I've hesitated too much before - giving away- writing this article, anyway I hope everyone find it useful!
Before we start I wanna clarify a very important point?!!!
Analyzing the forex market is something and making money from the forex market is something completely different.
Let’s start with technical analysis:
Technical Analysis: Technical analysis is a method of forecasting price movements by looking at market- data, the main point which technical analysis based on it is that History Repeats Itself, patterns happened in past can happen in future, this rule works over 70%, this is why T.A works !
There are too many ways of analyzing the fx market, after finding a trading system that works for you, this system should have these specifications:
1- Not complicated and easy to understand and follow from the first look!
2- It’s highly recommend to be 100% or at least 70% mechanical system, the history proves that
mechanical systems are the best and they can work with all people under any conditions.
3- Your system should have fixed stop loss and take profit, or at least have an exit strategy, the most important point about that; you shouldn't lose 3 trades in a row! ,Well sometimes the market moves sideways or unclear so it may happen now and then, but you shouldn’t lose 3 trades in a row more than once every month ,If it happens 2 or 3 times per month then your system needs optimization ,this is not a fixed rule since there are some anomalies!
4- Time frame, It depends on the type of system but generally for new traders I highly recommend bigger time frames like 4 hour or daily is better , why?!!
The bigger time frames are more stable and less confused than smaller one , the biggest benefit can be obtained by trading bigger time frames such as daily is learning patience and discipline, once you master the daily chart, then you can shift down to the smaller one and you can easily make hundreds of pips every week or few days…
Money Management: is the proportion of risk of your trading system based on back-test and forward- test; To get the highest possible profit with the lowest possible risk!
I hope you get that, so money management is not 1% or.2% of your account, it depends on the type of system you use.
If you have a good system and you really wanna make good money, you should back test and forward test your system to know every little piece of details, how many losses/wins per day/week/month..etc once you do it then you can set the right and the proper risk to get the highest possible profit with the lowest possible risk!
Some trades have good systems, they achieve – let’s say – 20% profit each month, while basically they can make 50% or double their accounts but they won’t because they don’t have a complete study of their systems…
EX. Let’s say I made a back-test (1 year) and forward test (3 months) and found that I could achieve 500 pips every months, consecutive wins: 7 trades ( 210 ) pips , consecutive losses : 2 trades (100) pips , so I decided to risk 10% for each trade , this way I could double my account every month without any risk but If I risk 2 % per trade I would achieve 20% profit...instead of 100%
In all case whatever the type of system you use , the best risk is between 8% and 14%
28 Apr 2012 10:10 AM
Hi Haitham - I always enjoy reading your blogs and your comments etc and as expected agree with many and also might disagree with others. I would have to disagree with your comments on the best risk of capital being 8% - 14% and I will explain why.
I have at time on smaller accounts risked up to 5% of capital on my trades - but once you get to account sizes of $50k+ to me its a different ball game. Imagine say a $200k account - I would prefer to achieve 100% ROI per month yes - but in reality I have to accept I would also be delighted with consistency of 15-40% per month - purely because i would be able to stay in the game for years. If i tried using anything like 8-14% of my capital on each trade on this size account - even with just 3 wrong trades in a row i could wipe out over a third of my account - and its a statistical fact - no matter even if you average 60-80% success over 100's of trades - that you will have a run of between 7 and 20 bad consecutive trades within a 10 year trading period.
I appreciate its correlated with the number of trades you do so a trader doing say 500 trades a year over 10 yrs will more likely have odd spells of 10 trades going wrong in a row ( 5000 trades - in theory say 3500 go correct and 1500 go wrong) than a trader only doing 150 trades a year.
Thats why many mathematical experts say under 5% - a "safety net" - allowing you a possible 20 trades to go consecutively wrong in your career. Anything 1-5% is safe - as long as you are not running say trades in 4 pairs at the same time.
So my conclusion would be - you could go 1 2 or even 4 yrs trading at say 10% of your account on each trade. However - you could also within your first 200 trades have the magic "10" go wrong in a row and blow you account.
There is another way around it using up to say 20% of your account on small account ( under $2k) and then each week or month keep withdrawing you winnings - and then when the fatal day or week comes -you never wipe out more than $2k and meanwhile you might have made $4K or $6K or even £20k.
I will be interested to hear other views - and if anybody has been using over 10% of his capital on each trade and is still on the same account after 5-7 years ??
Hi Guys ..obvious the bigger the percentage..the bigger the risk....it appears to me as "baby" trader that i lose money very quickly...although the scale of loss is reduced on smaller percentage..eventually my account get wiped out anyways...however the difference comes to me emotionally...i am lot more comfortable with a lower percentage..and feel like i have more control.
For me, it ends being a matter of are you a Sprint Trader ...
looking for fast $
a Marathon Trader ~ planning on being around for the long haul of it ...
with a healthy equity curve.
Risking a-lot on one trade means, to me, ...
you're looking for a big increase on one trade.
Being a “Trader” and risking a reasonable amount ...
(1-2% of your capital on one trade) ...
means, to me, that you’re planning on trading for awhile ...
and placing many more trades before you *kick the bucket*. Ƹ̵̡Ӝ̵̨̄Ʒ
@peter-i definitely agree with your money management thoughts, i just thought i would say when people talk about say 10 % per trade and the assumption is made they would have the ability to incur 10 losing trades thats assuming they take an amount and divide it evenly. i guess some people might always risk 10% ( for example ) of existing equiity, if they lose then they will trade 10 % of new equity ( which is 9 % of original). i m sure you no what i mean. basically you can always trade 10 % of existing equity theoretically to infinity. obviously your lot size would get smaller and smaller but i think this is a good way to explain to people. i seldom see position sizing explained this way so i thought i d throw it out there.
Hi Talisman - yes you are correct with position sizing and adjusting your percentages. I have seen accounts were the trader multi trades 2-5 trades a day and only adjusting the % at the end of a week. Because the trader had 2 very successsful months and compounded heavily as well - when he had a bad week on his higher stakes - suddenly after 14 trades he had got 2 - OK - 4 - break even and 8 losses ( never had before) and it really took a big chunk of his his account - and upset his mojo completely. Heres as example of what needed to then get back to normal -