Sunday, February 25, 2018

Forex: Plan your Currency Trades

March 14, 2010 by  
Filed under Forex Planning, Forex Strategy

“Buy when the price is the lowest, when it goes up. Sell it”

Sounds familiar? This is the same common advice I keep hearing for uneducated Forex traders wannabe. Nothing wrong with the advice. Be it long or short, that is what we are doing all the time. However, the questions lies in “How do I know that is the price to go Long/Short?”

Much of the time, these uneducated Forex traders will say, “Oh! Just look at the chart. It is really easy to see the lowest price.”

My guess is they don’t know what they are talking about.

Earning money from Forex can be easy. Like chess, games and business. If you plan ahead, Forex market can really help you earn money effortless. How hard can click and typing a few numbers be, right?

However, there are a few reasons why currency trading can be difficult for new traders. They have to realize that their emotions are playing a part in their trading too. They may perform well in demo account but emotions ran amok when real money is on the line. And to make matter worse, most of them has no trading plan in begin with.

Every Forex book I read, every Forex blog I come across, every trader that trade forex successfully teach me one thing in common. Please built your Freaking Trading Plan! They do the same thing every time! Once in a while, they do fine tune their plan. They have to tune their forex trading plan once in awhile because by change every aspect of the currency trading plan at once you never know which works or not.

Reason for the Trade

Bear in mind that one of the purpose of a trading plan is ensure you keep your actions against your emotions.

Before you enter a trade, ask yourself “Why do I make this trade? Is because of some indicators telling me the market is going this direction? If not, am I making the trade solely on ‘gut feeling‘ ?”

Of course, with indicators and chart patterns, you back up your trading with a reason. This make your trades more strategic.

Without indicators or chart patterns telling the direction of the forex market is going, your trades are based on feelings. This is gambling. I have yet to meet a gambler that profits consistently without a strategy. Yes, professional gamblers gamble with strategies and reason. This make their gambling more like a business than a stroke of fate.

Identify your Exits

It is very important that before you enter any trade, identify your entry price, stop loss and profit target first. If you do these after you entered your trade, your emotions will hinder your view of the information. If these exits are planted along with the trade, you will have more discipline to stay on your forex trading plan. Of course, another advantage you gain is that you don’t have to stare at the computer every hour to make your exit.

Know your Risk : Reward Ratio

It is also important to know your risk:reward ratio. This amplify the power of your planning. You can’t determine your risk:reward ration without planning your stop loss and take profit target. It just can’t be done. To assess your risk:reward ratio, just divide the number of pips between the entry price to take profit price by the number of pips between the entry price to the stop loss. ok… I know this is kind of wordy, let’s use an example.

Example

Long EUR/USD: 1.3585.

Take Profit: 1.3600

Number of pips to Take Profit: 15

Stop Loss: 1.3560

Number of pips to Stop Loss: 25

Risk : Reward ratio = 25 / 15 = 1.6 : 1

In this case, the risk is higher than the reward. Most of the traders does not think this is a good risk : reward ratio as it takes 2 successful trades to recover 1 loss trade. If your forex strategy has 50% winning trades, you will lose out money in the long run.

Plan your Position Size

Once all of the above are done. You can determine your position size. Your position size should be the same percentage of your money in your account in every trade. Most forex traders trade one to three percent of their equity each time. This make your all your trades weighted equally. For example, if you risk $100 on a 30 pips stop loss, you should also risk $100 for a 300 pip stop loss.

So, to find out your position size:

  1. multiply your total equity by your risk (usually in 1 to 3%): this is the amount of money you should risk per trade. Let’s call it X.
  2. multiply the number of pips between your entry price and stop loss by the currency’s pip value. Lets call this Y.
  3. draw a line from your entry price to stop loss using the value calculator to get Y.
  4. Then divide X by Y. this is the number of lots you should trading.

Conclusion

This method is very easy to follow. Everything is planned out, all you need to do is to fill in the blanks like your total equity and percentage that you want to risk for each trade. Planning your forex trades before you enter makes your trades more consistent and less risky.

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