Forex Sharing

Hi Guys,

I hope you had a good week trading. There was a lot of volatility in the majors this past week, I hope everyone was on the right side of their trades!

Which brings me to my topic for this newsletter. One of the most important rules of trading is protecting your principle and using proper risk management tools.

The most critical components of risk management are position sizing, setting stops, setting reward risk ratios, and draw-down control.

One of the biggest mistakes traders make is over-leveraging and taking a big hit on one single trade. Not only does this deplete your account balance, but it also can deliver a gigantic blow to the trader's psyche and mind set. Even though systems can be effective, only a few traders end up profitably following them. For now it is crucial to understand that taking a big loss on any one trade is one of the most detrimental things that can happen to a trader. Traders on a hot streak tend to feel invincible and begin to over-leverage or go for it on one "can't lose" trade and then end up unable to recover their psychological balance and ability trade effectively afterward. One way to deal with this problem that I personally consider the holy grail of risk management is setting the maximum percentage you are willing to lose on a single trade before you even begin trading. I recommend this percentage be below 5%; I personally use 2%. Someone with more guts (or experience) may use 4%-5%. Setting the maximum account risk percentage is vital to being able to retain your capital and continue trading the markets. The calculation is as follows:

Total account size: $100,000
Maximum single trade loss %: 2% {set}
Maximum single trade dollar loss: $2,000

This means that you have to calculate your loss on a single contract, lot or share based on the distance from your entry to your stop and then divide it into your maximum single trade dollar loss to obtain your optimal position size in contracts or shares. This to me is the most critical concept in trading.

Also please keep in mind that during fast market situations (i.e. news releases) stops may not be honored by your broker and you may get a fill past your stop price. As you know, a stop order turns into a market order once the stop price is crossed. This is all the more reason to trade conservatively. Different brokers have different pricing policies so if you plan to trade during these times read the fine print in your trading contract and let your broker know what you plan to do so you know that they can handle your trade size and needs. This prevents later misunderstandings, busted trades, and loss of trading equity. Most brokers reserve the right to "bust" (i.e. take back) a trade at any time for any reason or no reason, but must do so within twenty four hours of the trade occurring.

Example for $100,000 account in Forex contracts:

Entry: 1.1850
Stop: 1.1830
Max $ loss per contract: 20 pips $200
Maximum Single trade dollar loss from above: $2000 (2% of $100k)
Optimal position size: $2000/$200 = 10 contracts

This will keep trades small and emotions under control during the learning curve and eliminate the large losses that can cost you your trading capital and end the trading experience.

I know this is not the most exciting stuff, but it's the cornerstone to any good trading system. We do offer some third party services that teach you basics like this, and best of all they are free to our clients. If you have any questions about this or any interest just let me know.

Alex Nekritin
(P) 1-781-444-6969
(F) 1-781-444-0311
alexn@traderschoicefx.com
www.traderschoicefx.com