Your risk per a trade should never exceed 3% per trade. It's better to adjust your risk to 1% or 2%We prefer a risk of 1% but if you are confident in your trading system then you can lever your risk up to 3%1% risk of a 100,000$ account = 1,000$You should adjust your stop loss so that you never lose more than 1,000$ per a single trade.If you are a short term trader and you place your stop loss 50 pips below/above your entry point .50 pips = 1,000$1 pips = 20$The size of your trade should be adjusted so that you risk 20$/pip. With 20:1 leverage,your trade size will be 200,000$If the trade is stopped, you will lose 1,000$ which is 1% of your balance.This trade will require 10,000$ = 10% of your balance.If you are a long term trader and you place your stop loss 200 pips below/above your entry point.200 pips = 1,000$1 pip = 5$The size of your trade should be adjusted so that you risk 5$/pip. With 20:1 leverage, your trade size will be 50,000$If the trade is stopped, you will lose 1,000$ which is 1% of your balance.This trade will require 2,500$ = 2.5% of your balance.This's just an example. Your trading balance and leverage provided by your broker may differ from this formula. The most important is to stick to the 1% risk rule. Never risk too much in one trade. It's a fatal mistake when a trader lose 2 or 3 trades in a row, then he will be confident that his next trade will be winning and he may add more money to this trade. This's how you can blow up your account in a short time! A disciplined trader should never let his emotions and greed control his decisions.
Wednesday, December 9, 2009
poor money management
Money management is a critical point that shows difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don't understand how important it is.It's important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.There are different money management strategies. They all aim at preserving your balance from high risk exposure.First of all, you should understand the following term Core equityCore equity = Starting balance - Amount in open positions.If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade,your core equity will be 8,000$It's important to understand what's meant by core equity since your money management will depend on this equity.We will explain here one model of money management that has proved high anual return and limited risk. The standard account that we will be discussing is 100,000$ account with 20:1 leverage . Anyway,you can adapt this strategy to fit smaller or bigger trading accounts.
Thursday, November 12, 2009
The Merk Hard Currency Fund and forex
Funds such as the MERK hard currency fund offer FX specific returns as a mutual fund. From their website: http://www.merkfund.com/
The Merk Hard Currency Fund (MERKX) is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. Many consumers are aware of the falling dollar but don't know how to protect their capital against its decline. Others are uncomfortable choosing specific foreign currencies to invest in or investing in currency derivatives. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks-with the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market.
Hedge Funds are another venue for FX investing, but they typically have a $1 Million minimum and employ risky strategies.
The Merk Hard Currency Fund (MERKX) is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. Many consumers are aware of the falling dollar but don't know how to protect their capital against its decline. Others are uncomfortable choosing specific foreign currencies to invest in or investing in currency derivatives. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks-with the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market.
Hedge Funds are another venue for FX investing, but they typically have a $1 Million minimum and employ risky strategies.
downward spiral starts in currency
Technically, once a downward spiral starts in currency, it is very difficult to stop. In stocks, an issuer can buy back shares in order to dry up liquidity and stabilize the price; a common practice among penny stocks listed on pink sheets. However if the US Dollar declines, the Fed would need Euros in order to buy back US Dollars, and since the Fed is not an issuer of Euros, it would take a near act of God to convince the ECB to loan the trillions necessary to support the dollar in the event of a default or run on the banks. While the Fed does have some mechanisms in place to stabilize the markets, the act of supporting your own currency is like pulling yourself out of a sinkhole by your own hair. Once the selling starts, it could feed on itself and create a downward spiral as the value goes down more large holders, worried about further losses, may panic and sell, thus adding fuel to the fire.
It would be anything but capitalism if we didn't profit from this once in a lifetime opportunity of a declining dollar. On one hand, wealth will be wiped out en masse on the other, it will be created. A transfer of paper wealth from USD to Euro and other currencies is inevitable; why be on the wrong side of the fence? Germans, Argentineans, Japanese, French, British, Italians, Turks, and many others, can attest to the events surrounding currency collapse and hyper inflation. They say it cannot happen to USA because of the TBTF Too Big to Fail Policy, a fallacious reasoning that came out of a Senate hearing on banking regulation.
It would be anything but capitalism if we didn't profit from this once in a lifetime opportunity of a declining dollar. On one hand, wealth will be wiped out en masse on the other, it will be created. A transfer of paper wealth from USD to Euro and other currencies is inevitable; why be on the wrong side of the fence? Germans, Argentineans, Japanese, French, British, Italians, Turks, and many others, can attest to the events surrounding currency collapse and hyper inflation. They say it cannot happen to USA because of the TBTF Too Big to Fail Policy, a fallacious reasoning that came out of a Senate hearing on banking regulation.
cutting interest rates and dropping the dollar
The Fed therefore officially controls exchange rates of the US Dollar through Monetary Policy. The Fed, in response to a weakening US economy and a Subprime crisis, has taken an aggressive policy of cutting interest rates, thus dropping the dollar.
So we cannot expect the Fed to solve the weak dollar issue, because they are the creators of it! The Fed could start aggressively raising interest rates and we could see the dollar soar to new highs. But there is a low chance of that happening, as they have indicated the contrary. As the credit crisis unravels, we can expect the Fed to continue cutting rates. With a weak stock market, a weak real estate market, and a weak economy, we can expect more doom and gloom before we see the light at the end of the tunnel, and in the meantime the US Dollar can sink another 80% or more, as the Great British Pound did when it lost its status as reserve currency.
So we cannot expect the Fed to solve the weak dollar issue, because they are the creators of it! The Fed could start aggressively raising interest rates and we could see the dollar soar to new highs. But there is a low chance of that happening, as they have indicated the contrary. As the credit crisis unravels, we can expect the Fed to continue cutting rates. With a weak stock market, a weak real estate market, and a weak economy, we can expect more doom and gloom before we see the light at the end of the tunnel, and in the meantime the US Dollar can sink another 80% or more, as the Great British Pound did when it lost its status as reserve currency.
monetary policy actions influence exchange rates.
The largest player in the US Dollar is clearly the Fed, the sole issuer of the US Dollar. Investment Banks and Hedge Funds, at the end of the day, rely on the Fed for regulation, clearing, liquidity, and currency controls; they are distributors and traders of US Dollars not the manufacturer. It clearly states on the Fed's website that the Fed conducts foreign currency operations in the open market, and maintains US holdings of foreign currency and swaps. This would indicate the Fed has the ability to intervene in currency markets in order to protect the strength of the dollar, and although the Fed may have that ability, it states in the same article that:
US monetary policy actions influence exchange rates. The dollar's exchange value in terms of other currencies is therefore one of the channels through which U.S. monetary policy affects the U.S. economy. If Federal Reserve actions raised U.S. interest rates, for instance, the foreign ex-change value of the dollar generally would rise. An increase in the foreign exchange value of the dollar, in turn, would raise the price in foreign currency of U.S. goods traded on world markets and lower the dollar price of goods imported into the United States. By restraining exports and boosting imports, these developments could lower output and price levels in the economy. In contrast, an increase in interest rates in a foreign country could raise worldwide demand for assets denominated in that country's currency and thereby reduce the dollar's value in terms of that currency. Other things being equal, U.S. output and price levels would tend to increase must the opposite of what happens when U.S. interest rates rise.
US monetary policy actions influence exchange rates. The dollar's exchange value in terms of other currencies is therefore one of the channels through which U.S. monetary policy affects the U.S. economy. If Federal Reserve actions raised U.S. interest rates, for instance, the foreign ex-change value of the dollar generally would rise. An increase in the foreign exchange value of the dollar, in turn, would raise the price in foreign currency of U.S. goods traded on world markets and lower the dollar price of goods imported into the United States. By restraining exports and boosting imports, these developments could lower output and price levels in the economy. In contrast, an increase in interest rates in a foreign country could raise worldwide demand for assets denominated in that country's currency and thereby reduce the dollar's value in terms of that currency. Other things being equal, U.S. output and price levels would tend to increase must the opposite of what happens when U.S. interest rates rise.
perform your trade for dollars
Who is not affected by a declining dollar? The poor, debtors, manual laborers, and tradesmen (because you can continue to perform your trade for dollars, pesos, or bananas if need be regardless of the continuing slide of the dollar tomorrow you may charge twice as much but so what?) But if you have any wealth; a house or a stock portfolio, denominated in dollars, the declining US Dollar should be the most important issue to you because that portfolio is losing value as the dollar does. In the worst case scenario, the Fed can default making US Dollars worthless overnight.
Best case, although unlikely it should be mentioned, the Fed could raise rates to 10%, Bush could declare a flat tax, open the borders to foreign investors by deregulation and providing tax incentives, pull out US Military from all foreign engagements, and be the banker of the world. This would catapult the US economy and the US Dollar to currently unimaginable success, but this is a farfetched fantasy. In reality, we are increasing our Military presence around the world, cutting interest rates, and regulating US markets, forcing even homegrown companies to look abroad.
Let's examine why the dollar is declining and what can potentially stop the decline.
Best case, although unlikely it should be mentioned, the Fed could raise rates to 10%, Bush could declare a flat tax, open the borders to foreign investors by deregulation and providing tax incentives, pull out US Military from all foreign engagements, and be the banker of the world. This would catapult the US economy and the US Dollar to currently unimaginable success, but this is a farfetched fantasy. In reality, we are increasing our Military presence around the world, cutting interest rates, and regulating US markets, forcing even homegrown companies to look abroad.
Let's examine why the dollar is declining and what can potentially stop the decline.
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