Monday, 30 December 2013
Monday, 23 December 2013
Sunday, 15 December 2013
Wednesday, 11 December 2013
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Monday, 25 November 2013
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Monday, 11 November 2013
Tuesday, 5 November 2013
Tuesday, 29 October 2013
Tuesday, 22 October 2013
Friday, 11 October 2013
Monday, 1 April 2013
Practice Exercise #3 (Money Management Test on DEMO)
If you started this Practice Exercise #1 you probably notice that this isn't working on ranging market (we had some examples of 5% losses on the last couple of days, due to Cyprus situation).
Testing this, with a SL=30p, we notice that in a range market of let's say 50p, our profit target of 90p is almost impossible to reach even if our position run in profit, for a while. And the SL will be hit, eventually, unless the PA will break any side, to have that 50% to catch the new trend (based on flipping the coin math probabilities).
The first idea that we can think of, to improve the initial exercise, is to use the Position Management (to "lock the profits").
NEW:
The second idea that we can think of, is to use a double number of pips as SL = 60p. And of course to double the TP = 180p, as well. The reasons behind this are described here.
In order to keep the same MM, we can't use 20 opened positions like in the Exercise #1 (since we've doubled the SL and we need to keep the same % of loss per trade ). Then, we will have the next steps for this new exercise:
1. Open a DEMO account = $10,000 (or continue to use the old one)
2. Take a coin (yes a coin).
3. Establish which coin sides will give you the signals. E.q head = long, tail=short
4. Open 10 pairs on your platform (NEW)
(only pairs for not ruining the margins requirement. e.q no gold/silver/oil/indices, etc)
5. Flip the coin for first pair.
6. Enter (market order) using 0.01 lots (0.1 for $100,000 account), SL = 60p, TP =180p (NEW)
7. Go to the next pair and do the same entry technique, then the next...until 10 pairs (not 20 like in the previous exercise).
8. After having 10 opened positions, stop trading (NEW)
9. If any position run in profit, move the SL = Entry ± Spread ± few pips or use Trailing Stop
10. Let all the positions to run, until the new SL/TP hit.
11. If any position is closed (TP/SL hit), on the next day, open a new trade by flipping the coin, again (and move, the SL, for the profitable positions).
As I expected, the last week exercise didn't offered us enough published results, due to the people lack of time (jobs, etc). As soon as I will have it, I will update it on the Exercise #2 post.
The result for this Exercise #3 will be published here, as soon as I will have it, as well. Probably this exercise will take us 2 weeks, since we've doubled the SL and TP levels (no of pips). If we will still have a range market, it will be hard to have sooner, some closed trades to count for it.
Best Regards,
Sunday, 24 March 2013
Practice Exercise #2 (Money Management Test on DEMO)
If you started this Practice Exercise #1 you probably notice that this isn't working on ranging market (we had some examples of 5% losses on the last couple of days, due to Cyprus situation).
Testing this, with a SL=30p, we notice that in a range market of let's say 50p, our profit target of 90p is almost impossible to reach even if our position run in profit, for a while. And the SL will be hit, eventually, unless the PA will break any side, to have that 50% to catch the new trend (based on flipping the coin math probabilities).
The first idea that we can think of, to improve the initial exercise, is to use the Position Management (to "lock the profits").
Therefore after the step no8 ("± Spread ± few pips (i.e. 5p)
Or we can use a Trailing Stop = Initial SL ± Spread ± few pips (In case you can monitor the platform)
(Ofcourse you need to calculate this for every pair, since the Spread can vary from 2p up to +25p or more, for some pairs.)
Then, we will have the next steps for this new exercise:
1. Open a DEMO account = $10,000 (or continue to use the old one)
2. Take a coin (yes a coin).
3. Establish which coin sides will give you the signals. E.q head = long, tail=short
4. Open 20 pairs on your platform
(only pairs for not ruining the margins requirement. e.q no gold/silver/oil/indices, etc)
5. Flip the coin for first pair.
6. Enter (market order) using 0.01 lots (0.1 for $100,000 account), SL = 30p, TP =90p
7. Go to the next pair and do the same entry technique, then the next...until 20 pairs
8. After having 20 opened positions, stop trading.
9. If any position run in profit, move the SL = Entry ± Spread ± few pips or use Trailing Stop (NEW)
10. Let all the positions to run, until the new SL/TP hit.
11. If any position is closed (TP/SL hit), on the next day, open a new trade by flipping the coin, again (and move, the SL, for the profitable positions - NEW).
I expect the results to vary, because not everyone can monitor their trading platform, during the day trading sessions (i.e. NY, London). Also, for the Trailing Stop command, the trading station must be on (computer).
I will update here, the average results posted by all of you in my Main Facebook Group, on the end of the next week. We will look for developing new ideas (new exercises) to improve the original statistic, too.
Best Regards,
Thursday, 21 March 2013
Practice Exercise #1 (Money Management Test on DEMO)
Negative account balance = NONE / week
* Total no of trades (and profits) are related to the time invested in testing this strategy. Some traders couldn't monitor their trading platform whole days, due to their daily schedule, jobs, etc. So their closed positions were spot in the next day, only (to open a new trade / that pair). This decrease their total no of trades, pips and profits.
Conclusions:
As I expected, nobody had a negative account balance / week, by now. Ofcourse mathematicaly, this is possible, but rare (using math probabilities). But the Draw Down wont be higher than 5% ( Signals Providers, offer a DD of max 15%, usually)
And as you can see, by using a good MM and a very bad strategy, or none - flipping a coin is just luck - you can still trade profitable, as a beginner.
The profits, can't be considered "spectacular", thinking that we are using for this exercise a $10,000 account. But if we will remember that by trading Forex, 95% of the traders wipe out their accounts in less than 3 months... (some statistic data present this no even higher, close to 99%).
Wednesday, 27 February 2013
Understanding the Money Management in trading
I've always emphasized the importance of the MM in Forex, in my articles. Yet, many people failed to understand it properly.
Therefore I will take it, again, step by step from the basic theory.
Currencies Rates
The currency Rate is the value of one currency expressed in terms of another.
Common rates can be seen as: EURUSD = 1.3025
This can be read as 1 EUR = USD 1.3025
The first currency (EUR in our example) is the "Base currency" and the second one (USD in our example) is the "Quote currency".
Bid and Ask prices
EURUSD = 1.3025/1.3027
The first rate (1.3025) is the "Bid" and the second one (1.3027) is the "Ask"(Offer).
If you want to "Buy" the "Base currency" (EUR) and "Sell" the "Quote currency" (USD), you will use the "Ask" price.
If you want to "Sell" the "Base currency" (EUR) and "Buy" the "Quote currency" (USD), you will use the "Bid" price.
The difference between Bid and Ask is called Spread (in our example spread = 2 pips).
Pip
Pip = The smallest price movement on a currency. Also known as a "Tick size".
e.g. 1 pip = 0.0001 for EUR/USD, and 0.01 for USD/JPY.
Leverage & Margin
Leverage = multiplying factor that allow you to trade more money than you have into your account.
Margin = the amount of money, necessary to open a trade
E.q:
Leverage 1:50 = 1/ 50x100 = 2% Margin (requirement)
Leverage 1:100 = 1/100x100 = 1% Margin (requirement)
Leverage 1:200 = 1/200x100 = 0.5% Margin (requirement)
So let's say you want to trade $100,000. By using a Leverage of 1:100, that means you will need a margin of just $1,000 (1%).
Trading using the Leverage might work in your favor if you are right, but can also take you to the bankruptcy, if the trade goes against you.
Here is an example:
Trader 1 have Initial Account balance = $3,000
Trader 2 have Initial Account balance = $10,000
Trader1 use as Leverage = 1:200 = 0.5% Margin = $500
Trader1 use as Leverage = 1:50 = 2 % Margin = $2000
Trader1 and Trader 2, want to buy $100,000, each.
Scenario 1:
Lets say both traders are right and their trade work in their favor with +100p = + $1,000
For trader 1 = +33.3% from Account Balance
While for Trader2 = +10% from Account Balance
Scenario 2:
Lets say their trade went against them with -100 pips = -$1,000 from the Initial Account Balance.
For trader 1 = -33.3% from Account Balance
While for Trader2 = -10% from Account Balance
Conclusion:
Even if for some traders looks more profitable to use higher Leverage, due to their small accounts, if their trades work against them, this will ruin their account. Ofcourse they might be tempted to use a high Leverage (smaller Margin) so they can trade a much higher volume.
Lot size
In Forex, we dont use Base currencies for the trade volumes. We use Lots.
1 Lot = 100,000 units (full Lot)
0.1 Lot = 10,000 units (mini-lot)
0.01 Lot = 1,000 units (micro-lot)
In our previous example is obvious that if the trade work against you, and you traded a huge volume, the loss is highly important, as the expected profit.
Trader 1 have 3 potential negative trades until he will ruin entirely his account. While Trader2, can afford 10 trades, for that.
You know what they say: "A rich man is a man who can survive longer, without having anymore income". Same as in trading. It doesn't matter how much you can pull out of a trade, but how many negative trades you can take and still be in the market.
Risk/Reward Ratio
Also known as R:R ratio, it means the ratio between expected profits and potential losses.
I don't recommend a R:R lower than 1:3. That means for any loss you might have, you must take at least (minimum) 3 times more from the profitable trades.
TP = 3 x SL
This isnt a random number. This is related to any strategy statistic.
You all know, that you can't have profitable trades, only. So your strategy statistic can be from 5-9/10 trades in profit:
- min 5/10 since you can have 2 option on any market: buy and sell. So you can have 50-50% to be right on any trade.
- max 9/10 since you cant be right all the time.
So, in order to reach your profitable trades, you must be able (afford) to take those losses.
Ofcourse, I prefer to use a much more significant statistic for any strategy, like x/100 trades. Because this offer me a better understanding of the strategy on a longer period of time.
Imagine a 9/10 strategy might be less than 90/100 on a longer period of time (and trades).
What if those 10 negative trades will come, in raw, while starting to trade that strategy ?
Well, you must be prepared for that, as well. You need to still be in the market, when those profitable trades will come.
Money Management
I'm sure you all heard about "Money Management Rules". But what is this really means?
Well, you can consider it a "healthy" way to be in the market longer. Or how much negative trades you can take, in the worst case scenario.
For doing that you need to be able to calculate 2 main things: Volume (as no of lots) and Stop Loss (in pips) for your trades.
I wont develop here the calculations behind the mathematical probabilities of a strategy. All you need to know is that you should use these numbers, as beginner:
Max Risk/Trade = 2%
Max Investment = 15%
(take as example our previous exercise for the Trader1)
Example of MM Rules:
Account Balance = $10,000
Max Investment = 15% = $1,500
Risk = 2% = $200
Leverage = 1:100
EURUSD = 1.3025
How many lots can you trade?
1.0 lot = 100,000 EUR => Margin =1%=1,000 EUR =$1,302 (1000 EUR x 1.3025)
0.1 lot = 10,000 EUR => Margin =1%=100 EUR =$130
0.01 lot = 1,000 EUR => Margin =1%=10 EUR =$13,02
Lot size = Max Investment / Margin
Lot size = $1,500 / $1,302 = 1.15 lots (round it to 1.1 lots)
How much pips you can afford to lose ? (Stop Loss)
First we need to find out the pip value.
1 pip = lot size x tick size
( for Direct rates as: EUR/USD, GBP/USD, AUD/USD, NZD/USD )
1 pip = pip = lot size x tick size / current rate
( for Indirect rates as: USD/JPY, USD/CHF, USD/CAD )
1 pip = lot size x tick size x base quote / current rate
( for Cross rates as GBP/JPY, EUR/JPY, AUD/JPY, EUR/GBP, GBP/CHF - where USD is not involved )
Examples by using the standard formula:
EURUSD = 100,000 x 0.0001 = $10
USDCHF = 100,000 x 0.0001 = 10 CHF
USDJPY = 100,000 x 0.01 = 1000 JPY
Then use these results vs your account currency rate, to find the pip value into your account currency! (in our example in USD)
Or use instead the other 2 formulas and then denominate these $ results with your account currency vs USD rate.
E.q 1:
1 pip = lot size x tick size / current rate
( for Indirect rates as: USD/JPY, USD/CHF, USD/CAD)
For a trade of 10,000 USDCHF (0.1 lots):
USDCHF = 0.9290
1 pip = 10,000 (lot size) x 0.0001 (tick size) / 0.9290 (current rate) = $ 1.07
E.q2:
1 pip = lot size x tick size x base quote / current rate
( for Cross rates as GBP/JPY, EUR/JPY, AUD/JPY, EUR/GBP, GBP/CHF
For a trade of 10,000 EURJPY (0.1 lots):
EURJPY = 121.35 and EURUSD = 1.3060
1 pip = 10,000 (lot size) x 0.01 (tick size) x 1.3060 (EUR/USD base quote) / 121.35 (current rate) = 1.07 $
Pip Value for 1.0 lot = $10
Pip Value for 0.1 lot = $1
Pip Value for 0.01 lot = $0.1
If the max Risk/trade = 2% = $200 and the pip value = $10
SL = $200/$10 = 20p / 1.0 lots
SL = $200/$1 = 200p / 0.1 lots
SL = $200/$0.1 = 2000p / 0.01 lots
So, in this example you can trade 1.10 lots. The SL= 20p at this volume.
But if you want to use need a higher SL level for a trade, while keeping the same Money Management Rules, you can use smaller lot size ( mini-lots/micro-lots).
Eq1:
If you want to open 3 trades with 0.1 mini-lots/trade:
200p/3= 66p/trade (for each one of these 3x0.1 lots trades)
Eq2:
If you want to open 5 trades with 0.01 micro-lots/trade:
2000p/5= 400p/trade (for each one of these 5x0.01 lots trades)
But what if you found a potential trade and you know the SL level ? How many lots can you use for that trade ? ( this will be the only one opened trade, until is closed)
Lets say the SL = 90p needed for that trade.
This is how you can calculate the lot size according to your Money Management Rules:
Lot Size = Risk Amount* (in $) / Number of Pips x Pip Value
orLot size = (Capital x Risk%) / (Stop Loss in Pips x Pip Value)
*After each trade calculate the Risk Amount again or at least 1 time/week
Lot size = $200/90p x $10= $200 / $900 = 0.22 lots (for this trade example)
or
Lot size = ($10,000 x 0.02)/(90p x $10) = $200 / $900 = 0.22 lots = 2.2 mini-lots = 22 micro-lots
(when Actual Account Balance is different, than Initial - we must calculate again the Risk Amount)
Best Regards,
^^_Lord_Ice_^^
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