The Undergraduate Senior level consists six chapters.
- Management of risk.
- Leverage and margin details
- What is position sizing?
- How to set up stop losses.
- How to scale in and out.
- The currency correlations.
The forex market is full of risks that could lead to you losing money if you do not know how to manage them without stumbling too much. There is a lot you will need to do to make sure that you do not lose money.
Many of you are no doubt ready to get into the market and you may be fooled into thinking that you have everything that it takes to win. However, if you do not go in with a risk management plan, you will not find the gains that you are looking for and might end up losing money.
In this chapter, you will be taken through something that any of the best forex brokers will tell you.
These are the subtopics that you can expect to encounter when you are taking the risk management course:
- You will learn the basics of risk management
- You will be told how much trading capital you need to get into forex trading
- You will get an explanation of drawdown and maximum drawdown
- You will learn why you should never risk more than 2% per trade
- You will learn the reward to risk ratio
To sum up risk management, there is a lot more to trading than just having the guts to put money on the line. Smart trading involves more than just being ballsy. You need to trade smart. That is how you survive the FX online market.
The foreign exchange market will be good to you if you know what you are doing.
Leverage and Margin
The leverage and margin chapter provides valuable information about leverage, margin, and their significance in trading.
Leverage is the practice of borrowing funds to increase the potential profit of an investment. It allows traders to control larger positions with a smaller amount of capital. However, leverage also amplifies the risk of potential losses. The chapter emphasizes the importance of understanding leverage ratios and the need for proper risk analysis in forex trading.
Margin is the amount of funds a trader must deposit to initiate and sustain a leveraged position. It serves as a collateral or a security deposit to cover potential losses. The chapter distinguishes between the required margin (initial deposit) and maintenance margin (minimum account balance to sustain a position). It also introduces related margin terms such as account balance, used margin, margin requirement, usable margin, and margin call.
Here is what you will learn under this topic.
- Leverage and margin will be explained to you
- You will understand what a margin call is
- You will be taught how to be careful when trading on margin
- You will understand how swiftly leverage can blow your account
- The way low leverage allows new traders to survive will be covered.
- You will also learn how leverage impacts the transaction costs
When you finish learning about leverage and how you can use it, you will move on to position sizing. In simple terms, position sizing is the setting of correct amounts of units to buy or sell a currency pair.
Having the ability to determine the correct position sizing is something you will find very useful in forex trading.
In online trading risk managers will tell you that you must learn position sizing and the calculations that come with it before you can say that you know how to trade forex. The forex market may be difficult but to keep the position size within the risk comfort levels is not that hard.
You just cannot ignore it if you want to know what is forex trading.
All you need to make the calculations come out on paper is:
- The currency pairs you intend to trade
- Stop-loss setting in pips
- An equity or account balance e
- The percentage you can risk
- Conversions of the currency pair exchange rates
So, when you learn what all these and where they go, everything will fall into place. Under this topic, you will be taken through the following things;
- How you calculate position sizes
- How you calculate the position size of different forex pairs and account currencies
In summary, this is a section that will focus on making sure you do not ignore the things that will make a difference between failure and success.
Stop loss is a risk management tool used to limit potential losses on a trading position. It involves setting an order to close out a trade at a specific price, which is less favorable than the current market price, to prevent further losses.
The chapter explains that stop orders and stop-loss orders are essentially the same thing, referring to an order placed by traders to sell an asset when it reaches a specified price level. It discusses four types of stop losses in forex trading: percentage stop, volatility stop, chart stop, and time stop.
Later you will get step-by-step guidance on setting a percentage stop, which involves determining the risk tolerance and calculating the dollar amount and stop loss level. It also explains how to set a volatility stop using indicators like Bollinger Bands and Average True Range (ATR), as well as setting stop losses based on support and resistance levels from charts.
Additionally, the chapter explores setting stop losses based on a time limit, where traders choose to close a trade after a specific duration. It emphasizes the importance of using calculators and highlights four common mistakes traders make when setting stops: placing tight stops, using the position as a basis for stops, placing stops too wide, and placing stops on support or resistance levels.
Scale in and Out
Now that you know how to set stop losses, we will go to scaling in and out. What is it and how do you do it? In the last section, we looked at the rules of safely scaling in and out of trades. In this section, we are going to look at some of the specific details.
Following the rules means understanding them first. These are the fundamentals you have gathered up to this point:
- You must always use stops.
- When the combined positions are in the risk comfort zone, add losing positions
- Always trail your stop to control additional risks of a bigger position when you want to add to the winning positions.
- Know the correct position sizes before you trade.
- Trending markets are best for scaling into winning trades
- Scaling out is best for range-bound markets
From here, you will move on to the subtopics in this topic. They will cover:
- How to scale out of positions
- How to scale in positions
- Adding to winning positions
If you do not do anything unnecessary or risky, you will be fine.
The Currency Correlations
In this chapter, you will learn about currency correlations in forex trading. We will explain what currency correlations are and why they are important for managing risk.
Currency correlation is a way to measure how two currency pairs move together. It helps us understand the relationship between them. We use a number called the correlation coefficient to measure this relationship. The correlation coefficient can be between -1 and +1. A value of +1 means the currencies move in the same direction, -1 means they move in opposite directions, and 0 means there is no relationship between them.
You will also learn how to read currency correlation tables. These tables show the correlation coefficients between different currency pairs. They help us understand the strength of the relationship between currencies based on the correlation coefficient.
We will discuss different types of correlation coefficients, like the Pearson correlation coefficient, sample correlation coefficient, Spearman’s rank correlation coefficient, and Matthews correlation coefficient. Each type has its own uses and limitations in forex trading.
At the end of the chapter, we will explain five reasons why considering currency correlations can help traders make better trades. These reasons include avoiding unhelpful trades, maximizing profits and minimizing losses, managing risk effectively, confirming breakout patterns, and using correlations to make informed trading decisions.
Lastly, we will briefly mention how to calculate currency correlations using Excel, providing a step-by-step guide to help you.
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What Is Risk Management? Drawdown and Maximum Drawdown, Reward-to-Risk Ratio
Leverage and Margin Details Overview You Need to Know While Trading
Position Sizing Details Overview and How to Calculate Position Sizes
What is Stop Loss? 4 Types of Stop Losses, Rules and Mistakes on Stop Loss
Scaling In and Out of Positions Full Overview
Currency Correlations Explained, Factoring in Currency, Calculate Currency Correlations