Monday, March 2, 2009

Never risk more than 2%" on any forex trade

It's an advice you will hear from many professional traders. Trust me, they know what they are talking about. Why is it so important to follow this rule? Successful forex traders have high winning ratios(70% or more), so why don't they risk more? Maybe 5%!

Let's examine the roulette game. There's a 50/50 chance for either black or red. So you may think that out of 10 events you could expect 5 red and 5 black. You couldn't be wronger. I've personally seen 24 red numbers in a row. I couldn't believe my eyes but the casino employees weren't surprised at all and when i talked to one of them he told me he saw streaks like this many times and that he remembers a streak that went over 35. So my point is that even with a high winning ratio system you can still experience a large drawdown on your account if you don't respect the "2% rule".

Loosing streaks happen to successful forex traders too, you can't avoid that, the difference between you and them is that they don't get emotional when this happens because they never risk more than 2%. Not getting emotional helps them steak to their trading rules and survive the loosing streak.

I guarantee you that if you follow this rule you will improove your trading results. Not risking your shirt on a trade keeps you cool and concentrated on the market making the right decisions.

PS1: Don't lie to yourself by bending the rule thinking you could trade multiple pairs at the same time. If you are in a long EUR/USD trade risking 2% that's it. You can't buy GBP/USD and pretend it's another trade. EUR/USD and GBP/USD have a 95% correlation ratio so it's like risking 4% on EUR/USD.

PS2: Never ever violate this rule even if you are 100% certain that you have a great trade that you couldn't possible loose in a million years. As John Maynard Keynes used to say: "the market can stay irrational far longer that you can remain solvent” Forex traders are not gamblers so don't put all your eggs in one basket!

Happy pipping!

Forex strategy No1 - John Carter's Box Play Strategy

A very easy yet effective free forex strategy i've discovered reading John F. Carter's book : "Mastering the trade" - a great book about trading any financial market in general(it's not focused on forex trading but it has some examples from the forex market and an excellent chapter on trader's psychology which is a must read).

This free forex strategy works on any timeframe. As John Carter describes it the box play is a momentum play, the trader will buy a breakout and short a breakdown. A picture is worth a thousand words so:

As you can see in the picture, in order for this strategy to set up you need 4 points, 2 resistances and 2 supports. Once you identify those points if you draw a horizontal line you will get a box hence the "box play" strategy. The 2 supports and 2 resistance musn't be identical (to the pip), you can adjust the support or resistance line to the most recent S/R point. When i first draw the support line it was touching point 1 but after point 3 i've moved the support line to the new support wich was a few pips higher.

Usually after the 4th point you get a return towards the middle of the box and than a breakout/breakdown. Your entry is when either support or resistance line is breached. After you see a setup like this you can put 2 orders: a long order 3 pips above resistance and a short order 3 pips bellow support. Both your stop loss and profit target will be the length of the box. This strategy has 1:1 risk/reward ratio but it has a very high winning percent ratio (around 80%).

The Best Hours For Forex Trading

Forex is 24 hour market – it's traded from Sunday 5pm EST through Friday 4pm EST. Rollover is at 5pm EST. Forex Major markets are: London, New York and Tokyo.

Forex Trading activity is heaviest when major markets overlap - between 2am and 4am EST (Asian/European) and between 8am to 12pm EST(European/N. American).Nearly two-thirds of New York activity occurs in the morning hours while European markets are open.

Market Participants

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR).

This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading).

The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.

These are the main market participants:

* Banks
* Commercial Companies
* Central Banks
* Investment Management Firms
* Hedge Funds
* Retail Forex Brokers