Welcome to the penultimate level. This is you, almost done now. Your forex education has been leading up to this moment. With all the forex trading knowledge that you have accumulated up to this point has been great and now, we close the curriculum by going through these six major topics:
- Management of Risk
- The leading cause of failure in forex trading
- What is position sizing?
- How to set up stop losses.
- How to scale in and out.
- The currency correlations
Online trading is a risky activity that will need you to not only have a firm understanding of ‘what is forex trading?’, but also be able to manage how you will be doing business.
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.
The Leading Cause of Trader Failure in the FX Market
It usually goes something like this;
Trader: Who are you?
Leverage: I am leverage and you ignored me. I am here to end your life in the forex market
If that short conversation confused you, you probably do not know as much as you need to know about the forex market to survive the pitfalls that many of the new traders fall into. No matter what the forex brokers tell you, never try trading with a standard account with just $2,000 in it.
Do not play in a league that you are not ready for, no matter what anyone tells you. One of the main reasons why most of the new forex traders fail is because they do not understand leverage and how it works. That is the reason why we have this whole topic to look over this and what it means.
Anything less than $100,000 goes into the mini-account. Standard accounts should only come into the picture when you are good and ready.
These brokers attract new traders by promising something too big and too good.
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
As you will come to find out, nothing good ever comes out of underestimating leverage. Remember that conversation at the beginning of this topic? Leverage is wearing a black hood and carrying a scythe…do not ignore him.
What is Position Sizing?
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.
How to Set Up Stop Losses
Just knowing how to do this is not enough. You may set up stop losses levels and they might get hit all the time and that means you lose money. Knowing exactly what these levels are is more important, as any best forex broker will tell you.
Global politics have ensured that the currencies fluctuate in a way that is by no means dependent on what the traders do but what happens in the countries that host the currencies that you are trading. They might shift more quickly than you anticipated.
That means every move you make puts you at risk of being in the wrong position when trading and that could lead to big losses in your FX online endeavors.
The foreign exchange market needs you to be able to endure and survive the first days that you are in it. That is how you will get a chance to learn from small mistakes and see what happens and in that way, become a better version of yourself.
Stop losses is a technique that will enable you to make sure that this survival does not become endangered.
Under this topic, you will learn;
- Using the percentage of your account to set a stop loss
- Using support and resistance from charts to set up a stop loss
- Using price volatility to set up a stop loss
- Using a time limit to set up a stop loss
- The biggest 4 mistakes made by traders when setting up stop-loss levels
- The three rules you will have to follow when using the stop-loss orders feature
This topic will ensure that you understand what you must do to make sure that your survival is not a matter of debate, but a sure thing.
How to 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 rule of the forex market has always been; when one currency pair falls, the other one goes up. There is always the chance that when one currency pair falls, the other one falls too, copying the trend.
If you have ever seen this trend when doing your FX online, that is what currency correlation means.
When we statistically measure how two currencies move concerning each other, we call that currency correlation. As you will come to learn in this module, there is more to all this than you may have imagined. Currency correlations can directly impact the level of risk you are exposing yourself to.
Under this topic, you will be taken through the following subtopics:
- A clear explanation of currency correlation
- How you can read and understand currency correlation tables
- The times you double risk without knowing it.
- The five reasons why using currency correlations help you trades perform better
- Taking care not to be blindsided when the currency correlations change
- The ways you can use to calculate currency correlations with Excel
When you learn all the things you are supposed to do, you will find that the correlation coefficient is very important in figuring out how to mitigate risks and ensure that the trades you do carry out are protected.
And on that, we have come to the end of this level of forex education. You are not ready to move on to the next and last level for your graduation. There are a few things left to learn but after that, you can get started in your demo account and see how you do.
The Number 1 Cause of Death of Forex Traders
Setting Stop Losses
- 4 Types Of Stop Losses
- How To Set A Stop Loss Based On A Percentage Of Your Account
- How To Set A Stop Loss Based On Support And Resistance From Charts
- How To Set A Stop Loss Based On Price Volatility
- How To Set A Stop Loss Based On A Time Limit
- 4 Big Mistakes Traders Make When Setting Stops
- 3 Rules To Follow When Using Stop Loss Orders
- Summary: Setting Stops
Scaling In and Out
- Currency Correlation Explained
- How To Read Currency Correlation Tables
- Are You Doubling Your Risk Without Knowing It?
- 5 Reasons Why Factoring In Currency Correlations Help You Trade Better
- Be Careful! Currency Correlations Change!
- How To Calculate Currency Correlations With Excel
- Summary: Currency Correlations