Most traders new to Forex are often guilty of letting their losses run and cutting their profits short, even experienced traders do it every once in a while. Before we begin, answer the two questions below. When faced with a scenarios below which option would you prefer?

Most traders would chose Option B in Scenario 1 and Option A in Scenario 2. Compare these results with your own answers. If you chose the same then unfortunately you will be among 95% of traders who fails at Forex. Read Forex Loser’s Checklist, and see if you qualify. Lets look at psychology behind your decisions.

The two scenarios are quite interesting. Our perception of gain and loss changes our behaviour. When the options of a risky scenario involve profits, traders are risk-averse (risk-avoidance); however when options of a risky scenario involve losses, traders are risk-seeking. The other words, traders tend to seek risk in face of possible loss and avoid risk when profits are at stake.

This asymmetrical way of risk-taking has great implications on trading decisions we make as a trader. Our decision are based “subjectively”, taking in account recent events rather than looking at overall net trading balance. Let me explain:

After a profitable trade, the decision to close trade and take profit on next trade depends on gains made on previous trade. A trader starts to think ” I’ve made enough on the first trade, lets not lose it all and give away all the profits. Take early profit and call it a day”. At the same time, on a losing position trader delay cutting losses and hold on to trades hoping that it will reverse. The result is that trader realize profits way too early while allowing losses to accumulate.

Another interesting aspect of trading is the impact of losses on our minds. The feeling of losing an amount is much worse than pleasure gained from winning the same amount. Hence traders, hate losing 10,000 more than they love winning 10,000. Psychologically losses have twice the impact, no wonder why a trader don’t want to close a loosing position and willing to risk more.

A good trader is not a trader who makes millions in fraction of a second. A good trader is one who know where to cut his positions. It is not about making money; it is about losing as less as possible when we are wrong. Thus managing the psychological asymmetry in risk-taking is the key for succeeding as a trader. Bottom line “An experienced trader stands out from a new trader not by how he makes money, but how he loses money”

Do you agree? Leave comment below.

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We have partnered up with a broker known as Markets.com and they have offered to pay your fees ( for the first month) if you open Live trading account with them.

It is a win-win situation for all parties involved . You get to try our full set of services for no extra cost. You enjoy complete membership benefits for simply opening a Live trading account. It also works for us since we get to offer Free Trial, it is something we lacked earlier. Markets.com benefits by getting new clients and it helps them reach out to more traders.

Markets.com spreads are quite good and they are registered with FSA regulatory body. Their MT4 is compatible with our Expert Advisor as well. I still suggest to do your due diligence before opening account with them.

We are offering trial for two of our Packages “Live Plus” and “Elite”(Details) . You can try either package depending on your account opening balance:

$100 to $3000 :  “Live Plus” Trial
$3000 or more:   “Elite” Trial

It will take us 24-48 hours to provide you with login details once you have completed the account opening and funding process with Markets.com. After 1 month trial you can subscribe as usual by going to our Services page on the website.

Current members can also use this offer to receive a free month. Please email support@firepips.com for further instructions.

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Give a bunch of traders a proven successful system, you can bet that not everyone will make money from it. We know the system is not wrong. So what is it that makes a person successful at trading? Lets find out.

In my opinion success comes when there a perfect fit between the person and his/her trading strategy. If you are still struggling at making profits from trading then it is not because you are lazy but perhaps you are simply trading in a way which is not in sync with your personality.

Points below will help you to find your own Forex Trading Niche:

Have you tried trading intra-day, swing and position trading? If not, then how you know that the current timeframe you are using the best one which fits you.

From experimenting I found that I mentally handle swing trades better than trades that last for months or few seconds like in case of News trading.

Most people dive straight into technical analysis based on indicators. How about fundamental based trading, or even news trading (not that I recommend news trading).

I’ve played around with more indicators than you can imagine. Bottom line, I was getting no where; there is no end at finding the best combination of indicators that would work. I stopped once I found my peace in Price Action and it is where everything came together.

Why trade Forex only and not Stocks, Commodities and Futures? Unless you attempt to trade all these markets how would know which one is best for you.

I am guilty of this myself. I’ve never traded any other market. I may be not performing at my best and I would never know until I try all other markets. The good thing about Price Action strategy that I currently use is that I can apply it on any other market. I’ll save this one for 2011 New year resolution.

One would think that once they have found the best strategy then there would be no need to make any changes ever. That’s just not true. On the contrary most professional traders constantly tweak their systems to match current market conditions.

I’ve modified the current strategy several times in the past, and I’ll continue to do so as I seem fit. On the other hand I keep working on variations of the same strategy to see if there is more I can get out of it.

This point brings everything together. It would take time to try all the combination above. If you just got started in trading then it can take some time before you discover your trading niche.

I did not succeed for the first two years, I was barely able to keep my account above par. I think I was too adamant to follow any gurus at the time, now looking back I think I should have followed someone which could have shorten my learning curve.

In Summary of discovering Forex trading niche, one would naturally excel when they find the right market, the right strategy and the right fit with their personality. On the side note, remember it is the journey that matters so don’t forget people you meet on the way

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Are you continuously looking for some new systems? Are you visiting forums to look if there is new indicator or setup that can improve your trading. Let me tell you a secret, a lot of system out there are profitable only if traders start to follow their trading plan, keep records and analyze their mistakes. Blaming the system and moving on only hides the real cause of the problem – Trader Himself.

Have your come across websites that promise that their Expert Advisor would take away your emotions out of trading by trading automatically for you and you only have to log in once a week to check your profits. Those companies also promises 2000% return annually, simply incredible. Before your spend another penny on such software ask yourself would you bother to open up a website to sell your incredible EA which makes you tons and tons of money for $99 a month and then sit there and reply to customer inquiries. I guess NOT.

Have you ever added to your losing position, hoping that when it comes back it would be even more profitable? If yes, then you are suffering from “Marrying the Trade” syndrome. As I said earlier “Use Stops and Get Stopped”. Every time a trade hit stop loss you should congratulate yourself for following your trading plan.

Tell me who has not done this? This happens when we doubt ourselves and stop following trading plan. Once you have placed the trade then stop looking for confirmation or analyze it further. Leave it alone and let it do its thing. Come back later to check if it all worked out alright.

Read this article on how you can save yourself from account burn outs.

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• Account Wipe-outs
• Keeping Poor Trading Records
• Urge to Trade
• Switch Trading Systems
• Buy new softwares /EAs
• Double Up Losing Trades
• Reverse and Trade in Opposite Direction

Did you ever wipe out a trading account? If not, then congratulations, but I hope you do so sooner than later.  It sounds strange, however every successful trader at one stage have wiped himself off.  Remember those sleepless nights and loss of appetite.  Once you been through it, you promise yourself never to repeat it again and learn the most valuable lesson, “Use Stops and Get Stopped”, before a bad trade burns your account completely.

What were your last ten trades? Do you know how much was the drawdown before they turned into profit? Did you remember how did the chart setup look like?

If you are not saving screenshots and maintaining  a spreadsheets of trades then you are most likely to fail. I recommend using MS Office OneNote for keeping screenshots of every trade you take/miss/leave. Analyze every week or month depending on trading frequency and look for common mistakes and recurring patterns.

The “Need To Trade” is the biggest challenge for new traders. The constant desire to trade to either meet the goals or fulfill sense of excitement burns their account individually.

I recommend creating a trading plan. Every trade you take mark it down as “Impulse” if it didn’t meet your trading plan. At the end of the month look back and see how many were “Impulse” and their success rate. This will give you a better idea about your own mental process.

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We all know that fear and greed is what drives most of the new trader’s decisions. Though a very simple concept to understand, it is very to hard to put into practice. The primary reason why new traders let their winning trade become a loser is due to lack of trading plan. Before placing any trade we should know when to take profits and set the stop loss.  We will cover ways of setting profit targets and stop loss in another article.

Now we covered the psychological point of how it works, lets look into how we can avoid falling in this trap.  First divide the profit target into three parts. These three parts don’t have to be of equal size. They can very based on support / resistance or any other criteria. When placing trades always trade in lots divisible by 3.  Close first third when trade reaches third of your profit target. Do NOT move the  Stop Loss to starting point yet. Once the trade reaches second profit target close the second third and  move the  Stop Loss to starting point. The last third is now a free ride.

Trading this way not only reduces your risk but also locks in profit as you move along. However always keep in mind not to trade more than 2-3% of account equity in one trade. You can read more about Money Management Here.

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Ask yourself these questions: Are you trading Forex to make a living? Or Are you hoping to trade Forex Full Time? Or Do you  want to learn how to trade like a professional Forex trader? If the answer of any of the above question is Yes, then You Should  Care.

You must have come across Brokers advertising that their Mini account competition winner made 500% in one month. If you got excited reading such advertisement then I’ve a bad news for you.  The winner of such competitions usually have multiple accounts with rather small equity in each account. They bet all or nothing and try to gamble their way to win the prize money.  Anyone who want to last long in the markets and serious about trading then he should seriously consider 3% risk rule.

The 3% Risk rile basically says the every time you place a trade you don’t risk more than 3% of your total equity. So in case you  lose then you losses should not go beyond 3% of total account equity.   Look at the image on the right to see how it is calculated.

Another important thing to note here is Risk to Reward ratio (R/R). Ideally traders look for 1:2 Risk/Reward per trade, which means that for every dollar risk your wins should be two dollars or better.  So if you take example from the image then your risk is $300 and your expected reward should be $600 or better. Now as long as your trading system gives you a Win to Loss ratio of 50% or better you would end up in profit.

Anyone who has been in market long enough would realise that some currency pairs move in synchronisation.  From my personal experience I’ve noticed two major Pair Types:

1. EUR/USD, GBP/USD, AUD/USD and NZD/USD  (USD/CHF and USD/CAD in reverse direction)
2. USD/JPY, EUR/JPY, AUD/JPY, NZD/JPY, CHF/JPY

What this tells me that when I am looking at opening multiple trades then I would not risk more than 3% in one set of currency pairs.  For example if I want to go long EUR/USD and AUD/USD then I would risk 1.5% of total equity on both pairs at one given time.  However if the pairs are in the different set then I would risk 3% per trade never exceeding a total of 6% risk at any given time.

When trading with mini lots you may not want to worry about commissions or slippage. However if you start trading anything more than 5 standard lots I would recommend to consider commission and slippage to your calculations. Commission depends on the broker you use and usually large brokers charge commission in order to provide tighter spreads.  Slippage would happen when try to execute a large order and price move before complete order is filled.  It would also depend on the time you trade and liquidity provided by your broker.

How much you risk per trade? Feel free to post comments.

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As a trader I need to keep in mind that even the most successful system will have series of losses. This is called Drawdown and it is part of life. I am mentally prepared that this is going to happen sooner or later,  it helps me prepare and control my risk.

When I look at my equity curve and it points up steadily over the period of time, I know that I’ve been disciplined and successful in controlling risk.  This is gives the confidence boost beyond imagination. Getting into the zone and acquiring trader’s mindset will take time, here are tips that may help:

The points above helped me a lot to get where I am today. However you may disagree with some of the points, feel free to comment.

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As you saw in the last post that calculating right trade size is a relatively simple process.  Even so most traders don’t bother doing it until they suffer large losses and then decide to learn more about money management.  New traders concentrate on the result or the outcome of the trade, on the other hand professional traders ask themselves “how much can I afford to lose on this trade?”  The sooner you realize that outcome of every trade is different and beyond your control the sooner you would acknowledge the importance of sound Money Management.

So if we are losing at 40% of the time it is essential that we control risk. Every time we lose we need make sure we don’t let it run and cut the loss when we reach the risk identified earlier.  Trading with improper trade size and variable risk every time would result in account wipe out sooner than you would think.  The ability to come back next day and trade more is what creates a successful trader in long run.

In next part of this article we will look more deeply into the mindset of a trader.

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Was it a Fluke? Perhaps just a stroke of luck. Anyone claiming outstanding gains overnight is probably exposing his trading account to enormous risk by trade large number of lots. It is only matter of time before huge losses would wipe out gains and beyond, leaving trader feel devastated financially and emotionally. Trust me, I know that from personal experience.  Money management in Forex Trading is a combination of specialized techniques and your trading judgment.  Lets look further into it.

Overexposing or underexposing your account can change the end result drastically and hence the first thing we need to do is to come up with the right size for our trades. Also remember that this is not a one time process, in fact it is an ongoing process because variables like account size, stop loss and pip value keep changing with time.

Before we can even look into the formula for successfully calculating the right trade size we need to agree one very important thing, Risk. So what should be the ideal risk per trade?  Answer to this question would depend on the trader however most successful traders would recommend 2-3%. In my personal opinion you should not risk more than 3% per Pair Category. You can read up further on Trade Category here:  Risk Management

Once you have made up your mind about the Risk % then calculate Risk in Dollars by multiplying the account size by Risk %. For Example if you have $10,000 account and willing to risk 3% then total risk in dollars is $300 ({10,000 x 3} / 100).

Forex Money Management

Forex Money Management

Next step is to determine the Stop Loss.  Whatever trading system you are using, you would know by now what is your  Stop Loss. Lets say for the sake of this exercise your  Stop Loss is 100 pips.  The next important factor is to determine Pip Value of the pair your are about to trade. The easiest way to find out is to look at your brokers trading platform. Look at the attached screenshots from MBT and FXCM trading Platform. MBT represents Pip Value/Lot for a Mini Lot under their Watchlist or Position window and FXCM calls it Pip Cost under Simple Trading Rates window represented for a Standard Lot.

Money Management Forex

In  the example I’ve used MBT Pip Value as 1 resulting in Trade Size in Mini Lots. If you use FXCM Pip Value then the result would be in Standard Lots. Also keep in mind that resulting Trade Size may not come out as whole number and may be a fraction. In that case always go down to whole number and never go up. For Example,  If the resulting Trade Size is 2.32 Mini Lots then make it 2 Mini Lots and not 3. Some broker may let you trade fractional lot sizes and in that case you won’t need to worry about it.

In this article so far we have only touched the surface of what money management in Forex is all about.

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