to trade as this is how much it will cost you each time you place a trade.
What does “BUY” and “SELL” means in Forex
As I mentioned before the forex market is just like any other market in which you have buyers and sellers but what is being bought or sold in this market is not goods or services, it is currencies that are being bought or sold.
In a regular market if you buy goods in order to dispose of these goods you will have to sell. You can either sell at a profit, i.e you sell for a price higher than what you bought at or you can either sell at a loss, i.e you sell at a price lower than what you bought.
The forex market is no different. If you predict that the market will be going up you will have “BUY” in order to benefit from this move. In order to get out of this BUY POSITION you will have to SELL.
As mentioned above, in order to get out of your BUY POSITION you can SELL at a profit if the market goes in your direction, in forex you would place what is know as a LIMIT ORDER (TAKE PROFIT) at the price in which you want to get out of this BUY POSITION to make a profit.
On the other hand you can SELL at a LOSS if the market does not go in your predicted direction. In forex, you would place what is known as a STOP LOSS OR STOP ORDER at the price at which you want to get of of this BUY POSITION thus making a loss.
See diagram below that demonstrates how this would be represented on a chart.
YOU NEED TO PAY CAREFUL ATTENTON TO THIS
Not only can you make money when the market is going up in forex, you can also make money when the market is going down. CAN YOU BELIEVE THIS!!!!!! WOW! This is what can be confusing to new forex traders.
In order to benefit from the market when it is going down, instead of buying first you will have to SELL first.
In order to get out of thisSELL POSITION you will have to BUY.
If the market goes down in your favor you will BUY to get out of this SELL POSITION thus making a profit. The price which you set to exit the market is called your LIMIT ORDER (TAKE PROFIT) in forex.
If the market goes against you, that is, it goes up you will still have to BUY to get out of your SELL POSITION. You will then make a loss. The price which you set to exit the market is called your STOP LOSS. It’s basically the opposite to what happens when you are in a BUY Position.
See diagram below that shows how this will look on a chart.
What is an Entry Order?
An entry order is one that allows
you to open a position in the forex market.
You can either open a BUY POSITION if you think the market is going up
or you can either open a SELL POSTION if you think the market is going
down.
There are three types of entry
orders, they are:
Market orders
Limit orders or Limit
Stop orders or Stop
loss or stop order loss
What is a Market Order?
A MARKET ORDER is an order that
allows you to get into the market at the current price at this point in time.
Therefore you will either press your BUY or SELL button to open a position.
PLEASE NOTE! THE POSSIBILITY EXISTS THAT YOUR ORDER MANY
NOT BE FILLED OR PARTIALLY FILLED BASED ON THE LIQUIDITY OF THE MARKET AT THAT
POINT IN TIME.
PLEASE NOTE! BEFORE YOU PLACE
YOUR MARKET ORDER OR ANY ORDER AT ALL YOU NEED TO FIRST CALCULATE YOUR RISK AND
DETERMINE YOUR POSITION/LOT SIZE.
What is a Limit Order?
Unlike a market order a LIMIT
ORDER is an order that allows you to enter the market at a price that you
want. It is an order that you set to SELL
above the current market price (SELL LIMIT ORDER) or an order for you to BUY
below current market price (BUY LIMIT ORDER)
What is a Stop Order?
Unlike a market order a STOP
ORDER is an order that allows you to enter the market at a price that you
want. It is an order that you set to SELL
below the current market price (SELL STOP ORDER) or an order that you set
to BUY above the current market price (BUY STOP ORDER)
PLEASE NOTE! IF YOUR LIMIT ORDER IS REACHED YOUR POSITION WILL BE CLOSED AND AS A RESULT YOUR STOP ORDER THAT IS LINKED TO THAT SAME POSITION WILL AUTOMATICALLY BE CLOSED AS WELL.
ON THE OTHER HAND IF YOU STOP ORDER IS REACHED YOUR POSITION WILL BE CLOSED AND AS A RESULT YOUR LIMIT ORDER THAT IS LINKED TO THE SAME POSITION WILL AUTOMATICALLY BE CLOSED AS WELL.See table below showing stop and limit entry orders.
STOP AND LIMIT ENTRY ORDERS
Buy/Long Position
Sell/Short/Go Short
Above Current Price
Buy Stop Order
Sell Limit Order
Below Current Price
Buy Limit Order
Sell Stop Order
The MT4 platform used the orders above.
An easy way to remember is as follows:
Need to place an entry order above current price – just remember this – BS SL
Need to place and entry order below current price – just remember this – BL SS.
BS stands for buy stop
SL stands for sell stop
BL stands for buy limit
SS stands for sell stop
PLEASE NOTE! ONCE YOU HAVE A POSITION THAT IS OPENED WHICH CAN EITHER BE A BUY OR SELL POSITION, THE LIMIT AND STOP ORDER S THAT ARE LINKED TO THIS POSITION ARE USED AS EXIT ORDERS, THAT MEANS THESE ORDERS ALLOWS YOU TO GET OUT OF THAT POSITION.
THE ORDERS THAT ARE IN THE TABLE ABOVE IS WHAT YOU WILL USE TO ENTER THE MARKET AT YOUR PREDETERMINED PRICE AND NOT AT THE CURRENT MARKET PRICE.
Now that you have an understand of the information above you can open a live account to see how price behave in live market conditions. You can then fund the account when you think you are ready to trade as forex carries a high risk. Opening a live account will give you access to everything that is happening in the live markets. Some demo accounts don’t give you access to all information. You can do this by clicking on the banner below or at the top of this page. Note – each platform has it’s own training material relating to the platform, therefore, you will need to go through the trading platform training to fully understand how the platform works.
No matter what strategy you will be learning or developing you must be able to identify the following within that within that strategy.
What condition must be present before you enter the market – this is know as your setup conditions, if these are not present, then you will not enter the market.
How to enter the market – you strategy will tell you how to enter the market. You can enter by placing an market order or an entry order.
Where should you place your stop order or stop loss if the market goes against you
Where should you place you limit order to get out when the market moves in your direction.
How do you manage your risk or manage the trade?
You must to back test the strategy – that is you can look at information in the past and check how the strategy would have performed.
You should be able to use the strategy on all time frames.
There are many different strategies that you can use to trade the forex market. A lot of information is available on the internet as well. You can also develop your own strategy. This will definitely cost you money and time. If you are interested in educating yourself on learning a few simple strategies to use in the market straight away then click here.
Alternatively, you could learn from a person who has a tried and tested strategy, that is, a person who is a trader as well. This will allow you to hit the ground running. Below you will find a few strategy that you can learn. Take you time to see which one will fit your trading psychology. Trading takes time but when you have a strategy that gives consistent profit, this is like having your own cash machine. We we talk about consistent profit we mean that the amount of time that you have a winning trade is greater that the amount of time that you have losing trade. Then end result is that you will be making profit.
As I mention above one of the best way to learn forex trading is to have a mentor who will teach you how to trade the forex market in LIVE trading conditions. When you click the link below, it will take you to a new page in which you will be able to review the forex training on offer.
The are a number of courses that you can choose from. You can also choose to EARN WHILE YOU LEARN, that is, you can copy the trades of your mentor and make money while you do the course. Well, this seems to good to be true, but it is! No need to rush, take your time and review which course you think would be best for you and ask Rob as many questions as you like before you decide on learning his Price Action Trading Strategy
The price action trading strategy is more focused on technical trading with minimal emphasis on the fundamentals. On the other hand if you would like to focus more on the fundamentals of trading and gain aDIPLOMA and a GUARANTEED JOBat the end of your training the you use this link “TRADE LIKE A BANK”. You will be taken to a new page in which you will get more information on the course.
If you really want to be a forex trader, then you won’t be able to avoid learning a forex strategy as this is one of the key component. Therefore, take you time and check out what’s on offer.
If you already have a winning strategy for making consistent profit then check out ourfunded account section,in which you can get access to funds from investors who will accept all the losses you make. Funded accounts is a sector which is growing real fast and this will only continue to grow as investors seek out forex and other traders who are good at what they do.
HOW TO CALCULATE PIP VALUE WHERE THE SECOND CURRENCY IN THE CURRENCY PAIR MATCHES THE CURRENCY OF YOUR TRADING ACCOUNT
If your trading account is in US dollars and you are trading a currency pair in which the second currency is US dollars as well then the pip values below would apply based on the account type that you have.
If your account type is a standard lot account one pip would be US$10per pip
If your account type is a mini lot account one pip would be $US1 per pip
If your account type is a micro lot account one pip would be .10cents per pip.
For ease of calculation we will assume that you have a mini lot accounts in which the value of one pip is USS1 per pip if the second currency in the currency pair is the same as the currency as your account.
Example 1
Let’s look at some examples using your USD mini lot account. What’s the pip value for GBP/USD, NZD/USD, EUR/USD. Your answer should be US$1 per pip as the second currency in the currency pairs matches that of your account (US dollar mini account).
Example 2
If you trading account is not in US Dollar, let say your trading account is in GBP. What would be the pip value for the following currency pair – EUR/GBP. The answer would be £1 per pip. Why? Because the second currency in the currency pair matches that of the mini lot account Great British Pound (GBP).
PIP VALUE WHERE THEFIRST CURRENCY IN THE CURRENCY PAIR MATCHES THE CURRENCY OF YOUR TRADING ACCOUNT
Example 3
We are still using our US$ mini account. What is the pip value for USD/JPY? In this example, the second currency in the pair is not USD but the first currency is, in this situation you will have to calculate the pip value by dividing the fixed pip value amount US$1 for mini lot USD account by the rate for the USD/JPY.
Pip value = US$1 (fixed price for mini lot account) / rate of the currency pair
If the currency pair includes the JPY then you will have to multiply your result by 100 to get your pip value.
Let’s assume that the rate of the USD/JPY is 109.05. The the pip value for the USD/JPY is using the formula above is-
Pip value = US$1 / 109.05 multiply by 100
Pip value = .92 cents per pip
Example 4
Let look at another example, what’s the pip value for USD/CAD? Note the second currency in the currency pair is not USD but the first currency is, therefore you will divide the fixed price of US$1 for mini lot by the rate for the USD/CAD which is 1.2846. Your answer would be .78cents per pip (US$1/1.2846) In this example you do not need to multiply by 100 as the currency pair does not consist of JPY.
PIP VALUE WHERE NEITHER THEFIRST NOR THE SECOND CURRENCY IN THE CURRENCY PAIR MATCHES THE CURRENCY OF YOUR TRADING ACCOUNT
Example 5
Let say, you have mini lot account is in Australian Dollar (AU$) and you would like to find the pip value for the GBP/USD?
Please note – none of the currencies in the currency pair matches the currency of the account you are using – Australian Dollar (AU$).
First convert the second currency in the currency pair (USD) to the currency of your mini lot account AUD.
In order to do this you will need to use the currency for the account as the first currency and maintain the USD as the second currency. You will now have a new currency pair that is AUD/USD.
Second, find the rate for your new currency pair (AUD/USD) Let’s assume the rate is .7500.
Finally, divide the fixed mini lot price AU$1 per pip by the new AUD/USD rate of .7500, therefore your answer would be AU$1.33 per pip (AU$1/.7500)
Example 6
Let’s look at another example using your Australian Dollar mini account. What is the pip value for the EUR/JPY?
Please note – none of the currencies in the currency pair does not match the currency of the account.
First convert the second currency in the currency pair (JPY) to the currency of your mini lot account AUD.
In order to do this you will need to used the currency for the account as the first currency and maintain the JPY as the second currency. You will now have a new currency pair that is AUD/JPY.
Second, find the rate for your new currency pair (AUD/JPY) Let’s assume the rate is 82.19.
Finally, divide the fixed mini lot price AU$1 per pip by the new AUD/JPY rate of .82.19, therefore your answer would be .0122 (1AU$/82.19). As this currency pair includes the JPY you will need to multiply your answer by 100 to get the pip value, Therefore the pip value is AU$ 1.22 per pip (.0122*100)
Now take the plunge and do some further examples on your own for practice!!!!!
Position size is VERY, VERY, VERY important when in comes on to risk management. Position size is also called lot size. It is the number of position/lots you are able to trade within your risk management guidelines. Professional traders have a maximum risk of 1 or 2 % of account balance.
In order to determine the position size there is some preliminary work that needs to be done.
Assume you have the set up conditions based on your strategy, you first need to establish how much is 1% or your account balance.
Let’s assume you have a $10,000 USD mini account. Your 1% risk in $ is US$100
($10,000 multiply by 1%).
Now that you know your risk in US$ you need to establish where you will place your stop loss order (the point at which you want to get out of a trade if it goes against you). Knowing where to put your stop loss order in advance is very important for calculating your position size.
You will also need to establish your entry price. The difference between your entry price and your stop loss order is your risk in pips/points.
When you have all of these information you will be able to calculate your position size using the following formula:
Risk in Dollars divide by risk in pips divide by pip value = POSITION SIZE
Example 1
Let take an example, you have a US dollar account amounting to $10,000 and you only want to risk 1% of your account balance which is $100 ($10,000*1%).
You get your set up condition on the GBP/USD. You identify that you need to place your stop loss at 1.3500 and that your entry price is 1.3530. From this information you are able to calculate your risk in pips/points. In this example your risk in pips is 30(1.3530-1.3500*10,000)
You now need to establish the pip value for the GBP/USD currency pair. As the second currency in the currency pair matches that of the account you are trading then 1 pip in a mini lot account would be equal to $1 per pip.
Now that you have all three pieces of information you are now able to calculate your position size.
Position size = Risk in dollars divide by risk in pip divide by pip value
Position size = £100 divide by 30 divide by 1
Position size = 3.33
This means that for every 1pip movement your account will be increasing/decreasing by US$ 3.33 per pip.
The fact that you are only risking 1% of your account size means you will have 99% of your money left in your account for you to trade again if your trade goes against you.
PLEASE NOTE! BEFORE YOU PLACE A TRADE, CHECK YOU ACCOUNT BALANCE AND CALCULATE YOUR 1% RISK AS YOUR ACCOUNT BALANCE WILL KEEP ON CHANGING.
Example 2
Let take an example, you still have your US dollar account amounting to $10,000 and you only want to risk 1% of your account balance which is $100 ($10,000*1%).
You get your set up condition on the USD/CAD. You identify that you need to place your stop loss at 1.2845 and that your entry price is 1.2870.
From this information you are able to calculate your risk in pips/points. In this example your risk in pips is 25 (1.2870-1.2845*10000).
You now need to establish the pip value for the USD/CAD currency pair. As the second currency in the currency pair does not match that of the account you are trading but the first currency does then you will have to calculate the pip value by dividing the fixed amount for mini lot I.e $1 by the USD/CAD rate of 1.2870. This will result in a pip value of .77 cents per pip. ($1/1.2870)
Now that you have all three pieces of information you are now able to calculate your position size.
Position size = Risk in dollars divide by risk in pip divide by pip value
Position size = £100 divide by 25 divide by .78
Position size = 5.13
This means that for every 1pip movement your account will be increasing/decreasing by $5.13
per pip.
Example 3
Let take an example, you still have your US dollar account amounting to $10,000 and you only want to risk 1% of your account balance which is $100 ($10,000*1%).
You get your set up condition on the USD/JPY. You identify that you need to place your stop loss at 109.00 and that your entry price is 109.70.
From this information you are able to calculate your risk in pips/points. In this example your risk in pips is 70 (109.70-109.00*100).
You now need to establish the pip value for the USD/JPY currency pair. As the second currency in the currency does not match that of the account you are trading but the first currency does then you will have to calculate the pip value by dividing the fixed amount for mini lot I.e $1 by the USD/JPY rate of 109.70 *100. This will result in a pip value of .77cents per pip ($1/109.70*100)
Now that you have all three pieces of information you are now able to calculate your position size.
Position size = Risk in dollars divide by risk in pip divide by pip value
Position size = £100 divide by 70 divide by .77
Position size = 1.86
This means that for every 1pip movement your account will be increasing/decreasing by $1.86
per pip.
Now you are ready to practice some examples on your own, so that you are able to do this quickly. Keep referring to these examples if you have to.
Forex risk management very important. Before you can manage your forex risk you first need to know how to calculate it.
Forex risk is very easy to calculate. Let’s look at an example. Say, you have a trading account with an account balance of $100,000. Based on your forex strategy you will set a daily risk level of 2%. Therefore, your daily risk based on the example above is $2,000 ($100,000 x 2%).
Let’s expand on this example. You made a number of winning trades during the day which increase your account balance to $105,000. Your risk percentage remains the same at 2%, but the fact that your account balance has increased means that you will be able to risk some more. the next day. Therefore, your daily risk would now be $2,100 ($102,000 x 2%).
On the other hand let says you had a few losing trades which reduce your account balance to $97,000. Your risk percentage remains the same at 2%. In this example your account size has reduced, so the amount you will be able to risk will also reduced as well. As a result your daily risk will now be $1,940 ($197,000 x 2%).
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