Risk management is one of the most important topics you will ever read about trading.
Why is it important? Well, we are in the business of making money, and in order to make money we have to learn how to manage risk (potential losses).
Ironically, this is one of the most overlooked areas in trading. Many forex traders are just anxious to get right into trading with no regard for their total account size.
They simply determine how much they can stomach to lose in a single trade and hit the “trade” button. There’s a term for this type of investing….it’s called…
When you trade without risk management rules, you are in fact gambling.
You are not looking at the long term return on your investment. Instead, you are only looking for that “jackpot.”
Risk management rules will not only protect you, but they can make you very profitable in the long run. If you don’t believe us, and you think that “gambling” is the way to get rich, then consider this example:
People go to Las Vegas all the time to gamble their money in hopes of winning a big jackpot, and in fact, many people do win.
So how in the world are casinos still making money if many individuals are winning jackpots?
The answer is that while even though people win jackpots, in the long run, casinos are still profitable because they rake in more money from the people that don’t win. That is where the term “the house always wins” comes from.
The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money–not the gamblers.
Even if Joe Schmoe wins a $100,000 jackpot in a slot machine, the casinos know that there will be hundreds of other gamblers who WON’T win that jackpot and the money will go right back in their pockets.
This is a classic example of how statisticians make money over gamblers. Even though both lose money, the statistician, or casino in this case, knows how to control its losses. Essentially, this is how risk management works. If you learn how to control your losses, you will have a chance at being profitable.
In the end, forex trading is a numbers game, meaning you have to tilt every little factor in your favor as much as you can. In casinos, the house edge is sometimes only 5% above that of the player. But that 5% is the difference between being a winner and being a loser.
You want to be the rich statistician and NOT the gambler because, in the long run, you want to “always be the winner.”
Each country has various events happening throughout the year that may impact the currency of that country as well as its performance against competing currencies. These events can either be as a result of the central bank of the country or something planned by the government. This blog aims to point out some aspects of using economic reports as a part of your trading arsenal.
Importance of Economic Events
Economic events are normally scheduled when an economic year is being planned by the Finance sector of a country or its Central Bank is planning its financial year. Some events may be added throughout the year as some sort of mitigation for the currency's growth. Economic events are extremely important as they can drive the currency in a free fall or a hug climb. Checking economic events should always be done before you start your trading day to ascertain what the impact will be for the currency or currencies you wish to trade.
Each economic event will be classified in one of 3 levels;
1. High Impact - These kind of events normally pushes a currency in a defined direction based on the sentiments of the trades. These may involve a change in oil prices for commodity currencies or housing reports within the US market.
2. Medium Impact- Generally have a slight impact on the movement of a currency. You gain a few pips by trading these events.
3. Low impact - These events don't normally have any apparent immediate impact on currency movements, however, should still be monitored for any trade opportunities on lower timeframes.
Trading The News
A lot of traders will use these economic news events and trade and rake in huge profits. On the other hand a lot of traders will choose not trade the news because of the volatility that it can cause. What they will do is close their trades before the event occurs and open new trades after the currency resumes it normal behavior.
If you follow the news closely and trade wisely you can ride huge pip waves and make huge profits on the other hand because of the volatility that the news creates you can also lose big so be careful when trading the news.
How to get the news
there are various ways to get economic news and events even right as they happen. I use WBP Online Terminal to keep up to date the economic events and news as soon as they occur. There's also forex factory where you can get up to date information. Other sources include Bloomberg as well as Market Watch.
It is extremely important to learn about anything new that you will undertake, with Forex trading it isn't any different. Learning is tantamount to the success you will get from trading. if you don't endeavor to learn then you will fail fast. Therefore make it a point of your duty to always remain a student to the market even when you have become an extremely profitable trader. Learning can never be too much in such a dynamic society and a rapidly changing economic climate being pushed by technology and its effect on globalization.
I will introduce a number of ways to either start learning or continue developing your trading craft. These ways will take you from an extremely fundamental and primary level to a more sophisticated and interactive level.
This is an extremely helpful site for both beginner traders and experience traders. It incorporates an online school which takes persons who want to learn through stages of developing such a craft. It has an online school that allows you to track your progress while you learn from the basics to the most advanced things in the Forex market. The school is self-paced so you will not rushed or flooded with a lot of things to do. What it does is that it structures the learning environment so that it will take you from kindergarten to basic school then to primary school. After completing primary there is secondary level education and tertiary level education that is constructed of both undergraduate and graduate level information.
This is a marvelous place to start learning and continue learning as it also hosts a forum and a blog for its users. The forum allows you to interact with other traders at various levels in their trading life. The blog allows you to create your own trading cyber space where you can share your strategy and grow with the community of traders as well as read about the progress of other trading strategies as the traders tweak their tools. I highly recommend to anyone wanting to start off trading to begin here.
Tradimo is similar in its approach to Babypips as it provides a plethora of learning materials absolutely free. Hence you can also register, learn and track your learning progress. There is a slight difference however as tradimo offers a trading aspect where it can connect you directly to brokers and allow you to trade.
It has an excellent platform that allows you to grow your potential and hence your profitability when you begin to trade. Use the learning platform to add to your trading tools or sharpen the ones you already possess.
A number of YouTube channels exists that takes traders through different trading strategies, market signals, chart analysis and market preview. The channels may vary from individuals to Forex groups or major businesses helping you as a trader to be more profitable. I personally have followed a number of these channels and see how best i could incorporate what i learn with my trading strategy so as to maximize on my effectiveness in trading.
PATsTrading Channel takes you through daily analysis of charts using price action trading but focusing mainly on second entry strategy. A lot can be learned from the analysis done using this price action strategy and incorporating it your trading tool kit.
Forex Reviews is another excellent channel for market previews and reviews. It's done by Timon Weller and what he does is he uses price action to analyze a number of currency pairs, see what there price action has been and uses that to forecast particular movements that may arise.
There are lot more channels out there that can be used to learn from to increase your skill and knowledge but all should be analysed and see if they are in line with your risk appetite and trading strategy.
Webinars are another great way of learning and continuous growth. Webinars are mostly live and has a tutor or presenter delivering the objectives of the webinar. It is mostly interactive which allows you to ask your questions and get them answered so you can become a better, more informed trader.
Most brokers will provide a learning environment that will include weekly webinars. If your broker doesn't have a learning section then i suggest you find one that does. Every broker that i have tested so far have a learning section to their business and conducts weekly webinars to help its members grow.
I have also found social media to be an extremely useful place to connect with like-minded people and learn as well. Twitter has been one such place. I have connected with hundreds of trading enthusiasts, profitable traders and signal providers by simple utilizing the power of social media. Use whatever medium you can to seek knowledge and you will find that the knowledge will find you. Through twitter i was able to reach more persons with my trading knowledge and also was able to be impacted by other traders view the trading market place.
Printed media is also relevant and still provides a wide array of knowledge for investors and traders. Books contain a great of information from many successful traders who became expert in their craft. They decided to write books to help even more persons and have the knowledge that they have amassed be put in the hands of those who need it. Kathy Lien and Boris Schlossberg, Two extremely profitable traders who have written books on trading as well as they provide trading signal service.
I continue to urge you keep being a student so that you can learn more. However, don't just learn the info and sit on it. Learn it and use it to grow your bank balance.
"To learn and not to do is really not to learn. To know and not to do is really not to know" - Dr. Stephen Covey.
Keep follow this Forex blog as we venture soon into chart analysis and trading signals.
Just how profitable is each technical indicator on its own? After all, forex traders don’t include these technical indicators just to make their charts look nicer. Traders are in the business of making money!
If these indicators generate signals that don’t translate into a profitable bottom line over time, then they’re simply not the way to go for your needs! In order to give y’all a comparison of the effectiveness of each technical indicator, we’ve decided to backtest each of the indicators on their own for the past 5 years.
Backtesting, involves retroactively testing the parameters of the indicators against historical price action. You’ll learn more about this in your future studies. For now, just take a look at the parameters we used for our backtest.
Cover and go long when conversion line crosses above baseline. Cover and go short when conversion line crosses below base line
Using these parameters, we tested each of the technical indicators on its own on the daily time frame of EUR/USD over the past 5 years. We are trading 1 lot (that’s 100,000 units) at a time with no set stop losses or take profit points. We simply cover and switch position once a new signal appears. This means if we initially had a long position when the indicator told us to sell, we would cover and establish a new short position.
Also, we were assuming we were well capitalized (as suggested in our Leverage lesson) and started with an example balance of $100,000. Aside from the actual profit and loss of each strategy, we included total pips gained/lost and the max drawdown.
Again, let us just remind you that we DO NOT SUGGEST trading forex without any stop losses. This is just for illustrative purposes only! Moving on, here are the results of our backtest:
Number of Trades
P/L in Pips
P/L in %
Buy And Hold
Ichimoku Kinko Hyo
The data showed that over the past 5-years, the indicator that performed the best on its own was the Ichimoku Kinko Hyo indicator. It generated a total profit of $30,341, or 30.35%. Over 5 years, that gives us an average of just over 6% per year!
Surprisingly, the rest of the technical indicators were a lot less profitable, with the Stochastic indicator showing a return of negative 20.72%. Furthermore, all of the indicators led to substantial drawdowns of between 20% to 30%. However, this does not mean that the Ichimoku Kinko Hyo indicator is the best or that technical indicators as a whole are useless. Rather, this just goes to show that they aren’t that useful on their own.
Think of all those martial arts movies you watched growing up. Aside from The Rock and the People’s Elbow, no one relied on just one move to beat all the bad guys. Each of them used a combination of moves to get the job done. Forex trading is similar. It is an art and as traders, we need to learn how to use and combine the tools at hand in order to come up with a system that works for us. This brings us to our next lesson: putting all these indicators together!
If one of your forex goals for the year is to work with an expert advisor or a trading robot (Hey, that’s me!), then let me help you out by outlining the main advantages in doing so. Let me remind you though that this trading strategy requires a bit more knowledge, experience, and research so make sure you do your homework before running an EA.
1. It can trade while you sleep!
Even though the forex market is open 24 hours a day, humans like you can’t possibly stay up all day and night throughout the trading week just to keep track of price action the entire time. Well, that could be doable with copious amounts of coffee and energy drinks, but that ain’t healthy at all!
A forex robot, on the other hand, can be programmed to watch market movements without the need to rest or even take pee breaks. It simply follows a set of rules based on technical indicators or price action and can execute trades automatically. For a lot of forex traders who’d like to profit from market movements during a particular trading session but are stuck in a different time zone, using an expert advisor means that they don’t need to worry about trading sleep for pips.
2. It is not vulnerable to emotions.
Every forex trader out there has probably grappled with either greed or the fear of losing at some point. Human emotions can cloud decision-making sometimes and can lead a trader to deviate from a tried-and-tested strategy.
What sets trading robots apart from human forex traders is that we don’t have any emotional components at all. Expert advisors are wired to stick to system commands and take valid trade signals, without feeling pain from losses or joy from wins.
3. You can run backtests quickly.
Another advantage of having an expert advisor is the ease of conducting backtests, particularly on an MT4 platform. In fact, I’ve written a short tutorial on how to backtest and EA on MT4 and you’d be surprised to know that it just takes a few clicks to see how a system fared over several years!
4. It reacts to quick market movements instantly.
While humans take a few seconds or longer to digest market information and figure out how to react to price movements, a forex robot can react instantly and execute a trade faster than a blink of an eye. This can be beneficial for day traders who are looking to profit from quick price moves based on 1-minute or 5-minute charts.
Expert advisors can also book profits or cut losses without second-guessing. As Dr. Pipslow often discusses in his Pipsychology articles, the decision to exit early can sometimes be difficult to make, as it can involve either leaving profits on the table or realizing small losses.
5. It isn’t prone to human error.
Aside from having emotions interfere with making trading decisions, being human also entails making mistakes. This can be in the form of making wrong calculations in position-sizing (gasp) or entering an extra zero in the trade lot size (double gasp) – errors that can be avoided when using a forex robot.
Of course this isn’t to say that humans are inferior to robots… not at all! You guys created us! I’m just suggesting that, with a bit of programming knowledge and hard work, human forex traders can be able to automate their trading strategies and possibly ramp up their profit potential.
This week we will look into the two categories of trading accounts available to Forex traders. There is a Demo account where you practice and there is a live account where you risk your own money. Both accounts allow you to see live rates on the market while you place your trades. You will need to have a good internet connection for good rate updates as well as the connection of the software to its server. With most trading software, whether standalone or a web/mobile trader, every trade opened is saved on the brokers server as such even if you lose your internet connection your trades will still be validated based on the conditions set when you open them.
Demo Trading Account
A demo trading account opens you up to all the excitement of the market but without risking your own money. There are a number of advantages of having a demo account as a beginner trader. Almost every broker offers a demo account to its clients, if the broker you choose doesn't offer one then i suggest choosing another broker.
A demo account is where you make all the mistakes you need to make so you can learn all you need to learn. This is where you develop your trading strategy, implement risk management practices and see what your trading style is. The objective of having a demo account is for you to ensure that you are comfortable as as trader with the strategy you have chosen to use and above everything else, that your trading strategy is at least 80% profitable (more profitable is better for you, which you already know :) ).
Within particular softwares there is normally a function or a section where you can set particular criteria for you strategy and simulate it to see how it performs under certain market conditions. This function within MT4 is called a strategy tester and helps you in creating solid trading techniques. Most traders get exposed to so many different trading strategies they become overwhelmed with which one to use. The demo account is where you eliminate strategies by testing them out one by one and see which one works for you.
I have tested a number of strategies including, Pin Bar, Engulfing bar, inside bar, fakeouts and multiple others. currently I use support and resistance along with a couple indicators in my trading routine.
Another important thing to develop while using a demo account is a solid trading psychology. This will take a great deal of practice while testing out your strategies. An excellent trading psychology will be a huge determining factor for when you go live trading with your own hard-earned money. Successful traders do not do emotional trading, Everything is based on solid trading principles tied in with numbers. Too much emotion while trading is a sure way to fail fast and hard so it's essential that each trader strive to eliminate an emotional dependency while trading. I'm not saying you can't enjoy trading because you can but what i'm saying is that you should not be doing revenge trading or enthusiasm trading. Trade based on the strategy or strategies developed and stick to the numbers while always seeking high probability trades.
While practicing you can test out indicators, Expert Advisors (EA) also called robot traders as well as trading signals. These help to enhance your trading and make you a more profitable trader.
As for demo account trading capital i would suggest practicing with a similar amount to which you think you will start out live trading with. This will give you better practice as it will seem like you are trading with your own startup capital. This will help in developing your trading psychology and trading comfort. If the demo account from your broker does not offer the amount you want to start with then start with the lowest amount they offer or the one closest to what you are looking for. Most brokers have various amounts for opening a demo account.
Live Trading Account
A live trading account is where it all happens. This is where all your trading practice meets your real money while exercise excellent risk management. This is where the moula rolls in lol. The truth is it isn't always 'pretty' but as long as you stick to your strategy you will be on top of the market at least 80% of the time considering that your trading strategy is that profitable.
You will need to realize that its your real money at risk and execute your trading strategy according to practice. You will also need to recognize that you may lose some individual trades but as long as you had developed a strong strategy using a demo account then your overall profit and loss will be excellent.
Always exercise good risk management, which says you should not be risking more than 2-3% of your account capital on a single trade. Good risk management practices will tell how far your trading career will go. The importance of good risk management practices cannot be stressed enough and should always be used on every trade.
There are multiple types of live trading accounts offered by each broker. Check each one and see how it aligns with your trading goals and startup capital. Each account may offer different leverage, trading lots as well as a minimum start up capital. I've realized that almost all brokers offer between 3-5 live trading account, some even more.
I have also noticed that a number of brokers offer trading competitions where you test your strategy on a live market some times risking your own money some times not but you can win a pool prize. This is exciting and enhances your skills in different trading scenarios.
The same technical signals and indicators used in developing your trading strategy should also be employed in your live trading environment. If you have a tweaked an EA to perform the way you want it then use it.
Set goals for your live trading account and stick your plan and strategy. An important tip to remember is that, although the Forex market is liquid and lucrative it isn't a scheme to get rich over night but overtime it does pay off greatly. Happy Hunting those pips.