There are many definitions of Money Management, from the use of a stop loss to how many lots you trade on each trade. My definition of Money Management is safety of funds. The most important money in trading is the money you already have. Yes, it is important and required to risk some money to make profits, yet a true Money Management plan maximizes profits with as little risk as possible.
Once you have established a trading plan, practice your plan through some form of simulator or demo account. If you need a good trading plan, choose one of fifteen forex trading systems with Smart4xTrader. Log each trade and note all your orders (i.e. entry, stop loss, targets, etc.). After you have logged at least 30 trades, go back over these trades and look for the highest risk trades - those trades with the largest stop loss yet with the smallest potential return (Risk Reward Ratio). Establish rules to minimize this drawdown potential and test them over and new set of 30 trades. If these better your results then implement them into your trading plan. It is wise to evaluate your money management techniques every 100 trades to perfect your trading.
NOTE: Using Money Management techniques may actually lower your total return, but remember that Money Management is safety of funds first, profits second.
2. Forex Long-Term Hold Strategy
Is it possible to hold your cash in a bank and make a 12 percent plus annual rate of return with zero risk? It is if you know the Forex market. As mentioned earlier, the goal in cash investing is not obtaining the most money, but retaining the most valuable money. So how is it done? Place your cash reserves in the currency that is appreciating over your countries currency. You may need to find a worldwide bank, however, many international banks will allow you to save your cash in the currency of your choice. If you live in the US and you wish to save your cash in Euro's when you deposit your funds, make a request to the bank that the US Dollars be exchanged over to Euro's. When you withdraw your funds you will exchange back toUS Dollars for a profit if the Euro appreciated over the US Dollar. There are also many forex brokers that will allow you to do the same thing. AC Markets is a good example. Of course you need to have a system on when to exchange and when to not exchange your cash into the other currencies. Smart4xTrader teaches this Forex strategy in their Forex Training.
To give you an example of the potential of a Long-term hold, in the Premier System provided by Smart4xTrader we were given a signal for a premier time to move over to Euro from US Dollars the week of April 15, 2006. By holding that position until May 2007, if we were going to withdraw our funds to US Dollars, we would now have 7.17 percent more US Dollars then we started with. Plus, we would also have any interest that we would have made in the savings account. If we look to the New Zealand Dollar and its run against the US Dollar our system gave a premier signal to be long the New Zealand Dollar the week of October 7, 2006. Today you would be up 13.23 percent over the US Dollar in less than 8 months. (Premier Trading Strategy offered by Smart4xTrader)
Add a little leverage and diversification in the mix and now you could have some serious profits over the long term. It pays to understand the foreign exchange market!
3. Forex Fundamental Trading
Most of the time we talk about Technical trading strategies and systems. The On Target Trading System and other trading systems used and taught by Smart4xTrader, use technical analysis exclusively in making trading decisions. What about Fundamental Analysis? Does it have the potential of creating consistent profits over time? Fundamental Analysis is the study of the market strengths and weaknesses. Due to the global environment of the Forex, Fundamental Analysis is more focused on news catalysis's than the strengths and weaknesses of the currencies themselves. If you used fundamental analysis to trade stocks you would spend a great deal of time focused on the make-up of the company, its CEO, earnings per share, and future product line. The same isn't as true with Forex, you spend more time focused on the changing of interest rates than anything else. It is impossible to teach Fundamental Analysis in a single paragraph, but if you desire to explore further this trading technical my suggestion is to start by taking a look at the current news events of each day and spend some time seeing how the market reacts to the price fluctuations. Be careful as price can move on a dime with one single word change in the news. One of the best free sources on the web is www.forexfactory.com. Even though I don't trade on fundamental analysis I still from time to time like to see what the other guru's are talking about. This is a great resource to hear the buzz of the market. Check them out and happy trading.
4. Look Both Ways Before you Cross the Street – Forex Street
"Look both ways before you cross the street," is a phrase that we all heard as a child and now is a phrase that I say constantly to my own children. Why do we say this? Because we want our children to look for the potential dangers in front of them as well as those behind them. The same principle can be said with the forex market, but instead of looking for cars we are looking for support and resistance lines. Levels of support and resistance are what gives the markets shape and form. It is what keeps price from just drifting to the ends of the earth. Now to understand why these levels create shape to the markets you need to understand how they came about.
First, the why. Support and resistance levels are created by at least one of two major things: volume and/or the mental phenomenon. Volume is the major cause of these levels and creates the strongest level of the two. When price is either bought or sold in a high volume amount at a certain price level, that level now becomes either support or resistance (support if price was bought up or resistance if price was sold down). Since a large body of trades entered the market at that price, lets say 1.2345, if price returns to that area, price is usually held by those initial traders through additional position taking. Traders add additional positions to hold the market from going against them. In addition, other traders that missed out on the opportunity to get in from the beginning, now jump in and follow the crowd. Hence, price is maintained beyond the initial entry level. The greater the volume at a given price, the stronger the level will be. Initial volume levels are strong, but they do tend to weaken overtime as traders close out positions for profits. These high volume levels are usually generate through news catalysts and that is why we see a lot of support and resistance lines initiated at 5:30 AM, 8:30 AM, and 9:30 PM EST as these are the times when most major news releases come out worldwide.
Our other explanation for levels of support and resistance is the mental phenomenon. We are taught from an early age to recognize that the world is made of numbers from price tags to how much we weigh, everything is associated with a number. Just like in sales, where a number ending in .99 makes the product seem less expensive then the even number .00, even though it is only one cent lower, the same goes for the forex. The mental numbers in the forex market are those even-whole numbers like: 10, 50, and 100. Price is going to find some form of support or resistance at these number levels as traders tend to respect price as these numbers are approached. Of course the larger the even number the better (Ex. 1.3000 or 2.0000). Whether there was volume at these levels or not you will find that price tends to hold for a time at these levels.
6. How to Make Money with Support and Resistance – Profit Targets
The first is Profit Targets. The majority of traders trade on emotion and close their trades when, 1- They have made enough money. 2- The problem with most traders is they have never made enough money. Just like Las Vegas, they stay in the game too long and give back all their profits to the house. Using support and resistance lines as levels to take your money off the table is a consistently winning strategy. What I like to do is to look for a close level of support/resistance for my Target 1 and then look at a further away support/resistance for Target 2. Once I hit Target 1, I take half of the lots off the table realizing profits, and then I allow the other half to ride toward Target 2. To conserve capital and eliminate the risk of loss, I will bring my stop loss up to breakeven or even set-up a trailing stop. Remember when you are in Buy trade you are looking for the next level of resistance to place your targets and if you are in a Sell trade then you are looking for the next level of support. Learn Forex Trading Systems at our site.
The second way to make money with these Forex support and Resistance levels is through money management. This actually comprises two aspects: 1) stop loss positioning and 2) Lot Sizing. A smart Forex stop loss is one placed below/above a key level of support/resistance. If you are in a Buy trade, place your stop loss 5 - 10 pips below the next level of support that is below your entry price. If you are in a Sell trade, you are going to place your stop loss 5 - 10 pips above the next resistance line. By doing this, you actually hire other world traders to protect your position. If price approaches your stop, other larger traders will step in to maintain price as explained in our last week’s article. Lot Sizing is another form of management that can be enhanced with these support/resistance levels. It all has to do with risk. If your profit targets compared to your stop loss are not large enough then your risk vs. reward is not exactly in your favor. Instead of trading and missing the trade set-up, minimize your lots to reduce risk. Vice versa, if the risk vs. reward is in your favor or Target 1 sits at a place that has a high probability of being reached, then you can take on more risk and increase your lot sizing and profits.
Make sure that you look both ways before you enter a trade in the Forex. Look behind you for potential risks that may keep price from going where you think it will go and also look for shelter for a solid stop loss. Look ahead of you to establish profit targets where price will most likely go. Support and Resistance Lines are the railings of the markets. Lean on them, trust them, and use them to better your trading.
7. A Losing Month in the Forex
After a losing month in the Forex it is wise to step back and analyze your trading. Understand that to participate in the Forex market long term you are going to have losing months. The goal is to not let the losing month detour you from trading your system and plan into the future. The Fear and Greed Factor will destroy your trading if you let it. Yes, you lost, but if you used proper money management you should still be in the game. I have traders all the time tell me that they are "sitting out for awhile." This I highly suggest against! Why? Well, does Tiger Woods sit out a few golf Tournaments when he doesn't finish in the top five in one tournament? Absolutely not! He is back on the green working out the kinks in his system of golf and so must you as a Forex trader - get back in the game and work out your kinks of trading. Now, don't take out your frustrations on the market, but rather resort to our learning philosophy, "Learn, Simulate, Trade, Profit." Go back, analyze your strategy and trading rules, review them in your mind. Simulate a few months of trading data, including the losing month to see if there was anything that you could have done better - learn from it. Then get back in the game to Trade and Profit. Endurance is more important than returns. If you have a good trading system, like the On Target and Premier Trading Systems, then you simply need to trade your plan and get back in the game. If you do, you will look back and that losing month will be dwarfed by consistent trading profits.
8. Forex Diversification
Diversification is the key to any successful portfolio over the long term. The investor's greed is shown when he/she only wants to invest in the highest yielding investment without analyzing why one is higher and why one is lower. By diversifying in two great forex trading strategies that each have different goals and objectives, you reduce the risk of loss during unpredictable markets. When the market is good, all accounts are making money. The key to diversification is to maintain capital growth even during bumpy markets. Don't put all your eggs in one basket. Diversify between currency pairs and also trading strategies for long-term capital wealth.
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