Managing Risks and Currency Hedging

I realized that you can really minimize the risk in trading. To do that, you want to open your position on currency pairs that are correlated. If I want to open a position on EURUSD, you may realize after a while that you might be wrong, an attitude that is always good to have.

Having said that, you may want to look at the correlation table below.

As of September 2011

If you want to manage risk for the EURUSD trade. You may want to open a position on AUDUSD and other correlated pairs.

Hedging and Managing Risk

Lets say you go SHORT EURUSD, to hedge that risk you need to go:

  • LONG AUDUSD
  • LONG EURGBP
  • LONG GBPUSD
  • SHORT USDCAD
  • SHORT USDJPY
  • SHORT GOLD

if LONG EURUSD

  • SHORT AUDUSD
  • SHORT EURGBP
  • SHORT GBPUSD
  • LONG USDCAD
  • LONG USDJPY
  • LONG GOLD

Doing this strategy may give you lesser risk because once EURUSD may go downtrend other currency may go uptrend thus minimizing the risk. But it also minimizes the reward. If you want to be a daredevil and amped up your profits, you may use the one below.

Doubling the Risk & Reward

Your position SHORT EURUSD, to double the risk you need to go:

  • SHORT AUDUSD
  • SHORT EURGBP
  • SHORT GBPUSD
  • LONG USDCAD
  • LONG USDJPY
  • LONG GOLD

if LONG EURUSD

  • LONG AUDUSD
  • LONG EURGBP
  • LONG GBPUSD
  • SHORT USDCAD
  • SHORT USDJPY
  • SHORT GOLD

Knowing what currency relates to one another gives you the advantage to play your cards well in case you are not sure.

Forex Backtesting

Forex backtesting is the process of going through charts from previous years, weeks or days to confirm the effectivity of a system. Simply put, you look at past charts to know if your system worked well as you predicted or failed. Every new and experienced forex trader do backtesting because it allows the trader to gain knowledge and confidence on his system and make necessary tweaks and rule to find the system that works for them.

Forex Backtesting Software

Most forex companies will let you view at past charts or even download them, where you can mark (using pencil and paper) and trade by looking at one bar at a time (simulating a real trade session).

There are some software that will do this for you. One is forex tester. Well, I think, its the only back testing software out there. Either the forex brokerage company has a feature or not, you can either trade manually or demo trading. Demo trading can be long and tiresome. Using a back testing software, you can instantly test your strategy because you can control the time when each bar will appear.

Conclusion: Whatever method you take, always remember to test your strategy before trading live. Either by backtesting, paper trading or demo trading. You must gain full confidence on your trading system.

How to Get Out Of Losing Trades

Screen shot 2014-02-25 at 7.06.25 PMAs far as forex trading goes, every trading system has their own rules for entry and exit, their money management and risk and rewards. But system rules, entry and money management are the easiest part of the system. The hardest part of the system is the “exit” because its where you’ll make or lose money.

What’s even worse is if the position is a losing proposition. Clicking that exit button might seem like a Herculean task of discipline and strength. Most people breakdown at this point and fall into the abyss of self-denial, thinking that the market will eventually comes back and recuperate their losses. But the market never did come back and his trading account, vanished.

I’m here to tell you what I think about losing trades, how to ease the pain it brings, how to get out gracefully and how avoid it in the first place.

Avoid Losing Trades by Concentrating more on the Exit

When you see a trade, focus on the exit rather than the entry. A newbie forex trader will try to “imagine” patterns when they see an entry signal. And sometimes, deliberately try to convince themselves that the pattern is indeed 100% accurate. They become obsessed at proving themselves that they are right. You should do the opposite. You should always try to prove yourself wrong and always look for the exit rather than the entry.

As I quote Sun Tzu’s Art of War:

“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win”.

Know beforehand that your exit will be profitable and you have won that trade even before you make it. As you make this approach, you’ll notice that you’ll have fewer and fewer trades. But the quality of those trades will certainly increase.

Immediately Close a Losing Trade and Move On

This is probably the hardest action to take for a losing trade. Accepting the fact that you’re wrong is a sign that you have matured as a trader. While newbies will try to hold on to the trade wishing that the market would bounce back. There are probably another school of thought when it comes to this strategy. The market does not go in a straight line and they wait for it to bounce back even for a little. That is perhaps true. But I would rather end it now than to hope that the market will come back for me. What if I’m wrong on that part as well? Being wrong twice in a single trade could be the worst feeling and it could harm your future trades.

Never Risk Too Much Money

All in all, it all goes down to the amount of money in a trade. Demo trading is fun because the money used is not real. And so, every losing trade in a demo account is nothing to you. But if real money is at stake, “shit hits the fan” too much too often. Risk only the amount of money you are comfortable with. You need to have a good money management strategy on top of your trading system. This is different for every people. That’s why we have a term risk appetite. Some people likes to risk high and some people don’t. I don’t personally like risking alot of money in a single trade. Well, I used to risk a lot, but I’ve changed.

Personally, the amount of money I risk in a single trade is 2%. Max. I don’t go over that. I have found that I’m very much comfortable losing that amount of money and so I don’t panic when I have losing trade. I just kill that losing trade and move on.

Whatever you do, losing trade is not a good feeling to have. But remember that forex trading is a business and should be treated as such.

What Are Your Goals in Forex?

180+ Pips on AUD USD

180+ pips on AUD/USD

When people asks me what I do for a living and tell them I have a business called forex trading, people always jump out of joy and ask me to teach them how to do it. It seems that is rare for someone to encounter such a breed of people that you won’t be able to hide your joy and ask questions. It is a pleasure for me to teach. But it can quickly becomes a frustration when people don’t have the willingness to learn. Only the willingness to ask. There are a lot of forex tutorials, resources and beginner tools on the subject that its quite frustrating now to explain fibonacci, limit orders, SMA, margin and leverage to an average person. We all have those basic stuff online and for free. If you come across a forex trader in your life, do not scare him away by asking newbie questions. Educate yourself first so you can ask interesting question that would express your willingness to learn. You may build a good relationship with that person and might improve your trading.

In a business where your character will be tested, I think everyone should be willing to learn by themselves because after all, it is your money. First ask the question, what is your goal for trading forex. Is it to become a millionaire overnight? Is it to retire young? Or is it just a vehicle for you for wealth building?

Whatever your answer to this question ultimately lead to what kind of strategy you will utilize. Every person is different. And every person have a kind of threshold where he can take a loss and not quit. Everybody is different. So learn about yourself. And create your own strategy. Master the fundamentals and you’ll be able to learn faster. And most importantly, be patient and have self discipline.

I do have my personal goal in forex when I started out last year. I haven’t achieve this goal yet. But I’m seeing positive results now more than ever. And that’s because I never stopped learning.

Whatever your goals are in forex, I wish you good luck.

Forex Trading Rule #1: Never Lose Money

The most accepted adage, “Higher Risk is equal Higher Profit”, could be true for forex trading. But does it have to be that way?

I used to bet big on position only to find myself in a hole when the position becomes a lost. Ignoring the fact that if you want to be successful in forex trading, I think, the wisdom of the old rich people are still the best advice. Warren Buffett said “Rule #1 in making money is to never lose money. Rule #2 is never forget rule #1″.

This rule have been integrated into my trading system. Being contented in making small but sure profits instead of betting the house for a once in a lifetime lottery trade. Small but sure, consistent profits is much better than luxurious profits with high risk.

Week 33: EURCHF Consolidating

EURCHF is playing hard to get and is still consolidating. We might still have more consolidation for the next week. But if you are in this trade in LONG Position and it did move up, expect a great reward from this. After all, our stop loss is just at 1.200 which have a low risk with great rewards. On previous post, if you have entered the trade, you have around 10 – 12 pips of stop loss and we are looking at our first target if this breaks out at 120 – 150 pips. That’s x10 reward right there as our first target. We are actually buying at bottoms here.

Its time to test those patience. EUR/USD is looking very good on the short side though. But I wouldn’t enter personally at this time.. The stop loss would be too much of a risk for me. I’d like to be on top, being a contrarian trader. EUR/CHF is a better pair for us to trade at the moment.

While in consolidation, protect your money. You don’t want to lose money at this time because after consolidation you know what happen… A breakout. You want to be on the sidelines or hold any position so you can survive the whip saw of the price until you earn a payday on the breakout. Its time to practice patience guys.

Of course, all this is for educational purposes only. Trade at your own risk. :)

10 Misconceptions About Forex Trading

A lot of people will enter the market with the wrong misconception about the forex. Diving in, nose first without the proper mindset on what they are getting into. I hope this list will clear your mind and hopefully give you a healthy dose of forex trading success.

Forex trading is never easy… What is easy anyway? Picking your nose perhaps?

  1. Forex trading is easy. Many people that want to dive into the world of the foreign exchange market believe that the Forex trading is easy — you just read a book or two and then you will be able to earn daily profits with just 2-3 hours trading daily. Others think that they can buy a profitable strategy and it will make them rich in Forex. In reality that’s just a myth. Succeeding in Forex isn’t easier than mastering any other profession — it takes time, money and a lot of practice.
  2. “I will make money in Forex, if I can trade stocks successfully.” Success in stock market doesn’t imply that you will get success in Forex market — there are many differences between trading stocks and the spot currencies. First of all, Forex market requires a lot of hard work and dedication as this market is open for 24 hours a day. You cannot just sit in front of your computer for the whole day and night, so the best way is that you should find the most suitable time periods for trading. Second, “buy&hold„ strategy simply won’t work in Forex market. Third, you don’t have that much information about currencies as you can get from the companies’ reports and statistics.
  3. “I can make profit whenever I want if Forex market is open 24 hours a day.”Once again, you won’t be sitting in front of your PC for the whole day to be able to trade 24 hours. You’ll have to develop automated trading software to get the advantage of 24 hours a day working schedule.
  4. “I can be a successful Forex trader just following someone else’s signals.” Many beginning traders get burned by the blind signal-following. That’s like putting away the whole responsibility for your actions to someone else. That may sound cool, but in reality you end up with the huge losses. Learn to rely on your own knowledge and skills. Remember that there were no great signal-followers in any financial market.
  5. No commission is to be paid in Forex market. You only have to pay the spread, but you don’t have to pay the commission. And what’s spread? It is the difference between the buy and sell price of the currency pair at the same moment. You may end up with the major part of your profits in the broker’s hands if you plan to rely on the short-term trading.
  6. Forex is a scam. Some skeptics and disappointed traders think that Forex is just some new fad to scam people for their hard earned money. Although there are many scams that are hiding behind the “brand” of Forex, that doesn’t mean that the Forex itself is a scam. There are many institutional Forex brokers, regulated Forex account managers and other solid companies in the market to whom you can trust.
  7. “I need to exactly predict the market outcome to be profitable in Forex.” There is no scientific method to know something in advance in the market with a 100% certainty. There would be no Forex market if you could know the exact currency rates beforehand. Trading is not the game of certainties; it’s a game of odds. One of the first things that new traders learn is to think in the terms of probabilities and risk-to-reward ratios.
  8. “I need to use a very complex strategy to be successful in Forex.” It’s a popular myth, in which many on-line sellers would want you to believe. The main requirement to be successful in Forex is a self-discipline and money management. There are many traders that make consistent profits with rather simple and old strategies.
  9. “I need to have a lot of starting capital to get profit in Forex.” Big capital investment won’t help you in Forex. You don’t need a lot of money to diversify in currencies and you can’t move the currency rates with your trading orders (you’d need billions of dollars to do that). Actually you can trade with a very a little capital, because Forex trading is almost always leveraged with the broker’s money.
  10. Forex is gambling because it’s completely random. Although there is no certainty in Forex (as in any financial market) it doesn’t mean that it’s completely random. And it’s certainly not a gambling, since your success in this market depends mostly on your skills and experience, not on your luck.

Forex Trading as Gambling vs Forex Trading as Odds and Probabilities

I admit that I have been guilty of the title Forex Trading Gambler. During my first few years and quite some of the time, I trade forex because of the adrenaline rush and the thought of easy money. I get excited on every high risk trade that turns out to be a winner. It was my high. I was addicted to the feeling. Like a gambler who doesn’t care about the risk, odds or the probabilities of winning or losing. He just wants to experience that same high that got him hooked.

As if I were a junkie.

Then comes the realization, I continue to lose and I kept increasing my trading size. Only to burn even faster. With that good feeling that you miss, you just want to trade more and more, larger and larger, only to experience the bottom faster. Trading this way will not work.

It is not about the feeling in trading. How much money you made or how much you lost should not be the basis of trading. The more I trade, the more I realize that. Money doesn’t matter in trading. For me, being right matters most.

Its all about the odds and probabilities. Its all about timed aggression and patience. A little bit of luck may help. But don’t depend entirely on luck. Because even though luck is involved, there is a reason why the final table have so many familiar faces.

It is a different kind of feeling that the thrill of winning big. Being right is better than breaking the bank. This is not a sprint, its a marathon. Trading larger size may give you great gains, but also great drawdown, and greater risk to go bankrupt. What we want is to make the right decisions each and every time.

The more I read about the stories of successful traders, the more I realize that trading is much like poker. Some people treat it as gambling, some treat it like a sport, a mental sport like chess. Some play poker just to have fun, feel the rush, some play poker as a profession, as a business. We should approach forex trading the same way. Its all about the odds and probabilities. Its all about timed aggression and patience. A little bit of luck may help. But don’t depend entirely on luck. Because even though luck is involved, there is a reason why the final table have so many familiar faces.

Happy trading!

Forex Trading Small First Before You Go Big

People are greedy. That’s a fact. But its the emotion that keeps us wanting more and always wanting to have the things we want. Makes us think of ways on how to get it. Don’t fear greed. Make use of it. Master it.

Most newbie traders, me and my friend, talked about the profits in trading. One of us will argue that to have great profits you need to have large amounts of pips in a winning trade. Ok. Fair enough. More pips = more profits.

Think about this, you have $1M in your account as capital. And your target profit in terms of pips is in the 200+ pip range. Sounds like a lot money to be made when you get that 200+ pip. But think of the risk you will get and also the time before you get to profit. In forex trading, there are fluctuations, can you stay calm when your account displays -100pip because of its initial retracement? Can you still decide if the trend is against you or its just a retracement? Remember, earning that kind of pip will require you to hold the trade from 1 hr to 1 day. Can you handle the pressure?

I say, pip size doesn’t matter. How much you risk in each trade matters. Playing with small profit pips will reduce risk. And also, having a profit target that’s small will minimize risk. Smaller pips means, shorter time inside a trade which means lesser risk, less pressure from greed or fear.

Pip size doesn’t matter, volume does. Increase your volume once you got the thing going. Increase more to profit more, while still maintaining the same pip per trade profit. And always remember, don’t overtrade. Take a time out. Every businessman needs his vacation once in a while.

Good luck!

Contrarian Forex Trading

USD/JPY right after the Dollar Sell off, I placed a buy trade. Contradicting the market sentiment and news. And it paid off greatly with minimal risk.

There are a lot of forex traders out there and hundreds more forex trading system to choose from. But why I settled with contrarian trading is more of its match to my personality than any amount of percentages any system can deliver.

I would not promote my system to be the best trading system nor all other analysis are crap. I won’t even go far to say that one system fits all. The points of having the best forex trading system lies within the individual. Its like finding your soulmate, it must be a match.

A match to your personality. And that’s the beauty of trading, its both an art and a science. Its a science because you can explain all the data with numbers and predict some events that may occur based on that data, but its art to express your views of the world based on your strategy. Its a wonderful feeling. So finding the right strategy, system or method based on your world views and personality is the best forex trading system that you can use.

Stop searching for the holy grail. Stop going from one forex trading system to another. Know thyself and pick the right system for you. Make it your own then customize it to better fit you.

I am a contrarian trader. And has always been a contrarian all my life. I am the problem employee and the jerk in the group. My strong point is, I know what am. So I know what fits me. I don’t go pretend I’m a sheep just to be accepted. And forex trading is the best vehicle to express that view and be rewarded. When the whole world frown upon who thinks differently and does not conform. In the market, you get to be rich for thinking differently while staying anonymous in the process. Got to love that!