The secret to good Forex trading is to use sound judgement and analysis of the currencies you wish to trade on and prepare yourself in case your chosen trade loses.
This article will teach you basics of prolonging your trading capabilities.
If you scroll down, you can use our calculators.
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When it comes to trading, there is one major difference between a beginner and a professional trader:
A new trader concentrates on how much money he can make.
But an experienced one focuses on how much money he can lose.
Now think of that for a moment.
It may seem like the new trader is optimistic and the professional is a pessimist, but that is not the case.
One of the traits traders acquire over time is learning how to lose gracefully.
The truth behind investing is that stumbling across losing trades is inevitable.
No trader is correct 100% of the time.
Even if he is 100% correct in choosing the trade setups, the market can sometimes behave against what was expected.
However, properly managing your risks is vital for long-term success.
Loss is a part of investing/trading and thus, you must prepare yourself for the worst.
Risk management is all about knowing and limiting the risks in forex trading.
There’s always the likelihood that the forex market can move against you, increasing your losses over time.
Hence, you’ll want to use a protective stop loss: a strategy that allows you to protect your gains or prevent additional losses.
Such a technique activates at a given price level that assures a trader that he will make a predetermined profit or loss.
So, before you enter a trade, you should make an exit plan.
However, if the market continues to move against, some novices will insist on holding on to a trade, desperately hoping that it will go back up for the sake of recouping their losses.
In a worst case scenario, the market continues to go against them consistently and never rebounds.
As their emotions ensue, they now have taken bigger losses than they can cope with.
Now, trading for them has become a total nightmare or what is termed as a margin call.
Through lack of planning and emotional takeovers, you are putting yourself at high risk.
When you have real money on the line, you’ll tend to make decisions based on greed or fear.
Instead, you should make choices based on sound analysis rather than the need to get out of a trade.
On the other hand, traders have exited trades they thought have bottomed out, only to find the market moves back up.
Anyway, those who decide not to let this happen to them again become better traders.
Hence, there are three great strategies that you must apply again and again and again:
- Determine your entry
- Identify your risk
- Protect your potential profit
Managing Your Trade
We can look at risk through probability.
Apparently, when we toss a coin and choose heads or tails, there is a 50% chance that we’ll be correct.
Assume that we’ll win a dollar every time we’re right and lose a dollar every time we’re wrong.
We then are break-even traders.
To be profitable, one of two things must happen:
- We need to win a higher percentage of coin tosses (or trades).
- We need to profit more each time we’re right than we lose when we’re wrong.
Any successful trader knows that there is no one trade that is guaranteed to be a winner.
Therefore, they don’t let the outcome of a trade affect them personally.
They know that from a series of trades, they’re bound to find one that will earn them a profit.
So, if they found a profitable trade in the past, they know they’ll find one again.
The pros treat trading as a business rather than a form of entertainment.
They have two goals in mind:
Think About Winning Half the Trades:
While some novice traders get lucky and win three out of four trades, sometimes they lose more pips on the fourth trade than they won on the first three combined.
Use the Classic 1:3 Risk/Reward Ratio:
This means to win $3 every time you’re right and lose $1 each time you’re wrong.
Likewise, adjusting your protective stops according to forex market movement can increase your chances of being right over being wrong.
I say 1:3 risk/reward, because it is an acceptable start for novice traders.
Pros don’t think about less than 1:5 while they maximize their profit with some of the positions, sometimes up to 1:15.
Managing Your Account
When measuring risk, we must be familiar with one vital term: PIP
PIP is an acronym for percentage in point meaning the smallest price change that a given exchange rate can make.
As currencies are quoted, they are quoted to the full decimal place.
For instance, take the following quote: EUR/USD 1.2391.
The ‘1’ is the last digit to the right and thus the smallest amount the rate can increase or decrease by and hence is called the pip.
The very first question that comes to mind may be:
How many lots should we open?
This all depends on the total risk ratio you’re willing to take.
Let’s say you had the following:
– Account balance: $5,000
– Trade size: 250,000 EUR/USD (2.5 lots)
– PIP cost: $25 per pip
Pip Value Calculator
Use our pip value calculator below.
Now let’s assume that you prepare for a 100 pip loss on this trade.
This comes out to be a total loss of $2,500 ($25 x 100 pips).
In this case scenario, the loss potential is $2,500 or 50% of our total account balance.
Now it just doesn’t make much sense to take out as much as 2.5 lots on this trade since a 50% loss is rather steep.
With a risk ratio this high, we can run out of money before winning another trade.
Therefore, we want to risk a limited number of pips and a limited amount of our account balance so we can continue to trading even after a few losses.
Thus, it is advisable not to risk any greater than 2% of our account balance on any one trade at any one time.
To get a better feel for calculating our trade size, we can carry out some simple calculations:
$5,000 x 2% = $100 maximum loss
What will we need to do?
1. Determine the stop distance on our trade.
2. Determine the pip cost of your trade.
So let’s say that the pip cost per lot is $10.10.
For 100 pips x $10.10 = $1,010.
Now if we purchased 2 lots, our pip cost would double: 100 pips x $20.20 = $2,020.
How about 3 lots?
That of course would come out to be a loss potential of $3,030: 100 pips x $30.30 = $3,030.
In the previous calculation, we figured our maximum loss to be $100 and apparently taking one lot exceeds this.
So in this scenario, it would be best to buy 0.1 lots.
Basic Trading Money Management
Basic trading money management requires:
- Being prepared to take on a loss and managing risk appropriately
- Using protective stops whenever possible and adjusting them according to how the market is moving (up or down)
- Not allowing your emotions to take over, especially if the market tanks
It is best to limit your risk to 2% for each position, so you don’t lose a great deal of funds that can be applied on additional trades.
Remember, patience and consistency are key virtues.
One good trading opportunity now can lead to more in the future.
To have more winning trades, you have to learn and master a good and strong trading system, that not only help you locate the best trading opportunities, but also shows you the best possible place to set the stop loss orders to limit your risks.
Here is also some of the articles that help you in your money management plan.
Don’t miss them:
- Money Management Is the Critical Part of Forex Trading
- How to Become Multi Millionaire Trading Forex, with a Proper Trading and Risk Management Method
- Double or Even Triple Your Forex Trading Account Risking 2-5% Only
- Leverage, Margin, Balance, Equity, Free Margin, Margin Call And Stop Out Level In Forex Trading
- What Is the Proper Risk and Reward Ratio in Forex Trading?
Position Size Calculator:
As a forex trader, sometimes you have to make some calculations.
One of the most important thing that you have to calculate is the position size.
To follow the money management rules, you have to know how much risk you are taking in each position.
To do that, you should be able to calculate your position size based on your account balance and the trade stop loss size.
The below calculator makes the work much easier and faster.
Please also read my money management article to learn more about this important topic:
Pip Value Calculator:
Use the below calculator to know how much money each pip makes for you while trading different currency pairs:
Use the below calculator to know how much margin is required for each position:
Swap, Rollover or Interest Calculator:
Use the below calculator to know how much swap you have to pay or you will receive for trading different currency pairs:
Use the below calculator to know how much money you will make trading different currency pair:
Position Size Calculator Script for MT4 Platform
Calculating the position size based on the percentage of the risk you want to take and the stop loss size of the trade setup you locate is a pain, specially when you are in rush to enter the market before it becomes too late.
You can use a position size calculator, but a calculator that does the job for you right on the trading platform is a much better option.
Before sharing such a calculator, please let me explain a little about position size calculation.
Why should you calculate your position size before entering the market?
Let’s say you have located a trade setup based on your trading system.
That special trade setup needs a 100 pips stop loss.
You have a $10,000 account and you want to risk only 2% of your account which is $200.
It means if the price hits the stop loss, you should not lose more than $200.
Now the question is how big your position size has to be?
If you take a one lot EUR/USD position with a 100 pips stop loss, then if it hits the stop loss you will lose $1000 because EUR/USD pip value is about $10, and so 100 pips means $1000.
Therefore, if you want not to lose more than $200, then you have to take a 0.2 lots position which is 5 times smaller than one lot.
Am I right?
This is how you have to calculate your position size.
Different Currency Pairs
The problem is, different currency pairs have different pip values.
And to use a position size calculator, you have to enter the currency pair ask price.
Besides, it takes time and you can make mistakes when you are in rush to take your positions as soon as possible.
And usually you forget how to calculate when you are in rush.
So, an automatic tool that does all of this right on the trading platform is really helpful.
A tool that calculates the pip value of each currency pair in the background and gives you the result.
One of the LuckScout users, Dionisis, sent us a script that calculates the position size based on the stop loss value and risk percentage.
It also gives you the target value if you tell it how big you want your target to be.
Thank you Dionisis 🙂
This is how you can use the script according to Dionisis:
This script works only with the MT4 platform.
How to Install:
- Click Here to download the script.
- Go to File->Open Data Folder->MQL4->Scripts
- Copy/Paste the script
- Restart MT4
The script can be accessed in the navigator window, under the “Scripts” list.
How to use:
1. Draw a horizontal line at the desired Stop Loss level:
2. Attach the script at the same chart.
3. The following pop-up window should appear (make sure the “Inputs” tab is selected):
4. In the “Stop_Loss_Price” cell insert the price shown by the red horizontal line drawn in the chart.
5. In the “risk’’ cell insert the amount of risk to be taken for this trade, as a percentage of account’s balance.
6. In the “Target’’ cell insert the target of the trade expressed as Stop Loss multiples. For example, for Take Profit=3xStop Loss insert 3.
For the given example the table should look like this:
7. Press “OK”. The following message will appear:
The position size shall be 0.0387 (round this based on your broker’s settings) and the Take Profit price shall be 0.8922.
The Stop Loss price is shown in the chart by the horizontal line. In terms of pips, it is given by the script’s output message (97 pips).
- This is just a script, it will not take or modify any positions.
- The script will identify if it is going to be a short or a long position. In the former case it will include the spread pips in the stop loss calculation.
- This script works for all account currencies and for 5 or 4 (2 or 3 for JPY pairs) price decimal digits.
Click Here to download.
- The issue with gold is fixed.
- Two more features are added:
1. The output window now also shows the currency’s spread (in points).
2. An optional input (‘Enter_Price’) in case one wants to calculate the size for a pending order. If it is left to 0 (default value) the size will be calculated based on the current bid price.