Posted on February 26th, 2010
by Rapid Forex
Recently I’ve been discussing market orders for placing trades. Earlier today I explained some key equity management tips and how to use stops and limits when placing forex trades (the opposite of basic forex money management is the destructive forex gambling mentality).
Related to these concepts is one important money management concept that I want to share before moving on to more sophisticated trading tips.
How do you decide where to set your stop loss order?
There are several factors to consider:
1. Always set your stop loss order at the last level of support if you are buying and the last level of resistance if you are selling*
* small exception: because there is a spread between the bid price and the ask price (usually 3-10 pips), you may want to set your stop loss order 3-10 pips higher or lower than the last high or low if the stop loss order is tight (that is, if the stop loss is close to the entry point). Otherwise, you may be stopped out prematurely.
2. Don’t risk more than 2-5% of your margin account on any given trade. If the number of pips between your entry point and your stop loss price is more than 2-5% of your account (remember that 1 pip is about $10) then you should pass on the trade because the risk is too great.
If you risk more than 5% of your margin account on any given trade, you will be overtrading your account. This basic money mangement rule helps you stay in the forex game long enough to trade another day (so you don’t wipe out your account with a few bad trades).
In the blog posts that will follow this, you’ll learn about where to set your protective stop loss orders for each specific trade you are making. Nevertheless, the two rules listed above are applicable across the board no matter what indicators you are using to place your market order.
In addition to a stop loss order, you will need to set a profit limit order.
How do you decide where to set your profit limit order?
Your risk-reward ratio should be 1:1.5 for each trade you make. That is, for every $1 you risk you should seek $1.50 in reward. This is a good rule of thumb when getting started. As you gain experience, you’ll learn how to adjust this risk-reward ratio.
Setting your stop loss defines the risk you will take on that trade. Setting your profit limit defines your potential reward.
For now, make sure the number of pips between your entry and your profit limit is at least 1.5 times greater than the number of pips between your entry and your stop loss. Apply these basic money management principles to become a forex winner!
In my next post, I’ll be talking about understanding forex charts. This is where forex trading starts to get really exciting!!!
Posted in
Forex Basics
Posted on February 26th, 2010
by Rapid Forex
In my last post, I showed you some important tips for proper equity managment. Since this topic was on my mind, I thought I’d give you some more tips about using stop and limit orders to capture profits and protect against losses.
If you place an order to sell below the market that is also called a stop order (also called a protective stop loss order because it protects you against more loss than you originally planned on).
If your original market order is to buy, then you stop loss order will be below the market, set there in case the market does not go up as you predicted. If the market does not go your way, instead falling, you will be automatically taken out of the market once the market hits your stop loss order price.
Conversely, when you sell above the market or buy below the market your order is a limit order.
The reason is: if you place an order to sell above the market that means that your market order is a buy. Your order to sell above the market is a limit order, also called a for-profit limit order or profit limit order.
You set a profit limit order to safeguard your profits if the market does go the way you predicted (in this case, your market order is a buy so you hope the market goes up). If the market does go up, as you hoped, you want to make sure that you lock in your profits before the market turns around again. Setting a sell order above your buy market order (setting a profit limit order) does just that.
If you place an order to buy below the market that means that your market order is a sell. Your order to buy below the market is a limit order, also called a for-profit limit order or profit limit order.
You set a profit limit order to safeguard your profits if the market does go the way you predicted (in this case, your market order is a sell, so you hope the market goes down). If the market does go down, as you hoped, you want to make sure that you lock in your profits before the market turns around again.
Setting a buy order below your sell market order (setting a profit limit order) does just that.
To summarize: if your market order is a sell, then your protective stop loss order will be to buy above the current market price, set there in case the market goes up instead of down (if you’re selling you want the market to go down).
When you place a market order to sell, not only do you need to set your protective stop loss order to buy above the current market price (in case the trade does not go your way), but you also need to set a profit limit order to buy below the current market price, to safeguard your profits if the trade does go your way. Every sell market order has a buy stop order above the market and a buy limit order below the market.
If your market order is a buy, then your protective stop loss order will be to sell below the current market price, set there in case the market goes down instead of up (if you are buying you want the market to go up).
When you place a market order to buy, not only do you need to set your protective stop loss order to sell below the current market price (in case the trade does not go your way), but you also need to set a profit limit order to sell above the current market price, to safeguard your profits if the trade does go your way.
Every buy market order has a sell stop order below the market and a sell limit order above the market.
Now that you’re learning the basices about forex, you’ll soon be ready to begin trading the forex (excited? you should be. Don’t worry – you can start with as little as $25).
Posted in
Forex Basics
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