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Forex Money Management for Forex Sailing

You’ve learned the basic rules of trading with Forex Sailing, so how do you manage your trades with proper money management?

In a previous post, I discussed the basic forex money management principles to live by. The principles are extremely simple, but it can be tempting to “bend the rules” because you want to make more money fast!

Have Self Control & Become a Discplined Forex Trader

I hate the word discipline. It sounds like a bunch of hard work (and it is).  In order to be successful with online forex trading, we need proper forex money management.

So the next time you consider breaking these rules “just once,” or “one this higher-probability trade,” look in the mirror and rededicate yourself to following the habits of a forex winner.

Practical Forex Money Management

The core money management rule is:

NEVER risk more than 2-5% of your forex trading account on any ONE trade!

In case you weren’t paying attention, this means two things:

• NEVER, EVER, EVER risk more than 5% of your online forex trading account on a SINGLE trade!
• It’s a “good idea” to risk less than 5%, a safer plan is 2% (even though 5% is ok)

Measuring Your Forex Trading Risk on a Trade

So how do you know how much money you’re risking on a single trade?

It’s actually pretty easy.

On a normal forex trading account, 1 pip = $1 USD. This is a common value for most online forex brokers.

Since I’m trying to make online forex trading accessible to as many people as possible, I’ll be using an account where 1 pip = $0.10 USD.  Since a pip is only 10 cents, you’ll be able to do trades with 1/10th of the money you’d normally require.

Your Stop is Your Risk

The total amount of money you risk in a trade is how many pips below your entry price that you place your stop order.

In a recent forex sailing example, I shared a trade with a total risk of 131 pips.  When following the rules for forex sailing, the stop had to be placed 131 pips below the entry price.

Since 1 pip = $0.10 in this type of trading account, the total risk = 131 * $0.10 = $13.10.

Since $13.10 is at risk, we need to make sure that we’re not risking more than 5% to satisfy our forex money management plan.

Multiply By 20 for Proper Forex Money Management

If you multiply the total risk in a trade by twenty (20), you’ll be following the 5% rule.

To properly do a trade that requires a risk of $13.10, we need to have an online forex trading account balance of $13.10 * 20 = $262.

Before entering any trade, you’ll need to do this quick calculation. You can also do the calculation in reverse.

Calculating Maximum Risk Per Trade for You Forex Trading Account

Another way to determine if you can do a trade is to look at your online forex trading account balance.

If you have $500, you can risk up to 5% per trade, so you can risk $500 * 5% = $25 = 250 pips (@$0.10/pip).

If you have $750, you can risk up to 5% per trade, so you can risk $750 * 5% = $37.50 = 375 pips (@$0.10/pip).

The 10-cent-HALF Rule of Instant Forex Money Management

It turns out that you can do proper forex money management with a simple glance of your forex trading account balance.

If you’re using a forex trading account where 1 pip = $0.10, then you can risk HALF the amount of pips as dollars in your account.

• If you have $1,000, you do a trade that requires a 500 pip stop (500 is HALF of 1,000)
• If you have $300, you do a trade that requires a 150 pip stop (150 is HALF of 300)
• If you have $120, you do a trade that requires a 60 pip stop (60 is HALF of 120)
• If you have $50, you do a trade that requires a 25 pip stop (25 is HALF of 50)
• Get the idea?

Of course this works for accounts in US dollars using a leverage where 1 pip = $0.10. If you’re trading in a regular forex trading account where 1 pip = $1, then the HALF rule needs to be divided by 10 after taking HALF. If you’r trading with a different amount of leverage, you’ll need to adjust this rule accordingly.

Dynamic Forex Money Management

Every trade you do will change your forex account balance. It’s important to look at the HALF rule EVERY TIME YOU TRADE. This will allow you to dynamically change your trade size as your account grows.

Also, if you realize that you can risk 500 pips in a trade and the trade only requires a 200 pip stop, you will want to double your position size so you risk 400 pips. This helps your forex trading account to grow more rapidly, while still following the rules of forex money management.

Where to Get a 10-Cent-Pip Forex Trading Account

I’m recommending you sign up for  an eToro forex trading account for the free 90 day forex trading bootcamp. I’m recommending that you fund your eToro forex account with at least $250, so you will be able to follow money management and do most of the trades that we’ll be spotting.

Since the 90 day FREE online forex trading bootcamp is FREE, take the money that you’d normally spend on a forex trading course and put it into your eToro forex account. You can get a practice eToro account here. I suggest funding it with $250 as soon as possible so you’ll be ready for the bootcamp.

Why eToro?

eToro is probably the fastest growing online forex broker. There’s also a cool secret way for you to make money with eToro that other brokers aren’t offering. When we start the 90 day bootcamp, I’ll show you how to add some more money to your eToro account (you’ll love how easy this is).

I have been using eToro for about 2 months and I’m a fan. I’ve used other brokers, but right now I like eToro for people starting out with online forex trading.

We’ll be using some other free tools outside eToro for the bootcamp, but since you’ll be trading with real money you should start setting up your eToro account.

Posted in Forex Sailing, Money Management

Forex Gambling Mentality Kills Profits

Every forex trader understands that we need to use basic forex money management to be successful at forex trading online.

This mentality caused a winning series of trades (60% success) to lose 700% of a forex trading account that should have gained 520%. Read this post to see how a profitable forex trader can still lose so much money, and how you can prevent this from happening to you.

Confession: This trader was me a few years ago when I got started trading forex online. I’d be willing to bet something like this has happened to you…

Why is Money Management important?

It prevents what I call the “Forex Gambling Mentality,” when you see how this can turn online forex trading PROFITS into LOSSES, hopefully you’ll beat this dangerous way of thinking forever.

What is the Forex Gambling Mentality?

When you follow impulsive decisions to determine the amount of risk you take on a forex trade, you are falling into the Forex Gambling Mentality. Anything outside of a predetermined money management strategy is considered a forex gambling mentality.

Let’s look at an example:

• You enter trade #1 and risk 10 pips to make 10 pips. The trade succeeds and you make 10 pips!
• You enter trade #2 and risk 10 pips to make 10 pips. The trade succeeds and you’re now up 20 pips!
• You are felling good, so on trade #3 you risk 20 pips to make 20 pips.  The trade succeeds and you’re now up 40 pips!

At this point you’re feeling like you’ve mastered forex trading. You get out your calculator and start figuring out that at this rate of compounding your forex trading profits you’ll have $2.5 million in your online forex trading account in about 9 weeks (TRUST ME – I’ve actually thought this way, and you probably have to).

You are now cocky and you start trading again, since you’re on a roll you decide to trade more lots to make more money faster.

• You enter trade #4 and risk 40 pips to make 40 pips. The trade fails and now you are at breakeven!

You’ve still been successful 3 out of your last 4 trades, so you do another trade:

• You enter trade #5 and risk 40 pips to make 40 pips. The trade fails and now you are down 40 pips!

Now you get nervous and decide to be more conservative, so you go back to what was successful for you in the past:

• You enter trade #6 and risk 10 pips to make 10 pips. The trade succeeds and you’re only down 30 pips!
• You enter trade #7 and risk 10 pips to make 10 pips. The trade fails and you’re down 40 pips!
• You enter trade #8 and risk 10 pips to make 10 pips. The trade succeeds and you’re only down 30 pips!

You now look at your past 8 trades. You think to yourself  “I’ve been right 5 out of 8 times, or 62.5% of the time.  I’ve been allowing my emotions to control me. I need to stick to my plan. If I just risk 20 pips to make 20 pips, I’ll be successful.”

So you do the following:

• You enter trade #9 and risk 20 pips to make 20 pips. The trade succeeds and you’re only down 10 pips!
• You enter trade #10 and risk 20 pips to make 20 pips. The trade fails and you’re down 30 pips!
• You enter trade #11 and risk 20 pips to make 20 pips. The trade fails and you’re now down 50 pips!

You’re down 50 pips, so you look at what you’ve been doing to try to analyze patterns and stop making the same mistakes. You’re not too worried yet, so you notice the following. You’ve still been right 6/11 times. You also notice that you’ve never had three failing trades in a row. Since you just had two failed trades, now’s your turn to put the odds in your favor. So you decide to go for breakeven and risk 50 pips to make your money back:

• You enter trade #12 and risk 50 pips to make 50 pips. The trade fails and you’re now down 100 pips!

Now you feel like you’re having bad luck and aren’t going to risk any more money wildly. You’re still in the game and you know you can still make money with trading forex online, so you go back to risking 10 pips and the following happens:

• You enter trade #13 and risk 10 pips to make 10 pips. The trade succeeds and you’re only down 90 pips!
• You enter trade #14 and risk 10 pips to make 10 pips . The trade succeeds and you’re only down 80 pips!
• You enter trade #15 and risk 10 pips to make 10 pips . The trade succeeds and you’re only down 70 pips!

STOP! END OF EXAMPLE

It doesn’t seem right that a forex trader who is profitable 9 out of 15 times (60% of the time) could lose so much money trading forex online. This is the same reason that compulsive gamblers lose money, they don’t follow basic forex money management of trading only 2% of their account per trade. By doing this the forex trader gets to be more profitable. This is what forex losers do.

A forex winner who is free of the forex gambling mentality would have had the following experience (with the same trades):

• You enter trade #1 and risk 10 pips to make 10 pips. The trade succeeds and you make 10 pips!
• You enter trade #2 and risk 10 pips to make 10 pips. The trade succeeds and you’re now up 20 pips!

You notice that your account size has grown & you can now safely risk 12 pips to make 12 pips.

• You enter trade #3 you risk 12 pips to make 12 pips.  The trade succeeds and you’re now up 32 pips!
• You enter trade #4 you risk 12 pips to make 12 pips.  The trade fails and you’re still up 20 pips!
• You enter trade #5 you risk 12 pips to make 12 pips.  The trade fails and you’re still up 8 pips!

You notice that your account size has shrunk & you can now only safely risk 10 pips to make 10 pips.

• You enter trade #6 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 18 pips!
• You enter trade #7 and risk 10 pips to make 10 pips. The trade fails and you’re still up 8 pips!
• You enter trade #8 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 28 pips!

You notice that your account size has grown & you can now safely risk 12 pips to make 12 pips.

• You enter trade #9 and risk 12 pips to make 12 pips. The trade succeeds and you’re up 40 pips!
• You enter trade #10 and risk 12 pips to make 12 pips. The trade fails and you’re still up 28 pips!
• You enter trade #11 and risk 12 pips to make 12 pips. The trade fails and you’re still up 16 pips!

You notice that your account size has shrunk & you can now only safely risk 10 pips to make 10 pips.

• You enter trade #12 and risk 10 pips to make 10 pips. The trade fails and you’re still up 6 pips!
• You enter trade #13 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 18 pips!
• You enter trade #13 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 28 pips!

You notice that your account size has grown & you can now safely risk 12 pips to make 12 pips.

• You enter trade #14 and risk 12 pips to make 12 pips. The trade succeeds and you’re up 40 pips!
• You enter trade #15 and risk 12 pips to make 12 pips. The trade succeeds and you’re up 52 pips!

You notice that your account size has grown & you can now safely risk 14 pips to make 14 pips.

Would you rather be up 52 pips, or down 70 pips?

This is the difference between the Forex Gambling Mentality and Basic Forex Money Management.

Posted in Money Management

Six Killer Forex Trading Strategies

There are several forex trading strategies that can bring you profits. However, what works in a trending market may not work in a sideways market (and vice versa).

Here are six general strategies for placing trades in different forex trading situations. You may have seen some of these ideas in previous blog posts, but this will be a nice summary of forex trading rules to print and keep by your forex trading desk.

Remember to combine the general information listed here with the more detailed, case-specific information you’ve learned throughout this blog.

Strategy #1: This forex trading strategy works well in both sideways markets and trending markets. To trade the first trading strategy, follow these steps:

1. Enter with one lot.

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).
3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.
4. Go for small profits, don’t get greedy.
5. Exit just before the market makes a new high or low. Exit as the market passes through the previous level of support (resistance) to make a new low (high).

Strategy #2: This forex trading strategy works better in sideways markets, but also works fine in trending markets. To trade the second forex trading strategy, follow these steps:

1. Enter with several lots (5 or 10, for example).

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the risk-reward ratio. Keep your potential losses small.

4. Go for small profits (20-30 pips). You should be in and out of the trade quickly.

5. Exit just before the market makes a new high or low. Exit as the market passes through the previous level of support (resistance) to make a new low (high).

Strategy 3: This forex trading strategy works well in trending markets and poorly in sideways markets. To trade the third forex trading strategy, follow these steps:

1. Enter with one lot.

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.

4. Cancel and replace your original stop loss order (to seal in profits). Only cancel and replace the previous stop loss order after the market has made a new high (low).

5. Don’t set a profit limit order. Stay in the market until you are automatically exited when the market hits your stop loss order price (when you are stopped out).

Strategy #4: This forex trading strategy works well in trending markets and modestly in sideways markets. To trade the fourth forex trading strategy, follow these steps:

1. Enter with two lots.

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.

4. Exit with one lot for a small profit before the market makes a new high or low. Exit as the market passes through the previous level of support (resistance) to make a new low (high).

5. Exit with the second lot just before the market hits to Fibonacci extension bounce point (you will be going for a larger profit with this lot).

Strategy #5: This forex trading strategy works well in trending markets and poorly in sideways markets. To trade the fifth forex trading strategy, follow these steps:

1. Enter with multiple lots (5 or 10, for example).

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.

4. Place limit exit orders for each lot at different pip increments (e.g. place your first exit order to exit one lot at 40 pips away from entry; place your second exit order to exit one lot at 60 pips away from entry; place your third exit order to exit one lot at 100 pips away from entry; place your fourth exit order to exit one lot at 150 pips away from entry; place your fifth exit order to exit one lot at 200 pips away from entry).

5. Once the market has started to trend and has moved 100 pips or more away from entry, cancel and replace the stop loss orders for your remaining lots to eliminate your risk. In this case, cancel your original stop orders for the fourth and fifth lots, replacing those stop orders at the breakeven point (the market price 100 pips away from entry).

Strategy #6: This forex trading strategy also works well in trending markets and poorly in sideways markets. To trade the sixth forex trading strategy, follow these steps:

1. Enter with multiple lots (5 or 10, for example).

2. Place your stop loss order at the last level of support if you are a bull (you are buying) or the last level of resistance if you are a bear (you are selling).

3. Analyze the potential risk compared to the potential reward in the trade. Keep your potential losses small.

4. Place limit exit orders for each lot at different pip increments, just as you would in the fifth trading strategy, except this time don’t set a limit exit for the last lot (the fifth lot, in this case). Instead, allow your trade to take advantage of potentially huge moves.

5. Once the market has started to trend and has moved 100 pips or more away from entry, cancel and replace the stop loss orders for your remaining lots to eliminate your risk. In this case, cancel your original stop orders for the fourth and fifth lots, replacing those stop orders at the breakeven point (the market price 100 pips away from entry). As you follow the market with your fifth lot, continue canceling previous stop loss orders and replacing them at new highs or lows, to lock in your profit.

Now you have 6 different forex trading strategies for different market situations. Mastering a few of these could become your bread and butter as a forex trader. The rapid forex blog will continue to teach you more forex trading strategies, but knowing these will add valuable tools to your forex trading toolbox!

Posted in Money Management