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All posts in Forex Trading

Trade Sizes Vs Account Sizes

Posted by Diggy on May 21, 2010

I have had a number of emails from people wanting to know what trade sizes they should be using according to the size of their accounts.

I’ve decided to write this post (based on my own experience) as to how I think you should choose your trade sizes according to your account.

Acceptable risk

I always advise people to risk between 3% and 5% of their account on a single trade.

That means: If you have an account of $10 000, you risk between $300 and $500 on a single trade, no more.

The reason for this is simple. Everyone makes mistakes and nobody’s analysis is right all the time. By limiting your risk to 5%, you pretty much ensure that you will never go broke or blow your account because you can have over 10 consecutive wrong trades and still have over 50% of your account left to trade with.

I have been watching these markets for 4 years and still make mistakes and bad calls. People who have been doing this for 20, 30 and 40 years still make bad calls at times. That is why it is very important to limit your risk.

Trade Sizes vs Trading Accounts

I mentioned the acceptable risk first because it is relevant to your trade sizes.

If you want to stay within you acceptable risk and trade like me (withstanding swings of a few hundred pips) then you need to make some calculations of your trade sizes.

With a $10 000 account I think it is safe to trade at a size of $1 per pip. This means that you can withstand a swing of up to 500 pips and still stay within your risk of 5% of your account. $1 per pip is a lot size of 10 000 (plus/minus).

With a $100 000 account I think it is safe to trade at $10 per pip. This means a lot size of 100 000 and with one lot you can withstand a 500 pip swing against you at be within your 5% risk limit.

How I Like to Trade

If you have been following my analysis for a while you may have noticed that I like to trade in ranges.

Since I cannot determine exact points of entry (although I try), there is always an obvious 1st 2nd and 3rd level where I expect it to turn.

I like to enter trades in sections of up to a few lots, starting with one at the first obvious level and adding up to the 3rd level. After that I place my stop at a level where the risk is acceptable if my trade is incorrect and then wait and see if the trade goes as I expect it to do.

Another thing I’d like to mention although it’s fairly obvious is that as your account grows you can and should adjust your trade sizes accordingly to stay within that 5% risk limit.

I hope this helped!
Cheers
Diggy

Comments: 0

Believing 100% In Your Own Analysis Can Be Difficult

Posted by Diggy on May 9, 2010

Hello.

I felt that I wanted to write this post to share my experience with you.

Believing in your self with 100% confidence is difficult to do all the time, yet it is necessary if you want to make fantastic money.

I am a prefect example. For weeks now I have been calling for Eur Jpy to go below the 120 level. I held short positions for weeks because it took much longer than I expected. In fact, the market went against me by a few hundred pip, enough to make me uncomfortable with holding my shorts and with me being 100% convinced about my analysis that the market would indeed reach my projected targets.

Then, when the market started dropping and gave me a small profit, I exited my positions, partly because I was glad that I made money from them and partly because I had another trade that was going against me and I wanted to reduce exposure.

In this last week, actually on Thursday, the major indices and currency pairs dropped incredible percentages in matters of minutes and hours. Eur Jpy dropped from 120 down to the low 110 in a matter of one hour.

And I had no short positions…had I held them it would have been a fortune.

Could have, should have, would have. It doesn’t help.

There will always be new opportunities, and every time something like this happens I learn from it. I learn to trust my own analysis more.

I think you will be able to relate to this story. I hope you learn from it too.

Cheers
Diggy

Comments: 0

Goldman Sachs Sued By SEC For Fraud

Posted by Diggy on April 16, 2010

It’s about time…that is the first thing that came to mind when I turned on Bloomberg today and saw big headlines of Goldman Sachs being down 9% because they are being sued by the SEC. For Fraud!

Along with countless others, I have always had the suspicion that Goldman Sachs was severely manipulating the markets for their own profits. Have a look at the millions of dollars they have paid out to their employees the last couple of years…that money has to come from somewhere.

The global indices have made whopping recoveries since the March 2009 lows. Some indices coming close to a 100% rally from that bottom. This is all good and well, except for the fact that the rally was the fastest in history for the percentage that it rose (correct me if I’m wrong). Enormous amounts of cash were pumped into the system to prop it up and to prevent further collapses, but I have a sneaking suspicion (backed up by lots of reading of articles from professionals) that this whole ‘economic recovery’ is as fake as a $5 Rolex.

There are still enormous debts outstanding, countries are on the verge of default and bankruptcy, millions are unemployed, entire commercial complexes are standing empty. Does that sound like a healthy economy?

I have read many opinions of professional traders and economists who believe that another crash this year is imminent, a crash even possibly bigger than the 2008 crash. I have read that the markets are the most overbought in 24 years. Gerald Celente, a global trends forecaster who has correctly predicted economic events like the 2008 crash months in advance, is convinced that there will be a big crash in 2010.

Something needs to start the decline and get the ball rolling before it goes back into a bear market. Could Goldman Sachs being sued for fraud be the catalyst? Are all the other banks next in line to fall?

Comments: 0

Is A Return of 25% Per Month Sustainable?

Posted by Diggy on March 21, 2010

Over the last 4 months, my analysis and trading recommendations of Forexhabits.com have resulted in a 100% return on investment. Yes, 100% in 4 months, which averages 25% per month for the last four months.

The question is, “Is that sustainable?”.

When reading this, some of you may think that I over-leveraged my trades, or treated the account as a gambling account. I can assure you that this is not the case. Although I haven’t been the most risk-averse trader in the world, I have played it pretty safely.

Initially when I started off with the $100 000 (demo) account, I was trading lots of 100 000 for instance on a Eur/Jpy trade. This meant that it would need to go against me by 500 pips before I had a loss of 5000 Euro which would be about a 7% loss. Even if I were to make a massive misinterpretation of a trade and lose 5-7% on a trade, I would still have plenty of account left to recoup those losses.

Luckily (and with some skill) I was off to a good start and had a few winning trades. Of course this helps massively because then I was working from a profit and not from capital. As my account grew over time with my correct analysis and trades, I started scaling my trade sizes up to keep up with the size of the account.

Good Returns Are Possible to Sustain

My Forexhabits trades and analysis are far from a gamble. In my early days when I first discovered trading, I played around with a few demo accounts. By ‘played’ I really mean ‘gambled’. In those early days I would massively overleverage my account and sometimes double the entire account in a week or in 2 weeks. Similarly, I would also lose most of the account in a few weeks.

After much learning, playing, studying and observing I have gained a lot more knowledge about the Forex market and about trading. Of course, if I could guarantee a return of 25% per month for every month of the year I would have thousands of investors contacting me to give me their money to invest for them. WIthout a doubt.

There is no way that I can guarantee a return of 25% per month. I would be lying if I said otherwise. That being said, I do believe I can continue to make a good return month after month. I do not doubt that there will be times when my analysis is wrong and when I will have to take losses. That is part of the trading game.

How To Ensure Sustainable Profits

The best way to ensure sustainable profits is to have a system and stick to it. If you have been making good profits over a period of time, it must mean that you system has been working for you. What you need to do is have rules in place to make sure that you do not lose your account. As long as you have a good account, you can take a couple of hits and then claw your way back to making good profits. Every trader will go through periods of negative trades.

Do not get over confident and do not get arrogant. Even though I have made this massive return over the last 4 months, that by no means guarantees any future profits. It may be that I have been very lucky and not as skilled as I claim to be. Only time will tell. However, I have rules in place that will make me take losses when the trade goes against me. It may set me back a bit, maybe a bit more than a bit, but it will allow me to stay in the game and not blow my account.

That is the most important thing.

Stay humble.
Never think you are better than the marktes.
Always stay cautious.
Stick to your stop losses.
Trade according to your account size (%5 loss on a single trade as a general rule).

Comments: 2