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Recommendations that change your life
Recommendations that change your life
MODULE 1 BASIC RISK REDUCTION CONCEPTS NORMAL TRADING Lets take the example of a trader who has $ 10 000 in trading capital and trades 10 lots per trade using a mini account. Let say the winning trades are 50 pips and losing trades are 50 pips and $1 =1 pip. We will use 3 trades to illustrate the principles. EXAMPLE 1 During a winning phase this trader will make:- Trade 1 50 pips x 10 lots x $1 = $500 gain Trade 2 50 pips x 10 lots x $1 = $500 gain Trade 3 50 pips x 10 lots x $1 = $500 gain Total Gain = $ 1 500 (A return of 15% on the $10 000) During a losing phase this trader will make:- Trade 1 50 pips x 10 lots x $1 = $500 Loss Trade 2 50 pips x 10 lots x $1 = $500 Loss Trade 3 50 pips x 10 lots x $1 = $500 Loss Total loss = $ 1 500 (A loss of 15% on the $10 000) This trader therefore needs a success rate above 50% to start making profits. ADJUSTING LOT SIZES What we are after is a way of taking advantage of winning streaks and losing streaks so that losses are decreased and gains are increased. An improvement on the above result. Now a simple solution, would be, for example, to increase the number of lots by 2 for gains and decrease the number of lots by 2 for losses. EXAMPLE 2 During a winning phase this trader will make:- Trade 1 50 pips x 10 lots x $1 = $500 gain Trade 2 50 pips x 12 lots x $1 = $600 gain Trade 3 50 pips x 14 lots x $1 = $700 gain Total gain = $ 1 800 (A return of 18% on the $10 000) During a losing phase this trader will make:- Trade 1 50 pips x 10 lots x $1 = $500 Loss Trade 2 50 pips x 8 lots x $1 = $400 Loss Trade 3 50 pips x 6 lots x $1 = $300 Loss Total loss = $ 1 200 (A loss of 12% on the $10 000) Already this simple method has increased gains in winning streaks and decreased losses in losing streaks. |
| Disclaimer:-The information on online Forex trading presented on this website should not be regarded as forex or currency trading advice. Currency trading and fx trading is highly speculative and should only be done with risk capital. Foreign Exchange prices rise and fall and past performance from currency trades is no assurance of future performance. This online forex trading website is a currency trading information website only. Accordingly, we make no warranties or guarantees with respect to the correctness or validity of its content. Forex traders making use of the online currency trading information presented do so at their own risk. The information provided herein does not take into account their forex investing objectives, financial situation or needs of any particular person. This site is not intended to by used as the only source of currency trading information or forex education. It is important and assumed that traders use sound trading principles when using the online forex trading information on this currency trading site. This includes trading common sense, sound money and risk management and full personal ownership of any trading decisions. Investors should obtain individual financial advice based on their own particular circumstances before making any foreign currency investment decision. |
Hi Thank you for selecting the Expert4x maximum lot trading course The course consist of 3 modules 1 Basic risk reduction concepts 2 The calculation of maximum lots and splitting of trading capital 3 3 strategies for using maximum lots with examples At the end or during each of the above modules we will be asking you questions about the content covered to ensure that you are ready for the next modules. Please complete these questions and should your answers indicate that you are ready for the next module, the webpages for that module will be forwarded to you. We hope you enjoy the course and look forward to your feedback. Kind Regards Expert4x |
Can we do better? Another method is to look at ways of increasing gains from trades and decreasing losses from trades. From the above example we are risking 50 pips to make 50 pips. Our risk / return ratio is 1:1. It makes more sense to risk less for a greater return and in general traders seldom risk more than 2 thirds of their target. This means that if their target is 60 pips their stop loss should not be more than 40 pips. Now if we apply this return on risk approach to our above example 2 the results are:- Example 3 During a winning phase this trader will make:- Trade 1 60 pips x 10 lots x $1 = $600 gain Trade 2 60 pips x 12 lots x $1 = $720 gain Trade 3 60 pips x 14 lots x $1 = $840 gain Total gain = $ 2 160 (A return of 21.6% on the $10 000) During a losing phase this trader will make:- Trade 1 40 pips x 10 lots x $1 = $400 Loss Trade 2 40 pips x 8 lots x $1 = $320 Loss Trade 3 40 pips x 6 lots x $1 = $240 Loss Total loss = $ 960 (A loss of 9.6% on the $10 000) We are now make more than double the gains during successful streaks than we are losing during bad streaks!! USING A PIP BY PIP TRAILING STOP How can we improve this even more? – One way is to make use of a pip by pip trailing or following stop. A trailing or following stop is one that follows the price while it is going in the direction of the trade but does not move backwards when the price moves against the trade. An example of this is that if one were to use a 40 pip following stop in the above example and the price moved to +10. The following stop would move to -30. Should the price then turnaround and move in the unfavorable direction for say 50 pips the transaction will be stopped out at -30 as the trailing stop will be hit. Not -40 that used to be the previous stop loss. Our losses were therefore reduced. In the same way the price could reach +50 and then turn around and run 100 pips in the wrong direction. Instead of being stopped out at -40 pips the transaction will be stopped out at +10. A much better result. Lets say that losses are reduced to 20 pips (on average) by using a following stop and gains are reduced to say 50 pips (on average) by using a following stop the following will result (using Example 3’s results) During a winning phase this trader will make:- Trade 1 50 pips x 10 lots x $1 = $500 gain Trade 2 50 pips x 12 lots x $1 = $600 gain Trade 3 50 pips x 14 lots x $1 = $700 gain Total gain = $ 1 800 (A return of 18% on the $10 000) During a losing phase this trader will make:- Trade 1 20 pips x 10 lots x $1 = $200 Loss Trade 2 20 pips x 8 lots x $1 = $160 Loss Trade 3 20 pips x 6 lots x $1 = $120 Loss Total loss = $ 480 (A loss of 4.8% on the $10 000) We are now making gains of 18% during winning streaks and only losing 4.8% during losing streaks. |
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The above examples has been kept simple to illustrate the principles involved. In practice you don't know whether you are in a winning phase or a losing phase until it happens or is over. In practice we therefore use our last (most recent) transaction to determine what phase we are in. It the last transaction was a loss then we are in a losing phase and if the last transaction was a profit we are in a winning phase. The beauty of the Maximum lot system as you will see later on is that we always calculate our lots from the amount in our trading account so we don't need to know or care if we are in a losing or winning phase. |