Forex Risk Management, The Introductory

We are here attacking the first lesson of what we call “the work of the trader”, ie everything that does not strictly concern the analysis … If you ask yourself what trading can ask for as competence to apart from the analysis, you are in the right place.

What is risk management?
Risk management, also known as money management, refers to a set of rules and principles that will allow you to maximize the efficiency of your operations, and avoid taking too many risks, or at least risks that are not mastered.

For some people, these principles will seem obvious. However, keep in mind that when you really invest your money, you do not think so lucidly. We are won by stress, fear, and hope , which can sometimes “pollute” our ability to make rational and effective decisions.

This is where risk management comes in.

In fact, by setting strict rules in advance , we manage to overcome the difficulties caused by emotions such as fear or hope, two of your greatest enemies when it comes to trading on Forex.

Risk management is a somewhat tidy concept, so we are going to teach you here the most indispensable notions, the ones you will need directly at the beginning of your trading career.

Managing your capital

Main rule: do not use too much of your capital

Here, the notion of available margin is paramount. As a reminder, the margin available is the amount on which you can intervene, taking into account the leverage effect. For example, if you made a deposit of $ 1,000 on your account and you use a leverage of 100, your available margin is $ 100,000.

However, you should never use too much of your available margin, be wary of the leverage allowed.

For example, in the previous case, if you take a big position relative to your capital, for example on 50000 units, each variation of 1 pip will represent 5 dollars.

So, with 100 pips in the opposite direction of your position, you are already losing $ 500, which is half of your capital .

And once you reach 200 lost pips, your capital has gone up, and you’re going through what’s called a “margin call,” which means that the broker automatically cuts your position and your account is at zero …

There are no precise rules to know what proportion of its available margin should be used, but in the present case (deposit of $ 1000, leverage of 100), it seems advisable to limit oneself to positions of 10,000 units, where the value of the pip is 1 dollar over EUR / USD.

By prudently using your capital, you will be able to cope in the event of a transient change to your position. You will be able to hold the position until the trend becomes favorable again (if you have good reason to think that your position is always wise and you have simply made a timing error).

To conclude, do not be too greedy . Admittedly, the bigger the position, the faster and faster the gains, but we must not forget that it also works with the losses!

Pay patiently for gains on reasonable positions, increase your capital, then increase the size of your positions, this is the best way to be sure to last in trading.

Risk management of positions with stops and limits

We have previously learned to manage our capital, now learn how to manage our positions. In this field, the notions of Stops and Limits are paramount. Let’s start with the definitions:

Stop: We call stop the limit of maximum latent loss that is fixed. This is the threshold from which we consider that we were wrong in our position, and that our analysis is false.

That is, we cut our positions as soon as the stop is reached. For example, you buy EUR / USD at 1.3060: If your stop is 10 pips, you will set it at 1.3050, and cut your position at this price.

Limit: A limit is the opposite of a stop. This is the goal of gain that we set. This is the threshold from which we consider that it is wiser to cash out your winnings than to hold the position. Specifically, with a limit of 10 pips, if you buy EUR / USD at 1.3060, you will sell at 1.3070.

Stops and limits can be defined “orally” or automatically , which we recommend.

You can automatically place stop and limit orders on your platforms, so that positions are automatically closed if they have reached the stop or limit.

The usefulness of stops and limits
The interest is obvious in the case of stops: Avoid being caught in the game of “it’s good, it’ll go back” , because by doing so, you will drag long losing positions, which will undermine your margin and therefore your ability investment.

Our opinion is that if the courses go in the wrong direction, it is better to accept it and move on . Things move very quickly on the Forex, and it is better to accept to have been wrong than to wait for the courses back up and to let go of opportunities.

For limits, it will be to avoid being “too greedy” waiting too long before taking his winnings on a winning position. Many traders doing this have been surprised by the speed at which prices fall after a spike …

An old stock market adage says that trees never go up to heaven, and it is better to take profits early than to wait too long and face a brutal turnaround that will wipe out your winnings.

We strongly advise you to place your auto-stop stop and limit orders right after your position statement, and not to touch it anymore . Once the position is taken, we are not so lucid, and we may be tempted to disregard the rules we have set, which is usually a bad idea.

In addition, with automatic stops and limits, you will not have to monitor the position closely, which is more comfortable.

How to choose stops and limits?

Firstly, we must know that the more we invest in the short term, the more our stops and limits will have to be tight. Then everything depends on your strategy, everything depends on the risks you want to take …

However, it will be necessary to ensure that your limits are always wider than your stops.

Your winning positions must earn you more than you lose your losing positions.

But this principle alone is not enough to properly position its stops and its limits. Indeed, the risk management intervenes in the choice of the levels on which one will set its stops and its limits, but the analysis also intervenes.

Conclusion

To conclude, risk management aims to help you overcome psychological errors, mistakes that can lead you to make your emotions. But for that, it is also essential to know each other well, to know the psychological biases that the trader is often subjected to: This is the subject of the following lesson.

Best Moving Average Settings for Daily Trading

Moving-average (MA) are traditional indicator that are commonly used by traders, both beginner traders as well as skilled and professional traders. Its usability and brilliant capacity to peruse (detect) long-term trends make the MA as the first known indicator of novice traders. There are numerous variants of the MA created by experts. Starting from as simplest as average of certain candle periods to the most complicated formula that consider a specific level of significant value.

MA’s are considered as a lagging indicator. Considering this, many people are competing to refine the basic formula by entering new parameters. Until now, there have been no fewer than 45 types of MAs with various variations.

Enough with all the background regarding the MA. Now the most important thing is, how to set the best MA so that we can get optimal profit.

The basic concept in setting up a Moving Average

Once again we must remember that MA is an indicator that recognizes ongoing trends. With this premise, we know that trends are very closely related to time. Trends in the past week can be very different from the current trend in the past month. Especially compared to the past six months, the last year, the last five years, even the last 10 years. It is possible that in the last one year the price of a commodity or currency pair is in a downtrend, in contrast to the condition of the past week where prices are continuing to move up.

Based on this, then in using a MA we must consider a minimum of three periods which are our references, namely short, medium and long periods. As a variation, maybe you can also use two short periods and one long period. Which is better than both? I would suggest the first one more. Why? Using two short periods may be good at determining your entry point, but you lose a period between short and long periods. You will lose a connecting bridge that illustrates the correlation between short-term movements with long-term trends. This is very dangerous for your trading, especially if you are a beginner trader.

So, whether you use a combination of daily-weekly-monthly or monthly-quarter-semester or even quarterly periods, I still recommend that you always use a combination of three short-medium-long MAs.

Recommended period numbers

The MA period which is usually recommended by default is 14. Beginner traders usually do not understand where these numbers are obtained. This is given as it is, and is usually used for granted. Some will add or reduce it, but how much is needed, nobody knows. Each changes it as they wish. Here I will explain how I determine the number.

I am a daily trader. You certainly know the intent of the daily trader I mean here. Yes, I make transactions with an average of no more than one day open and close. So, I use the daily trend period compared to the weekly trend with a monthly long-term trend reference.

As a daily trader, I used to use the 1H timeframe for my trading. Sometimes I jump to M15, but I don’t do it too often. Sometimes I also see H4 as a consideration, but I very rarely trade on this timeframe.

So, I will suggest period numbers for daily traders. Can these numbers be used by long-term traders or vice versa the scalper? It could be, of course with a little adjustment.

Basically I divide the trend period with the timeframe I use. This is the period number key that I use. For example, if I want to map the daily MA period on the 1H timeframe, I use number 24. This number is obtained from how many 1-hour candles are produced in 1 day. I use the same method if I want to describe the weekly trend in the 1H timeframe. The formula that I use is the number of candles in a day multiplied by 5 days (active trading days in a week) equivalent to 120. Next, to get an overview of monthly trends, the multiplier that I use is an active day of trading in one month equal to 480. (Note: the number of active trading days in one month varies between 20-22, so I am rounding to 20 days).

Thus, I have gotten an overview of trends in the short (daily), medium (weekly), and long (monthly) periods, namely 24, 120, and 480. It is easy right?

What about scalpers or swinger? You can adjust the period by considering the things in the Best MA Setting for Scalper and Best MA Settings for Swinger

What is the difference of Forex Brokerage from the Ordinary Money Changer?

Firstly, there is no very basic distinction between online currency exchange/trading and the ordinary money-changer. Generally, both entities benefit from the spread. Spread is the left amount after subtraction between the buy-sell prices. Spreads between various institutions may differ relying on company policy. However, basically this is how this business goes.

Forex has its leverage mechanism. The existence of leverage, among others, is the most point or way in which physical exchange of money at the public money changer and forex trading are not the same. The mechanism of leverage allows buyer-seller to make high volume transactions with small investments. Thus, high gains can be achieved even in small movements in the transaction parity. The highest leverage ratio allowed in most country is 1: 100, which means that the investor can make a transaction with 100.000 USD with a guarantee of 1,000 USD. Yet, sometimes there are small broker offer higher leverage to attract consumers. The highest leverage offered by broker until this article published is 1 : 3000.

Another contrast between money changer and foreign exchange (FX) market is that the last is a bi-directional market. In physical market, we can only sell if we have goods (in this case, physical money itself). It is barely possibly to sell no money to changer office. On the other way, in order to benefit from the rise of an opposite currency pair, we may also make a sale transaction to take advantage of the decline as we do the buying transaction. For example, USD / TRY: 2.9000 level and we think it will drop by selling a sales process, we start to make profit at the moment when the parity starts to fall below 2.9000. Taking the resident producers in Turkey get out of raw materials bought dollars at time t, t + x is the risk of falling dollar prices at the time. Because the raw material at a low price can be purchased at a high price. In order to hedge against this risk, Forex markets have a sales position in USD / TRY parity so that even if the dollar falls, it gains a profit and avoids risk and is called a hedge.

Forex can be invested not only on currency pairs, but also on commodity products and indices such as gold, oil, copper and silver.

One of the major advantages of the FX market is the possibility to process data instantly. Forex market is open for 5 days and 24 hours. Therefore, currency can be dealed almost all the time (except when holiday). There is no opening and closing hours such as money changer office. Forex traders, for example, are expected to see a change of prime minister, resignation etc. when there is an unexpected event during the night. they can instantly evaluate the data and gain a change in the parity.

Forex markets are not physical. The physical delivery in the purchase-sale transactions is not applied. Traders do not need to take the high quantity of money to the changer office for trading. One can perform transactions by sending orders via the internet whenever and wherever he/she wants. When the investor wants to sell, the buyer finds the opposite because forex is the world’s largest financial exchange-market where daily sum of exchange overreach USD 5 trillion.