Trading Rules
Hi there!
Losing money in Forex is a very painful experience and it usually leads the trader to one of two decisions:
1- Giving up trading and you return to your old safety job.
2- To set up your rules.
It’s very strange that the most of traders had lost a lot of money before learning the lesson that “there’s no way to make profit trading Forex (or achieving any success in any field) without firmly established rules and the discipline to obey them”.
I’m wondering why don’t you set these rules before gambling your hard earned money and practice your rules and discipline examination in a demo account before going to trade real account? Anyway nothing is free in this world and you have to pay to learn before gaining from the paid lessons “no pain no gain”.
How to set up your rules:
I’ll write down my trading rules which I’m not recommend or ask you to use them (you can use them if you want) but I’m writing them to tell you what’s the kind of rules you have to set up.
Whatever the kind of you trading style you have to answer the most important three questions in trading Forex:
1- When to enter a trade?
2- When to exist a trade?
3- Why should I trade?
These are the 3 must(s) your rules have to answer them:
When to enter a trade?
Betting on the price raising or failing is the only strategy that the losers uses. To trade Forex one of the most important questions you have to answer “Why should I enter a trade?”.
You have to know what should happen to enter a trade, for example your collection of indicators giving you the entry signal. And you have to know how much of money (lots) you are going to trade.
If these questions have no answer how can you except to have trading rules??
When to exit a trade?
“Swimming is the art of breathing control” these words fit the Forex trading too. You have to know when to leave the Forex ocean and control your breath while you are swimming in this ocean.
Exiting in the correct time without hoping of more profit or hoping that the loss decreasing is one of the very important points that you rules have to include!
Why should I trade?
It maybe strange to ask this question to a Forex trader, Why should you trade? The question itself needs to be clearer!
The question means “There are times that you have to enter the market, and there are times that you have to exit the market, right, Huh? well, there are times that you should not trade at all?”
Yes, You have to stop trade when you make a lot of loss and you have to do the following in this case:
1- Ask yourself: did you obey your rules? If no! you have to ask yourself Why? Was is it a problem in myself or it was a problem in the rules (The rules wasn’t clear or wasn’t profitable) and How in the future I’ll obey my rules
2- If you have obeyed your rules and made losses you have to examine your rules again and again to know what was the wrong.
3- In any case you have to stop for awhile to take your breath and continue your swimming. Losing money is a good time to stop trading not to try to compensate them! I heard these words from ages “Don’t cry on whom loss, but cry on whom want to compensate”
What should I do with my rules?
This is a silly question but I have to finish my article with it because the most of us forget to answer it daily and hourly even minutely:
1- Obey them!
2- Obey them!
3- Obey them!
4- “Plan your trade and trade your plan” Which means “Obey them!”
Money Management - 2%-6% rules
Hi there!
In this series of articles i’m going to introduce to you some of the best money management concepts/methods that have been developped by great forex and stock traders.
All of us heard and read about how important the money management but the most of us have been lost in finding clear money management strategies to follow. Our money management strategy today is very simple and easy to follow; it,s the 2%-6% rules.
The 2%-6% rules money management strategy was introduced by Elder Alexander in his book “Come to my trading room” in chapter 7 that labeled “Money Management Formulas”.
Sharks and piranhas :
Elder says “The goal of money management is to accumulate equity by reducing losses on losing trades and maximizing gains on winning trades.” and he affirm that Everyone in the market (competitor traders and brokers) want to eat your money, they have two ways to eat your money:
1- A big single shark bite that wipe of all or the most of your capital.
2- A series of small piranhas bites that none of them is lethal alone but which together strip an account to the bone.
The 2%-6% rules is the Money Management method that protects you from the sharks and piranhas.
2% limit rule:
The first thing you have to do to keep your account away of the sharks is to limit your lose at any trade to 2% of your equity. Do you have 10000USD in your trading account? So, you have to risk 10000 x 2% = 200USD in any of your trades. You have to set your stop loss to this level and you have not lose at any trade you make more than 2% of your equity. Some of professional traders use less than 2% but no more than 2%.
Whenever you make a loss or a profit you have to recalculate the 2% of the equity to know your new maximum risk per trade. For example if you made a profit trade and your account now is 11000USD, your maximum risk will be 220USD. At the other hand if you made a loss and and your account now is 9000USD, your maximum risk will be 180USD.
US Dollar Index
Hi there!
The most traded pairs - that are called Majors - are the pairs that the US dollar is a part of them or by other means that traded against the US dollar (for example the EURUSD pair which is the most traded pair in the world, the EURO is traded against the US dollar).
Any trader will notice the strong relationship between these pairs which called “Correlation” for example when the EURO raise against the US dollar it’s very likely that the GBP will raise against the USD and also the JPY and CHF. We can say in this case the US Dollar had been declined against the other major currencies. Or we can say “The US dollar index had been declined”.
What’s the USDX (US Dollar Index)?
The US dollar Index (USDX) is a measurement of the US dollar value by comparing the US dollar against the majors currencies traded as pairs with the US dollar. The selected currencies are 6 currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. This index started in 1973 with a base of 100 and is relative to this base.
How the USDX is calculated?
As mentioned above the USDX is calculated against 6 currencies and it is calculated with this formula:
USDX = 50.14348112 × EURUSD -0.576 × USDJPY 0.136 × GBPUSD -0.119 × USDCAD 0.091 × USDSEK 0.042 × USDCHF 0.036
In the formula above we can notice two things:
1- Not all the currencies have the same weight, but there are currencies more important than others. Table 1 and image 1 show the weight of each currency.
|
Currency |
Weight |
| Euro EUR | 0.576 |
| Japanese Yen JPY | 0.136 |
| British Pound GBP | 0.119 |
| Canadian Dollar CAD | 0.091 |
| Swedish Krona SEK | 0.042 |
| Swiss France CHF | 0.036 |
2- When the the USD is the base currency the value is positive and when it the USD is the quote currency the value is negative.
Note: The above value is compared against the US Dollar relative to March 1973. March 1973 was chosen as a base period because it represents a significant milestone in foreign exchange history when the world’s major trading nations allowed their currencies to float freely against each other.
What the USDX is useful for?
It’s very obvious that when the strength or weakness of the US dollar in the USDX means the same strength or weakness against the currencies that the USD is a part of its pairs. So, you can use the USDX to predict the movement of your favorite pair. Also it’s recommended to observe the other pairs related to the USD while you observing your favorite pair.