Risk Management:
How to avoid losing your shirt while trading forex.

Ask not for whom the margin calls.

Have you ever seen things like these on a website or in a review?
"I followed those trading signals, and my account dropped 70% in 3 days."
"I tried this method and got margin called in less than a week."


Let me put this simply. It doesn't matter if some trading method, trading room, signals service, or anything else has a perfect reviews and a 5 year history showing that it never had a single losing trade. It doesn't matter if it's endorsed by Felix, Crazy Cat, Sir Pipsalot, me, and the heads of the IMF, ECB, and the US Treasury. Not matter what "proof" is offered, no matter how well endorsed it is, no matter what the guarantee is, DO NOT EVER RISK TOO MUCH OF YOUR ACCOUNT ON ANY ONE TRADE.

No human, no computer, no "perfect" signals or other trading method can be right 100% of the time. It's possible to backtest and optimize something so that it's "perfect" with old data, but the forex market is an unpredictable beast. Good systems and signals can be right much of the time, but NOTHING will ever be right 100% of the time if you let it run long enough.

Risk Management is the concept of having a plan that sets a maximum amount of risk that you will place on any one trade. How much risk is "too much" risk is the subject of much debate. I've seen numbers ranging from 1/2% to 5%. Some of this will depend on the forward tested success rate of your system, and some will depend on what you consider to be an acceptable level of risk.

"But if I don't risk much, I can't make much." is a common complaint against risk management. To some extent, this is true. On the other hand, if you have nothing in your forex account to trade with, you won't make any money at all. If you risk too much and there's a big gap in price (or your broker gives you too much slippage), you can not only lose all the money in your account, but you can possibly even end up OWING money to your broker.

Let's say you have $10,000 in your account. Then you decide to risk $5000 for the chance to make $5000 (a 1:1 ratio). If the trade goes your way, you have $15,000. That's great, but what if it goes the other way? Then you only have $5000. Now, you need to double your $5000 to get back to where you started. If you risk half your account again and the "99% accurate" system fails you again, then you only have $2500 left. Now you would have to quadruple your account to get back to where you started. Fail one more trade like this and you have only $1250 left. You would have to have more than 5 perfect trades gaining 50% each time to get back to where you started. After 3 losses in a row wiping out over 85% of your account, would you really want to trust this trading method to work 5 or 6 times in a row now?

Let's say you feel like using the highest end of typical risk management recommendations and risk 5% of your $10,000 account on each trade. Once again, we'll use a 1:1 ratio just to keep the math simple. This means you'll risk $500 on the first trade while hoping to make $500. If the first trade goes bad, you have $9500 left. You would have to lose many trades in a row to lose half of your account, and far more to go all the way down to $1250. It is true that you won't be able to make money as fast, but what good is making huge sums of cash if you can lose most or all of your hard earned profits from a single bad trade.

I would NEVER risk more than 1/2 percent of my account per trade on something I hadn't personally forward tested on a live account for an extended period. If I have confidence in a system that I have tested live over time, I slowly and carefully scale up the size of each trade. I’m not going to say exactly what my personal maximum risk is, since I want you to select your own, not just copy what I do.

If you want to try something new, first try it with a demo account, but remember that demo accounts get filled quicker and have little or no slippage. A real account is much more likely to have slippage and requotes, thus cutting into potential profits. If demo testing looks good, then move it to your live account and trade the smallest amounts possible, just to see how the trading works with your broker.

The Daily Trading Signals here at the FPA are a good example of how different demo and live accounts can be. It's not that hard to catch a news spike (or to straddle the price with pending orders) on a demo account. With a live account, even the best broker won't fill every order perfectly if you try to catch the news spike. Some brokers even go so far as to prohibit news trading. This means that if you make a profit trying to catch a news spike, they will confiscate it. Somehow, they never will give you a refund if you lose money on a news trade. Since I'm primarily a technical trader, this isn't a problem for me. If you really want to try to catch news spikes, Felix strongly recommends MB Trading. I haven’t tried them out for news trading, so I can’t give a personal opinion on this.

If you are using forex signals or some other system and you have successfully traded it for long enough to be comfortable with it, ask the signals (or other product’s) support staff what the maximum risk they recommend is. They should be more familiar with the product than anyone else. Just remember to start small on any new system and never to exceed your own personal maximum risk per trade no matter what anyone else says.

Although a historic record of pip gains for a signals service, trading room, or trading method is a good thing to consider, the actual results you get will always be a little different. See where I've been reporting the results of my tests of Intelli4x's signals. At the moment due to pure dumb luck, I've actually been doing a little better in total pips on the trades I’ve taken than the "official" record for the signals I've taken from them. Sometimes I've entered a little better, sometimes I've missed a close signal and something went on and hit the take profit number. If my schedule had been a little different, this could just as easily gone the other way and cut into the results.

Setting your risk is easy with most brokers. You just need to set a stoploss on each trade. Remember that xxxUSD pairs are worth $10 per pip for a full lot, $1 per pip for a minilot, 10 cents per pip for a microlot, and 1 cent per pip for a nanolots. For other pairs, it's a very good idea to check a pip value calculator. If you wanted to take a maximum risk of $100 on a trade, then you can only set the stoploss to a mere 10 pips if you plan to trade a full lot of a xxxUSD pair. On the other hand, you can trade 5 minilots and with a 20 pip stoploss or 1 minilot and use a 100 pip stoploss. Usually, the stoploss is determined by your trading method and then you need calculate the maximum lot size of the trade that you can risk. If the smallest amount your broker will let you trade would exceed your maximum risk, skip the trade (or find a broker that lets you trade smaller amounts).

Remember, some brokers are better at closing your order exactly where you set the stoploss. Others frequently have very bad slippage and will fill your order at a price that is worse for you. If your broker does this too often, reduce your total risk per trade to compensate for the potential slippage loss and look for a better broker.

If you plan to leave an order open after the New York trading session ends on Friday afternoon, be aware that there might be a gap in price when the Tokyo market opens (Sunday evening in New York). If price gaps across your stoploss, you could lose a lot more than you planned. Alternatively, some brokers won't observe the stoploss under these circumstances and the price could continue to move against you even more. Until you have a solid understanding of market dynamics, your broker’s methods, and understand all of the risks involved, you might want to close all positions on Friday before the market shuts down for the weekend and then re-open them when the market opens on Sunday.

My personal advice for ANY trading method you are considering would be to start with a combination of backtesting as well as forward testing on a demo account. Don't base your decision to go live on 1 or 2 trades. Remember, coin tosses are accurate 1/2 the time, and getting heads or tails 3 or even 4 times in a row isn't that hard to do. Once you have enough data to feel confident, trade TINY amounts of money live to make sure that the method can work under real world market conditions with your broker. If it's still profitable, scale up at a reasonable pace, but NEVER exceed the maximum amount of risk per trade that you set for yourself. Even the best system in the world will still have an occasional losing streak.


Always remember this. You can't make your fortune if you lose most of your account on a few bad trades. To get rich trading forex, you must first learn not to go broke.

I can't promise that following this advice will absolutely save you from losing all of your money, but at least you'll lose it slowly enough that you'll have a chance to improve your trading technique before blowing your account.

from FPA forumers for education purposes

Fed Discount Rate Cut Statement

The Fed has cut the Discount rate by 25 bps in an emergency market to primarily "Reduce the spread between Fed Funds rate and Discount rate".

The Fed is still likely to cut the headline Fed funds rate by 75 bps on Tuesday, its scheduled meeting.

The Statement along with Discount rate cut has been given below. It has been taken from http://www.federalreserve.gov/newsev.../20080316a.htm

The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.

First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Second, the Federal Reserve Board unanimously approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. This step lowers the spread of the primary credit rate over the Federal Open Market Committee’s target federal funds rate to 1/4 percentage point. The Board also approved an increase in the maximum maturity of primary credit loans to 90 days from 30 days.

The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc.

Trade Wise, Trade Well!
__________________

Vikrant Goyal
Kshitij Consultancy Services Analyst
Forex Factory Analyst

erm.. put anything

Fibonacci theory a mental game challenge?

Leonardo of Pisa was an Italian mathematician who lived between 1170 – 1250, also known as Fibonacci. In his Book of Calculation (Liber Abaci) he presented a modern number sequence named after him known as the Fibonacci numbers. The Fibonacci numbers looks like this:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc

a number being the sum of the preceding two numbers. The Fibonacci sequence can also be found in nature,in leaf buds, spiral seeds, sunflowers, scales on pineapples, petals on artichokes, daisy petals, fruits, pears, pine cones, pine needles, and many more natural objects. The sequence is also found in musical theory, there are 13 notes in an octave with 8 white keys, 13 follows right after 8 in the sequence.

If we divide one number in the series by the number that follows it, we will find out that each number is 1.618 times greater than the preceding number. For example:

5/8 = 0.625
8/13 = 0.615
21/34 = 0.617
55/89 = 0.6179

The Fibonacci key points used for trading are being calculated as follows:

First ratio: 8/13 = 0.6153 - 61.8% ratio

Second ratio: to obtain it we divide one number by the number found two places after it.
8/21 = 0.380 - 38.2% ratio

The third ratio: we divide one number by the number found three places after it.
8/34 = 0.2352 - 23.6% ratio

For unknown reasons, these numbers represents the support and resistance points, as you can see from the above chart:

There is no logic behind this market behaviour, as there is no logic behind the appearance of the sequence in natural patterns, but most of the times is happents, thats why traders are using the Fibonacci indicator. I have found one logical explanation though. Like any other prophecy, we make it happen by trading according to its prediction. For example if the trend reaches one of fibonacci retracement point, everyone will sell/buy thus making the prophecy happen.
Fibonacci is being also used for identifying Elliot waves, because most of the time the waves are formed around fibonacci retracement point.

Bush Signs Landmark Energy Bill Into Law

12/19/2007 11:30:45 AM President Bush signed into law on Wednesday legislation that will set higher fuel economy standards for cars and light trucks and phase out the use of incandescent light bulbs.

The legislation is “a major step toward reducing our dependence on oil, confronting global climate change, expanding the production of renewable fuels and giving future generations of our country a nation that is stronger, cleaner and more secure,” Bush at a ceremony at the Department of Energy in Washington.

The bill was roundly passed by the House on Tuesday by a vote of 314 to 100. It marks the first time fuel economy standards have been updated by law since 1975, and will require vehicles to average 35 miles per gallon by 2020. In addition, the annual production of renewable fuels will be upped fivefold to 36 billion gallons by 2022.

According to the Renewable Fuels Association, an organization that lobbies for distillers of alternative fuels like ethanol, by 2022 36-billion-gallon annual production will represent a sixth of overall fuel consumption.

“At that level of consumption, 36 billion gallons of renewable fuels will effectively drive us through the months of January and February,” the group said in a statement. “No oil 'til March.”

The legislation, known as the Energy Independence and Security Act, was hailed by Bush as an important step in curing the United States' “addiction to oil,” an issue he gave large attention to in his 2007 State of the Union.

Incandescent light bulbs will likely be eliminated within the next 10 years, according to measures in the legislation. The law also requires reduced energy use by several appliances, including dishwashers, washing machines, and walk-in coolers and freezers.

The bill has been praised by House Speaker Nancy Pelosi (D-CA) as groundbreaking.

“You are present at a moment of change, of real change,” she said before Tuesday's House vote.

However, critics counter that it will increase automobile costs and potentially compromise safety. Also, the efficiency of ethanol has been questioned recently, and has the potential to raise prices of corn and grain. The bill has also been criticized by some Democrats and environmental groups as too watered down. Bush had threatened to veto a bill that would have required utilities to utilize renewable sources like wind and solar energy for power and would have been funded by higher taxes on oil companies.

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Tsunami

The Tsunami, I call it the Tsunami, you’ll get the reason later on. First of all, I want to talk about the money changers, what they do is – they land you money, when Interest Rates are very low and they create an environment for you to lend money, because it’s easy money, easy to pay back, it’s normally when the economy of the country is really having a good time, and everybody is buying new cars, and new houses, and go on holidays and things like that. Then, at the certain stage there is too much money floating around, so now they’ve got to do something to stop that, people are lending are all over the place. And things don’t balance any more, the one side gets heavier than the other side and then they decide to raise the Interest Rates. Then they start collecting from you. And if your budget was not very nice, you either have to give back your car, or give back your house. And that’s what they do. They create a playing field, where they lend out money, but the reasons for them is to make money.

I want to show something, that I’ll do by illustration, by explaining how I see this. Now, who are the money changers? I call the “the big ones” “the big guys”. I haven’t met one of them yet, I don’t know who they are, fund managers, governments, banks, I don’t know. But somehow, at certain stages they create a sort of environment; I call it “the playing field” in the Forex market. At this specific point you’ll remember, if you go back saying in a year, two or three from now, or even ten years from now, and you take the exact date, today, and you’ll take three weeks back, you’ll see the past three week have been difficult. If you look at the Euro, if you look at the British pound, you’ll see there are a lot of ups and down. That’s “playing field”, there is a lot of emotion going on, there’s a lot of movement going on, but it goes nowhere.

Now, it’s like sitting on a beach, you see people running all over, I can not run after every one, that come run past me. Because he might just play with a ball, it might be just someone running past, so if I get up and run after everyone I am gonna be tired by the end of the day. So, what do I do? I can sit there and I can put on my dark glasses, put on my suntan lotion, and forget about everything. But by doing that the Tsunami might hit me, and I won’t even know that. So, what do I really look for? I look for an unease or a pattern of movement that’s not a part of a playing on the beach. You’ll start to realize, well, people are not playing anymore now, there are some people running toward the gates, so there is something going on. You don’t know what yet, so what do you do? There are basically three things that you can do. You can totally ignore it, as I said put on your sun glasses, and be hit by tsunami. Or, what most of us do, we get up and we appoint a commissioner, of commission, couple of people that must go and find out, why are those people running. And you get yourself deep in to the fundamentals, and you start reading here, and you start reading there, and by the time you figure out: “Oh, it’s a Tsunami”, and you got hit by it. Then it’s too late. That’s a second part.

But, there’s a third part as well, you can run with the people running. And why you running with them, you can ask: “Why are we running?” And you’ll get an answer, if they can’t answer you, at least, you have a choice to decide, I’ll stay with it until it stops, and that is what market is doing. When it runs, you’ve got to be in it. Sometimes you know it’s news, sometimes you know it’s this and that, but sometimes you don’t, as long as you are there. But now comes the main part, you must desern, I’m using the word desern, because desern - is a separation. First of all, you’ve got to recognize, when it’s playing time, like we had now these last three weeks. It was playing time and then, the next step is you’ve got to desern, when the informed are leaving the playground. When those money changers, when they start moving. You’ve got to desern it, it’s a separation, technically, you’ve got to see the emotions on the faces if you are on the beach, they serious. And then you must desern when the playing is about to end. You know it’s gonna end, but you don’t know when. And then I‘ve got this last on B1 of the followers, of the informed. There are people that are informed in this whole playing scenario. And you’ve got to know the motion of the market in terms of its movement, because price is moved by people, by decisions of people. And their decisions make the market run, and why is it running – you don’t know yet, but you have recognized, that playing time, the playing field – is about over. The end is about there, but you don’t know exactly when. And that is what MACD system sort of tells you. Gives you an early indication when playing time is over. And when it runs you’ve got to be on board. That’s very important. And then when it runs it’s got a certain emotion, you just happen to be in that flow, you run with it, because if they want to take you out, they must take themselves out, but they not gonna do that, so you’ve got to be in that flow all the time. And that’s what I’m gonna teach you as well later on. Is to know the market rhythm, and to know when the market is moving, in a certain patter, in a certain rhythm, to stay with it as long as possible. So, remember to desern when the move is on.

Source: (Phillip Nell)Profesional MACD Guru.