Currency pair USD/CHF

Presumably, within the limits of an impulse () of [b] finishes formation a correctional wave iv of (c). If the assumption is true, after its termination, it is possible to expect short-term falling of pair as an impulse or a Diagonal Triangle v of (c).

Currency pair EUR/USD

Presumably, formation of a correctional wave [b] of B proceeds. Probably, it takes the form of a double (threefold) Zigzag in which frameworks its next phase (y) of [b], at present, is formed. If the assumption is true, in short term, it is possible to expect continuation of growth of pair as Zigzag formation y of (y) of [b].

Currency pair GBP/USD.

Probably correctional wave [b] of X becomes a Flat. If the assumption is true, after end of its wave (b) of [b], it is possible to expect growth of pair as impulse or Diagonal Triangle formation (c) of [b].

Currency pair USD/JPY.

While the pair is in frameworks of the modified scenario. The correctional wave [b] of v, a Diagonal Triangle (v) of [c] of X is presumably formed. If the assumption is true, after its termination, it is possible to count on short-term falling of pair as an impulse or a Diagonal Triangle [C] of v.

Trading is the exchange of goods or services between two or more parties. So if you need gasoline for your car, then you would trade your dollars for gasoline. In the old days, and still in some societies, trading was done by barter, where one commodity was swapped for another. A trade may have gone like this: Person A will fix Person B’s broken window in exchange for a basket of apples from Person B’s tree. This is a practical, easy to manage, day-to-day example of making a trade, with relatively easy management of risk. In order to lessen the risk, Person A might ask Person B to show his apples, to make sure they are good to eat, before fixing the window. This is how trading has been for millennia: a practical, thoughtful human process.

This is Now
Now enter the world wide web and all of a sudden risk can become completely out of control, in part due to the speed at which a transaction can take place. In fact, the speed of the transaction, the instant gratification and the adrenalin rush of making a profit in less than 60 seconds can often trigger a gambling instinct, to which many traders may succumb. Hence, they might turn to online trading as a form of gambling rather than approaching trading as a professional business that requires proper speculative habits. (Learn more in Are You Investing Or Gambling?)
Speculating as a trader is not gambling. The difference between gambling and speculating is risk management. In other words, with speculating, you have some kind of control over your risk, whereas with gambling you don’t. Even a card game such as Poker can be played with either the mindset of a gambler or with the mindset of a speculator, usually with totally different outcomes.

Betting Strategies
There are three basic ways to take a bet: Martingale, anti-Martingale or speculative. Speculation comes from the Latin word "speculari," meaning to spy out or look forward.
In a Martingale strategy, you would double-up your bet each time you lose, and hope that eventually the losing streak will end and you will make a favorable bet, thereby recovering all your losses and even making a small profit.
Using an anti-Martingale strategy, you would halve your bets each time you lost, but would double your bets each time you won. This theory assumes that you can capitalize on a winning streak and profit accordingly. Clearly, for online traders, this is the better of the two strategies to adopt. It is always less risky to take your losses quickly and add or increase your trade size when you are winning.

However, no trade should be taken without first stacking the odds in your favor, and if this is not clearly possible then no trade should be taken at all. (For more on the Martingale method, read FX Trading The Martingale Way.)

Know the Odds
So, the first rule in risk management is to calculate the odds of your trade being successful. To do that, you need to grasp both fundamental and technical analysis. You will need to understand the dynamics of the market in which you are trading, and also know where the likely psychological price trigger points are, which a price chart can help you decide.

Once a decision is made to take the trade then the next most important factor is in how you control or manage the risk. Remember, if you can measure the risk, you can, for the most part, manage it.

In stacking the odds in your favor, it is important to draw a line in the sand, which will be your cut out point if the market trades to that level. The difference between this cut-out point and where you enter the market is your risk. Psychologically, you must accept this risk upfront before you even take the trade. If you can accept the potential loss, and you are OK with it, then you can consider the trade further. If the loss will be too much for you to bear, then you must not take the trade or else you will be severely stressed and unable to be objective as your trade proceeds.

Since risk is the opposite side of the coin to reward, you should draw a second line in the sand, which is where, if the market trades to that point, you will move your original cut-out line to secure your position. This is known as sliding your stops. This second line is the price at which you break even if the market cuts you out at that point. Once you are protected by a break-even stop, your risk has virtually been reduced to zero, as long as the market is very liquid and you know your trade will be executed at that price. Make sure you understand the difference between stop orders, limit orders and market orders.

Liquidity
The next risk factor to study is liquidity. Liquidity means that there are a sufficient number of buyers and sellers at current prices to easily and efficiently take your trade. In the case of the forex markets, liquidity, at least in the major currencies, is never a problem. This liquidity is known as market liquidity, and in the spot cash forex market, it accounts for some $2 trillion per day in trading volume.

However, this liquidity is not necessarily available to all brokers and is not the same in all currency pairs. It is really the broker liquidity that will affect you as a trader. Unless you trade directly with a large forex dealing bank, you most likely will need to rely on an online broker to hold your account and to execute your trades accordingly. Questions relating to broker risk are beyond the scope of this article, but large, well-known and well capitalized brokers should be fine for most retail online traders, at least in terms of having sufficient liquidity to effectively execute your trade.

Risk per Trade
Another aspect of risk is determined by how much trading capital you have available. Risk per trade should always be a small percentage of your total capital. A good starting percentage could be 2% of your available trading capital. So, for example, if you have $5000 in your account, the maximum loss allowable should be no more than 2%. With these parameters your maximum loss would be $100 per trade. A 2% loss per trade would mean you can be wrong 50 times in a row before you wipe out your account. This is an unlikely scenario if you have a proper system for stacking the odds in your favor.

So how do we actually measure the risk?

The way to measure risk per trade is by using your price chart. This is best demonstrated by looking at a chart as follows:

Figure 1: EUR/USD One-Hour Time Frame

Chart by Netdania.com

We have already determined that our first line in the sand (stop loss) should be drawn where we would cut out of the position if the market traded to this level. The line is set at 1.3534. To give the market a little room, I would set the stop loss to 1.3530. (Learn more about stop losses in The Art Of Selling A Losing Position.)

A good place to enter the position would be at 1.3580, which, in this example, is just above the high of the hourly close after a an attempt to form a triple bottom failed. The difference between this entry point and the exit point is therefore 50 pips. If you are trading with $5,000 in your account, you would limit your loss to the 2% of your trading capital, which is $100.

Let’s assume you are trading mini lots. If one pip in a mini lot is equal to approximately $1 and your risk is 50 pips then, for each lot you trade, you are risking $50. You could trade one or two mini lots and keep your risk to between $50-100. You should not trade more than three mini lots in this example, if you do not wish to violate your 2% rule.

Leverage
The next big risk magnifier is leverage. Leverage is the use of the bank’s or broker’s money rather than the strict use of your own. The spot forex market is a very leveraged market, in that you could put down a deposit of just $1,000 to actually trade $100,000. This is a 100:1 leverage factor. A one pip loss in a 100:1 leveraged situation is equal to $10. So if you had 10 mini lots in the trade, and you lost 50 pips, your loss would be $500, not $50.

However, one of the big benefits of trading the spot forex markets is the availability of high leverage. This high leverage is available because the market is so liquid that it is easy to cut out of a position very quickly and, therefore, easier compared with most other markets to manage leveraged positions. Leverage of course cuts two ways. If you are leveraged and you make a profit, your returns are magnified very quickly but, in the converse, losses will erode your account just as quickly too. (See Leverage’s "Double-Edged Sword" Need Not Cut Deep for more.)

But of all the risks inherent in a trade, the hardest risk to manage, and by far the most common risk blamed for trader loss, is the bad habit patterns of the trader himself.

All traders have to take responsibility for their own decisions. In trading, losses are part of the norm, so a trader must learn to accept losses as part of the process. Losses are not failures. However, not taking a loss quickly is a failure of proper trade management. Usually a trader, when his position moves into a loss, will second guess his system and wait for the loss to turn around and for the position to become profitable. This is fine for those occasions when the market does turn around, but it can be a disaster when the loss gets worse. (Learn to overcome this big hurdle in Master Your Trading Mindtraps.)

The solution to trader risk is to work on your own habits and to be honest enough to acknowledge the times when your ego gets in the way of making the right decisions or when you simply can’t manage the instinctive pull of a bad habit.

The best way to objectify your trading is by keeping a journal of each trade, noting the reasons for entry and exit and keeping score of how effective your system is. In other words how confident are you that your system provides a reliable method in stacking the odds in your favor and thus provide you with more profitable trade opportunities than potential losses.

Conclusion
Risk is inherent in every trade you take, but as long as you can measure risk you can manage it. Just don’t overlook the fact that risk can be magnified by using too much leverage in respect to your trading capital as well as being magnified by a lack of liquidity in the market. With a disciplined approach and good trading habits, taking on some risk is the only way to generate good rewards.

For related reading, take a look at Risk Management Techniques For Active Traders.

by Selwyn Gishen (Contact Author | Biography)
Selwyn Gishen is a trader with more than 15 years of experience trading forex and equities for a private equity fund. For the past 35 years, he has also been a student of metaphysics, and has written a book called "Mind: How Changing Your Mind Can Change Your Life!" (2007). Gishen is the founder of FXNewsandViews.Com and the author of a forex trading guide entitled "Trading the Forex Markets: A Foundation Course for Online Traders". The course is designed to provide the trader with all the aspects of Gishen’s Fusion Trading Model.

Article Source : http://www.investopedia.com/articles/forex/10/forex-risk-management.asp?partner=fxweekly4

By D Bennett

A trading plan gives a day trader points of reference as market action unfolds quickly in real time. It enables them to always know what to do next, and how to do it. Specifically the plan should answer four key questions.

1. When should a trade by opened?

You must specify some trigger which will signal you to take a trade, for example: (i) Buy if price moves down to a key support level or penetrates a resistance level. (ii) Sell if a "fast" moving average crosses below a "slower" one. (iii) Buy if an expected news item meets some specific criterion. The trigger must be clear, unambiguous and easily determined in the heat of battle. When the trigger is detected, you act.

2. How large should the trade be?

A signal to buy or sell is not enough unless you also know what size investment to make. In futures trading, this means knowing how many contracts to buy or sell. There are various strategies you might choose. For example: (i) Always trade the same number of contracts. (ii) Identify where the initial stop loss order is placed, calculate the level of risk per contract, and divide this into the highest level of acceptable risk per trade to find the number of contracts to trade.

It is very easy to get this wrong and find yourself carrying too much risk, or missing opportunities by being in too small a position. Trading with the right position size is possible the factor which makes the greatest contribution to the ultimate success or failure of the trader.

3. Where should the initial stop be placed?

Never enter a futures trade without placing a stop loss order to guard against catastrophic loss. Choose a strategy for setting the stop loss level, such as: (i) Use a "money stop". Knowing how many contracts you want to trade, calculate how far away from the entry the stop must be placed to limit loss to a fixed amount. (ii) Use a "technical stop". For instance, place a stop below a previous support level for a long trade, or above a previous resistance level for a short trade.

Whichever method is chosen, the plan must clearly specify the process so that you do it automatically in the trading session.

4. How will the trade be exited?

Before you get into a trade you need to know how you will get out! You should already have a stop loss order to exit if the trade loses, but what if things go your way? Various approaches are possible, for example: (i) Set a target. (ii) "Trail" the stop loss order to lock in profit as the market moves your way. (iii) Exit after a certain time period, or just before the end of the session.

Whatever your intention, you need to know ahead of time and the plan must specify exactly what to do. If you have a target, where is it? If you trail stops, when do you move the stop and where do you move it to? Ensure that each element of the plan dovetails neatly with the other parts. Write it down and learn it thoroughly through practice trading before using it in a live situation.

David Bennett is a futures trader based in Australia and the author of the unique TradeOnAuto software. Follow his daily trades at http://www.tradeonauto.com/blog.

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In day trading, the most important thing is risk management. Surprisingly, many people jump into day trading without giving much thought to risk management. Manage your risk first, rewards will come later.

Day trading requires long term commitment. You have to be persistent. You need to improve continuously. That’s why risk management is important. If you do not preserve your capital, you will not be able to survive long in this game and you will be unable to reap the real profits.

So how do you start with risk management in day trading? Treat day trading as a business. Make a good business plan with proper targets. Risk management should be an important part of this business plan. Now risk management may require a number of different control levels like managing your account balance.Making sure, it does not fall below a certain level. Than you need to learn how to manage losses in each trade. Your business plan should be long term. You should think about yourself as a long term player.

So how do you manage your account balance? Each trader will have to determine the amount of money, he or she is willing to risk. You see, I may be comfortable with one level of risk and you maybe comfortable with another level of risk. Now, you need to determine the amount of money that you can afford to lose without getting emotionally disturbed and losing your sleep. Call this number, “The Tilt Number.” Keep this number in mind and once you lose this much money in a single day, stop trading. Your trading strategies might be flawed. You need to re-evaluate your methodologies before you trade again.

Another rule that you can follow is,” Three Strikes and you are out.” What this means is that if you lose three trades in a row, stop trading. Re-evaluate your trading strategies and style and only trade after a thorough analysis of what went wrong and how you are going to correct it.

Always calculate your Risk to Reward Ratio before you enter in a trade. Do not trade if the Risk to Reward Ratio is more than 1:3. What this means is that you have a chance of winning 3 trades against losing 1 with this Risk to Reward Ratio. Any thing more than this should be considered as too risky.

Never ever trade without using stops. Use of stop loss is must in each trade. First put a stop loss and only then enter the trade. This should be your cardinal principle. At times when you are unable to figure out the mood of the markets or the market seems to be unpredictable, don’t trade, take rest!

Mr. Ahmad Hassam is a Harvard University Graduate. Get this FREE 82 page PDF Candlestick Guide! Watch these 4 FREE Forex Day Trading Risk Shield Videos by Bill Poulos that show how to reduce risk to zero and triple profits. Try Bill’s Forex Income Engine 2.0 Course RISK FREE for 60 days if you are serious about reaching a 5 figure monthly income part time with forex trading. This course comes with 8 weeks of FREE personal coaching by Bill.

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The critical difference between who will win and who will lose in the business of Forex market trading is learning how to manage your money. For example, if 100 Forex traders begin trading by using a system with 60% of winning odds, only about 5 of those traders would see a profit by the end of the year. Despite those 60% winning odds, only 95% of those Forex traders will lose because of poor money management skills. When entering a trading system one must have great money management skills in order to succeed. Traders enter the Forex system to make a profit, after all, not to lose money.

The amount of money you will put on a trade and the risks you are willing to accept for that trade is money management. It is very important to understand the concept of managing money and to understand the difference between managing money and trading decisions, in order to diversify your Forex trading strategies. There are a number of different strategies that can be employed that will aspire to preserve your balance from any high-risk liabilities.

To begin with an understanding of the “core equity” is a necessity. Basically the core equity illustrates the starting balance of the account and what amounts are in the open positions. Your money management will greatly depend on this equity so it’s very important to understand the meaning of core equity. For instance, if you have an open account with a balance of $5,000 and you enter a trade with $1,000 your core equity will be $4,000. If you enter another trade for another $1,000 then your core equity would be $3,000.

From the outset, it’s best to diversify trades by using several different currencies. By only trading one currency pair, you will generate very few entry signals. For example, if you have an account balance of $100,000 and have an open position for $10,000 then that makes your core equity $90,000. If you choose to enter on a second position, then calculate the 1% risk from your core equity, but not your starting account balance. This would mean that the second trade would not exceed $900. Then if you decide to enter a third position, with a core equity of $80,000 then the risk from that trade should not surpass $800. The key is to diversify the lots between all currencies that have a low correlation.

For example, if you want to trade EUR/USD and GBP/USD with a $10,000 (1% risk) standard position size in money management, then it would be safe to trade $5,000 in each EUR/USD and GBP/USD. This way, you will only be risking 0.5% on each position.

When trying to diversify your Forex trading strategies, it’s very important to understand the strategies of the Martingale and the Anti-Martingale. The Martingale rule means: increasing your risks when you’re losing. Gamblers worldwide who claim that one should increase the size of a trade even when one is losing have adopted this strategy. Basically, gamblers use the rule in the following way: bet $20, if you lose bet $40, if you loose bet $80, if you lose bet $160, if you lose bet $320, etc.

The strategy is to assume that if you lose more than four times, then the chances to win become bigger and as you add more money, you will be able to recover from your loss. Although there are many people who choose to use this strategy, the truth is, the odds are still the same 50/50 regardless of the previous losses. Even if you lose five times in a row, the odds for your sixth bet, and even for those there after, are still 50/50. This is a common mistake made by those who are new to the trading business.

For instance, if a trader started with a $10,000 balance and lost four trades of $1,000 a piece for a total of $4,000 then the traders remaining balance would be $6,000. If the trader thinks there is a higher chance of winning the fifth trade and increases the size of the position four times, enough to recover from the loss, then if the fifth trade loses the trader will be down to $2,000. A loss like this can never be recovered back to the $10,000 starting balance. No experienced trader would use such a risky gambling tactic as the result is negative – losing all the money in a short period of time.

A new trading e-book has been uploaded to my site today. It’s Money Management and Risk Management by Ryan Jones. As the title of this book goes, it’s about money management — one of the most important parts of Forex trading (and not only Forex, but any other financial trading that involves risk and probability). The author wisely divides the money management into two kinds — the proper and improper money management. Where the first type refers to the one that always keeps in mind both the risk and reward parts of each trading action, while the improper tries to amplify the importance of only one of those to vital parts. Unfortunately, the majority of traders, especially newbie traders, that see the possibilities opened by the on-line Forex market and its huge leverage, fail to see the full picture and all the more so they can’t apply the proper money management to their trading strategy. But now you can download this book to learn more about the proper money management:

• Money Management and Risk Management

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I uploaded a new e-book about trading in the psychology section today. It’s The Disciplined Trader by Mark Douglas. The book is all about the process of developing the new winning attitudes in the financial market traders. The great deal of success in the market depends on a clearness of the trader’s mind and his ability to make rational thoughtful decisions. Unfortunately the market is quite a difficult entity, which can disturb emotions and dim minds. From the psychological point of view the market had better be accepted as the trader’s environment, but its actions towards the trader had better be treated with a great care. Discipline is a tool, which can help a trader see not his guilt, worthlessness or helplessness in the bad trade outcomes but rather see losses as the expenses. Meanwhile, the profits had bettern’t be treated as the rewards for trading itself but rather as a reward for the weighted decision made at a right moment of time. You can download this book for free:

• The Disciplined Trader

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