Fifty Below

AU200AUD, M30, 2015 July 24

http://www.investing.com/indices/aus-200

ASX Overview

actual equity: 706.-$

Brent Crude Oil, Long @ 54.473, Target @ 61.40
(0.01 Lot)

Brent Crude Oil, Long @ 54.555, Target @ 66.20
(0.02 Lot)

actual equity: 706.-$

http://www.dailyfx.com/forex/educati...at_part_5.html

How to Build a Strategy, Part 5: Risk Management
By James Stanley, Forex Trading Instructor


Before you read any further, I want you to think about a simple question.

http://media.dailyfx.com/illustratio..._Picture_7.png

When I ask this question at our DailyFX Bootcamps, the most common answers are around 60-70%. Some traders will guess a little lower, answering with a number around ~55%.

Rarely do we get an answer below 50%.

This is not correct.

In trading, we can be right only 30% of the time and still be profitable. In this article, I will show you how.

We’re also going to look at a question that is potentially even more important – which is investigating why you might not want to expect to be right much more than half of the time.

What is in current price?

When banks receive orders from their customers to exchange $1,000,000 US Dollars for Euros, Yen, or British Pounds, they accordingly transact their business and this additional supply or demand will cause changes to price.

Alternatively, if we get a surprise announcement from Fed Chief Ben Bernanke, prices will begin changing pretty quickly to incorporate whatever new news might be getting introduced to the environment.

But both of these factors affect future price, and, unfortunately – there is no way of knowing that these will happen until after they happen.

Current price is just showing us a roadmap of those events that have happened in the past.

That’s it. There is no free lunch.

As traders, we probably aren’t going to exhibit a pattern of continually out-smarting the market on our way to a pile of riches.

Why?

Because the market is always right. Upcoming price changes will often be dictated by future events that we cannot forecast (such as large orders by banks, or news that has yet to occur). With these types of events, it’s impossible to know what will take place, thereby; it’s impossible to continue to successfully forecast future price movements without assistance from risk management.

Sure, we might be able to gleam a bias – and if no news enters that market that radically changes perspective, we might even be able to trade in the direction of this bias (the trend). We’ve published numerous materials attempting to help traders see this.

But as we place trades and build a strategy, we have to KNOW there is always a chance of being wrong on a trade – as there are no assurances that price will move up or down at any point in time.

Trading is managing probabilities.

At any point in time, what do you think the chances are of price going up or down?

It’s important to look at this question when planning risk management. How often do you want to expect to be right?

From the DailyFX Traits of Successful Traders series, we found that retail traders are right more often than they are wrong in many of the most commonly traded pairs. The table below shows winning percentages in these pairs during the period of analysis:

http://media.dailyfx.com/illustratio...profitable.png
From The Number One Mistake FX Traders Make by David Rodriguez

For most of the observed currency pairs, traders were profitable far more than half-of-the-time (the exception on the above graphic in which traders in AUDJPY were right only 49% of the time). So, one might expect that these traders, with their hearty winning percentages were doing well?

Unfortunately not: Despite the fact that traders were winning on as many as 71% of trades, traders still lost money as a whole. Want to venture a guess as to why?
Well, here it is:

http://media.dailyfx.com/illustratio...trade_pips.png

From The Number One Mistake FX Traders Make by David Rodriguez

The average win is in blue, and the average loss is in red, and as you can see – every pair shows that traders took larger losses when they were wrong than the amount that they made when they were right.

And despite the fact that traders were winning much more in the previous graphic, the fact that they lose so much more when they are wrong brings many unwanted consequences.

In The Number One Mistake Forex Traders Make, Quantitative Strategist David Rodriguez found that this was the most common pitfall for traders in the FX market; and this can be rectified by using risk management to your advantage.

Using Risk Management

So, if a trader wants to properly institute risk management into their strategies, how can they do it?

There are two primary areas that traders want to investigate whilst building their approach.

The first we looked at above, and that pertains to the risk-reward ratio used on each trade that is taken; in effort to avoid The Number One Mistake Forex Traders Make.

In the article, David suggests that ‘traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.’ This can be instituted by placing a stop and a limit on each trade, ensuring that the limit is at least as far away from current market price as your stop.

We can even take this concept a step further by looking for larger profits when right, but risking smaller amounts so that when losses are smaller; this can be done with a 1-to-2 risk-to-reward ratio (risking 1 dollar for every 2 dollars sought).
A visual representation of a 1-to-2 risk-to-reward ratio is illustrated in the picture below:

http://media.dailyfx.com/illustratio..._Picture_4.png

The reasons for such a risk-reward setup are numerous, as future prices can be difficult to forecast and impossible to predict. But when a trader is on the right side of the trade, this type of risk-reward ratio can maximize their gain and limit their losses in the instances in which they are wrong.

As a matter of fact, let’s say that a trader isn’t even right half-of-the time. Let’s assume a trader is only winning in 40% of their trades. By using a 1-to-2 risk-to-reward ratio, they can still attain a net profit.

http://media.dailyfx.com/illustratio..._Picture_3.png

As you can see, the risk-reward ratio completely changed the strategy. If the trader was only looking for one dollar in reward for every one dollar risked, the strategy would have lost 200 pips. But by adjusting this to a 1-to-2 risk-to-reward ratio, the trader tilts the odds back in their favor (even if only being right 40% of the time).
But what if our strategy is only successful 30% of the time (as we had mentioned above)?

We can simply look to be more aggressive, seeking a higher reward for the fewer times that we are right. The table below looks at 3 different risk-to-reward ratios with a 30% winning ratio:

http://media.dailyfx.com/illustratio..._Picture_2.png

Leverage

Taking the discussion of risk management a step further, we can begin to focus on the leverage being utilized. After all, it doesn’t matter how strong our risk-to-reward ratios are if we face a margin call within our first couple of trades of executing the strategy.

This topic was investigated in much more depth in the article ‘How Much Capital Should I Trade Forex With,’ by Jeremy Wagner.

While researching how traders fared based on the amount of trading capital being used, Jeremy made a fascinating observation. Traders with smaller balances in their accounts, in general, carried much higher leverage than traders with larger balances.

The traders using less leverage saw far better results than the smaller-balance traders using levels over 20-to-1. Larger-balance traders (using average leverage of 5-to-1) were profitable over 80% more often than smaller-balance traders (using average leverage of 26-to-1).

The table below was taken directly from ‘How Much Capital Should I Trade Forex With,’ and illustrates in more detail this massive deviation between these groups of traders.

http://media.dailyfx.com/illustratio..._Picture_4.png

Taken from ‘How Much Capital Should I Trade Forex With?’ by Jeremy Wagner

From the article, Jeremy states that ‘traders should look to use an effective leverage of 10-to-1 or less.’ Doing so will enable traders to mitigate the damage posed by losses; and if this is combined with strong risk-to-reward ratios (looking for more of a reward than the amount risked as mentioned above), traders can begin looking to put the concept of risk management to work in their favor.

--- Written by James B. Stanley

To contact James Stanley, please email [email protected]. You can follow James on Twitter @JStanleyFX.

To join James Stanley’s distribution list, please click here.

How to Build a Strategy, Part 1: Market Conditions

How to Build a Strategy, Part 2: The Time Frames of Trading

How to Build a Strategy, Part 3: Support and Resistance

How to Build a Strategy, Part 4: How to Grade Momentum

Trading Psychological Whole Numbers

http://www.dailyfx.com/forex/educati...ders_Make.html

What is the Number One Mistake Forex Traders Make?
By David Rodriguez, Quantitative Strategist and Timothy Shea

Summary: Traders are right more than 50% of the time, but lose more money on losing trades than they win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1 or higher.

Big US Dollar moves against the Euro and other currencies have made forex trading more popular than ever, but the influx of new traders has been matched by an outflow of existing traders.

Why do major currency moves bring increased trader losses? To find out, the DailyFX research team has looked through amalgamated trading data on thousands of FXCM live accounts. In this article, we look at the biggest mistake that forex traders make, and a way to trade appropriately.

David Rodriguez, Quantitative Strategist at DailyFX presented this research at the 2011 FXCM Currency Trading Expo. Watch the video at fxcmexpo.com.

Why Does the Average Forex Trader Do Wrong?

Many forex traders have significant experience trading in other markets, and their technical and fundamental analysis is often quite good. In fact, in almost all of the most popular currency pairs that FXCM clients trade, traders are correct more than 50% of the time:

http://media.dailyfx.com/illustratio...profitable.png

The above chart shows the results of a data set of over 12 million real trades conducted by FXCM clients worldwide in 2009 and 2010. It shows the 15 most popular currency pairs that clients trade. The blue bar shows the percentage of trades that ended with a profit for the client. Red shows the percentage of trades that ended in loss. For example, in EUR/USD, the most popular currency pair, FXCM clients in the sample were profitable on 59% of their trades, and lost on 41% of their trades.

So if traders tend to be right more than half the time, what are they doing wrong?

http://media.dailyfx.com/illustratio...trade_pips.png

The above chart says it all. In blue, it shows the average number of pips traders earned on profitable trades. In red, it shows the average number of pips lost in losing trades. We can now clearly see why traders lose money despite bring right more than half the time. They lose more money on their losing trades than they make on their winning trades.

Let’s use EUR/USD as an example. We know that EUR/USD trades were profitable 59% of the time, but trader losses on EUR/USD were an average of 127 pips while profits were only an average of 65 pips. While traders were correct more than half the time, they lost nearly twice as much on their losing trades as they won on winning trades losing money overall.

The track record for the volatile GBP/JPY pair was even worse. Traders were right an impressive 66% of the time in GBP/JPY – that’s twice as many successful trades as unsuccessful ones. However, traders overall lost money in GBP/JPY because they made an average of only 52 pips on winning trades, while losing more than twice that – an average 122 pips – on losing trades.

Cut Your Losses Early, Let Your Profits Run

Countless trading books advise traders to do this. When your trade goes against you, close it out. Take the small loss and then try again later, if appropriate. It is better to take a small loss early than a big loss later. Conversely, when a trade is going well, do not be afraid to let it continue working. You may be able to gain more profits.

This may sound simple – “do more of what is working and less of what is not” – but it runs contrary to human nature. We want to be right. We naturally want to hold on to losses, hoping that “things will turn around” and that our trade “will be right”. Meanwhile, we want to take our profitable trades off the table early, because we become afraid of losing the profits that we’ve already made. This is how you lose money trading. When trading, it is more important to be profitable than to be right. So take your losses early, and let your profits run.

How to Do It: Follow One Simple Rule

Avoiding the loss-making problem described above is pretty simple. When trading, always follow one simple rule: always seek a bigger reward than the loss you are risking. This is a valuable piece of advice that can be found in almost every trading book. Typically, this is called a “risk/reward ratio”. If you risk losing the same number of pips as you hope to gain, then your risk/reward ratio is 1-to-1 (sometimes written 1:1). If you target a profit of 80 pips with a risk of 40 pips, then you have a 1:2 risk/reward ratio. If you follow this simple rule, you can be right on the direction of only half of your trades and still make money because you will earn more profits on your winning trades than losses on your losing trades.

What ratio should you use? It depends on the type of trade you are making. You should always use a minimum 1:1 ratio. That way, if you are right only half the time, you will at least break even. Generally, with high probability trading strategies, such as range trading strategies, you will want to use a lower ratio, perhaps between 1:1 and 1:2. For lower probability trades, such as trend trading strategies, a higher risk/reward ratio is recommended, such as 1:2, 1:3, or even 1:4. Remember, the higher the risk/reward ratio you choose, the less often you need to correctly predict market direction in order to make money trading.

Stick to Your Plan: Use Stops and Limits

Once you have a trading plan that uses a proper risk/reward ratio, the next challenge is to stick to the plan. Remember, it is natural for humans to want to hold on to losses and take profits early, but it makes for bad trading. We must overcome this natural tendency and remove our emotions from trading. The best way to do this is to set up your trade with Stop-Loss and Limit orders from the beginning. This will allow you to use the proper risk/reward ratio (1:1 or higher) from the outset, and to stick to it. Once you set them, don’t touch them (One exception: you can move your stop in your favor to lock in profits as the market moves in your favor).

http://media.dailyfx.com/illustratio...isk-reward.png

Managing your risk in this way is a part of what many traders call “money management”. Many of the most successful forex traders are right about the market’s direction less than half the time. Since they practice good money management, they cut their losses quickly and let their profits run, so they are still profitable in their overall trading.

Does This Rule Really Work?

Absolutely. There is a reason why so many traders advocate it. You can readily see the difference in the chart below.

http://media.dailyfx.com/illustratio...dy_Chart_1.png

The 2 lines in the chart above show the hypothetical returns from a basic RSI trading strategy on USD/CHF using a 60 minute chart. This system was developed to mimic the strategy followed by a very large number of FXCM clients, who tend to be range traders. The blue line shows the “raw” returns, if we run the system without any stops or limits. The red line shows the results if we use stops and limits. The improved results are plain to see.

Our “raw” system follows FXCM clients in another way – it has a high win percentage, but still loses more money on losing trades than it gains on winning ones. The “raw” system’s trades are profitable an impressive 65% of the time during the test period, but it lost an average $200 on losing trades, while only making an average $121 on winning trades.

For our Stop and Limit settings in this model, we set the stop to a constant 115 pips, and the limit to 120 pips, giving us a risk/reward ratio of slightly higher than 1:1. Since this is an RSI Range Trading Strategy, a lower risk/reward ratio gave us better results, because it is a high-probability strategy. 56% of trades in the system were profitable.

In comparing these two results, you can see that not only are the overall results better with the stops and limits, but positive results are more consistent. Drawdowns tend to be smaller, and the equity curve a bit smoother.

Also, in general, a risk/reward of 1-to-1 or higher was more profitable than one that was lower. The next chart shows a simulation for setting a stop to 110 pips on every trade. The system had the best overall profit at around the 1-to-1 and 1-to-1.5 risk/reward level. In the chart below, the left axis shows you the overall return generated over time by the system. The bottom axis shows the risk/reward ratios. You can see the steep rise right at the 1:1 level. At higher risk/rewards levels, the results are broadly similar to the 1:1 level.


http://media.dailyfx.com/illustratio...riskreward.png

Again, we note that our model strategy in this case is a high probability range trading strategy, so a low risk/reward ratio is likely to work well. With a trending strategy, we would expect better results at a higher risk/reward, as trends can continue in your favor for far longer than a range-bound price move.

Game Plan: What Strategy Should I Use?

Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher

Whenever you place a trade, make sure that you use a stop-loss order. Always make sure that your profit target is at least as far away from your entry price as your stop-loss is. You can certainly set your price target higher, and probably should aim for 1:2 or more when trend trading. Then you can choose the market direction correctly only half the time and still make money in your account.

The actual distance you place your stops and limits will depend on the conditions in the market at the time, such as volatility, currency pair, and where you see support and resistance. You can apply the same risk/reward ratio to any trade. If you have a stop level 40 pips away from entry, you should have a profit target 40 pips or more away. If you have a stop level 500 pips away, your profit target should be at least 500 pips away.

DailyFX Resources for Successful Money Management

The DailyFX Trading Instructors have years of experience trading the markets and helping thousands of new traders learn forex. Here are a few of their many tips that can help you trade better by improving your money management:

Watch the Money Management Basics Video

Watch a video of David Rodriguez’s presentation of this research at fxcmexpo.com

Exclusive for FXCM Clients: Sign Up for Live Classes

FXCM Clients can take free interactive classes via the DailyFX PLUS Trading Course.

Model Strategy:

For our models in this article, we simulated a “typical trader” using one of the most common and simple intraday range trading strategies there is, following RSI on a 15 minute chart.

Entry Rule: When the 14-period RSI crosses above 30, buy at market on the open of the next bar. When RSI crosses below 70, sell at market on the open of the next bar.
Exit Rule: Strategy will exit a trade and flip direction when the opposite signal is triggered.

When adding in the stops and limits, the strategy can close out a trade before a stop or limit is hit, if the RSI indicates that a position should be closed or flipped. When a Stop or Limit order is triggered, the position is closed and the system waits to open its next position according to the Entry Rule.

The Traits of Successful Traders

This article is Part 1 of our Traits of Successful Traders series.

Part 2: When is the Best Time of Day to Trade Forex?

Part 3: Here is How to Trade Forex Majors like the Euro During Active Hours

Part 4: How Much Capital Should I Trade Forex With?

Over the past several months, the DailyFX research team has been closely studying the trading trends of FXCM clients, utilizing trade data from FXCM. We have gone through an enormous number of statistics and anonymized trading records in order to answer one question: “What separates successful traders from unsuccessful traders?”. We have been using this unique resource to distill some of the “best practices” that successful traders follow, such as the best time of day, appropriate use of leverage, the best currency pairs, and more.

Risk - Management

If you've read #68 #67 maybe you think that it's really interesting, - no doubt! it is.
I second that but I have changed my mind in over ten years when reading articles like these two ones above.

Article like these will always keep sonme critical point in secret and don't bother to point out it.

I'll give you the lowdown!

If you want to do that, fair enough but...

...its sciolism

...any information you will give us?

surely not!

...these articles are setting traders on the wrong track.

Illustration 1

For approval - for inspection

First

"Trade forex with stops and limits set to a risk/reward ratio of 1:1 or higher"

This is absolutely bullsh*t!

Why?

De facto you will lose more money in this way due to the fact that the market (e.g. algorithm trading) have consider the price movements where other traders have to go out of the market concerning the 1:1 or higher bullsh*t ratio.

Not feasible in the field!
FXcube

Hi Cube
I am not clear of your statement.Please elaborate more
Thank you

Generally its true that average retail trader hangs on to losers longer then taking profit despite of being right more then wrong.
This is because trading is 100% psychological.Average joe trader is only always seeking indicators,systems,method but fail to implement stop losses etc.
The essential "self" is neglected
This phenomena is very apparent on Turtle experiment
They interviewed about 2k smart people from different walks of life and selected small smart group of individuals
Same system was taught to all and rules were laid down.Funds provided (note not their money was asked to spend)
and after months of trading roughly 90% failed to follow rules.Failed to take a loss was big one.
Remember they were taught same course to all and they risked not their money hence taking a loss was behind money but obviously serious psychological flaw.
This factor the mind is huge and most neglect developing. RR is only effective if implemented correctly otherwise its useless to incompetent trader who can not even follow his own rules.

Risk Management
For traders who are interested in my way of risk I will describe it in a simple & clear way in the following days and weeks
by demonstrating with real orders on this board here in life trading.
Maybe you could win more quality in your trading praxis.
FXcube

#60

The target was executed.
Exit @ 5'518, +27.7 (+20.14$)
Profit: +2.8%

AU200AUD, M5, 2015 July 07

#48

Delete the target @ 1.1070
Exit @ 1.10358, +47.7 (+4.77$)
Profit: +0.6%

EURUSD; M30, 2015 July 27

#46

Delete the target @ 1.1390
Exit @ 1.10358, +44.8 (+4.48$)
Profit: +0.62%
EURUSD, M30, 2015 July 27

actual equity: 745.-$