Money Management

You’ve probably read about money management many times, a word forex brokers wouldn’t be unfamiliar with. Yet very few managed applying it in their day-to-day forex trading. How can you turn money management from a buzzword, into an actionable trade plan.

 

Risk is involved in most types of investments. The concept would be to take control, and be aware, of your risk . This could help you avoid margin calls, in addition to being an easy way to control your account.

 

1. Always use a stop loss: Putting a stop loss in any trade will get you out of your trade, and prevents a situation where you loose a lot from one trade. Although this states the obvious for the vast majority of traders reading this, I still know traders who don’t use a stop loss order. This precarious deed is done also by folk working at forex brokerage companies and trade with their account. Sad but true.

 

2. How much money are you risking: There are lots of money management methods out there emphasizing the risk/reward ratio. Some take 2:1 and others take 3:1. That’s awesome. But many ignores how many dollars they are risking per trade. Is the sum too high? Check with your forex broker. There are two mathematical factors that could help reduce the amount of money you risk:


Set a tighter Stop Loss: Setting a tighter stop loss lets you lose less money in a losing trade. Sounds good? Not really. A tighter stop loss can put your trade in a riskier situation. Lowering the money you risk doesn’t mean you should increase the chance a stop loss being hit. It shouldn’t depend on the amount of money risked.

Lowering the position size: A lower position size still gives you the option to place a stop loss at a level that is right for you and the money at risk are lower. On the other side of the coin, your reward is also lowered. Although most people attempt to trade large positions, always keep in mind that we are trading with leveraged money, not real money that we have on hand. By lowering the position size you still get to trade your position in full, just with lower risks.

 

3. Account Risk: By now you’ve learned to monitor the amount of the cash you are risking. But to be frank, what is your burn rate? Suppose you start your trading account with $1000 USD. And for each trade your risk is 20% of your account capital. If you stick with this high risk it only takes 5 trades to blow up your account. And for new forex traders, it’s not uncommon to see 5 or more consecutive losing trades at a time. Risking a big portions means you burn out your account quickly before you had enough time to learn and increase your winning rate.

 

Thumb Rules: Never risk more than 2% of your account per trade!

This may sound very strict, but it helps you stay in the battle of forex trading and will help you accumulate a long term sustainable profit.

A forex demo account is probably very useful for practice, but only a real live account brings you the emotional stress. If you start applying the 2% rule in your trading, you will understand the power of money management.

 

Posted in Educational Material, Forex Tips, Forex Trading | Tagged , |

Transparent MT4 to ECN trading now just $1 per lot

Since the T3 Integration Bridge was first released a year ago, we have been working hard to constantly improve our Metatrader to ECN trading bridge for forex traders. Our developers are hard at work expanding the capabilities of our bridge solution, as well as adding additional tools and platforms to be announced in the near future.

We also want to make the T3 Integration Bridge the best possible value, making a transparent trading solution accessible to all forex traders. Which is why we are proud to announce that we are eliminating our tiered commission structure in place of a simpler, lower technology fee.

Effective today, we are introducing a flat $1 per lot fee, regardless of monthly turnover.

The new fee will mean substantial savings over the former commission structure, especially for lower volume traders. We strongly believe that verifiable, transparent trading should be accessible to all traders at a fee that is affordable. This change really does level the playing field for traders.

It’s important to note that this is solely a fee change. The T3 Integration Bridge itself remains unchanged. Traders will continue to enjoy the same transparent MT4 to ECN trading bridge with multi-way execution, and even receive new additions to the service over the coming months for the new, flat $1 per lot fee.

Customers registering for live trading with the T3 Integration Bridge will be subject to the lower pricing immediately.

If you are already a customer with Fair Trading Technology, you will be contacted by our customer support team with further information on how to switch your account to the new flat fee.

You can find more information on the T3 Integration Bridge fee page.

Posted in Forex Trading | Tagged , , , |

Withdrawing in Forex Trading

Trading forex to make money? The answer is usually yes. The next question is: When do you plan on withdrawing your profits?

If you do not have a withdrawal plan in place here are some of the advantages of making one and ideas about how to do it.

Unfortunately, many brokers see your full deposit as their revenue. Too many cases involve unfair brokers and reckless traders. Let’s assume that your broker is fair and you are cautious, trading according to a set plan.

The next step is making a strategy for withdrawals, a Take Profit point for your account as a whole. There are several advantages:

  • Seeing the bigger picture: provides a framework for your trading, moves, the greater goal and not just trading for the sake of trading.
  • Putting losses into proportion: loosing is not a tragedy but rather part of pattern of winning some and losing some while getting closer to your own trading goals.
  • Motivation: to remain motivated, especially if your plans include making profits. Staying motivated also keeps you from becoming overconfident. If you enter a winning streak, you might get the feeling that you can “beat the market” and  increase position size and trade with less caution. This can result in heavy losses and erased profits. Having some money set aside will allow you to enjoy your profits and keep your focus on your trading.

How can you set a withdrawal plan? Depending on your character there are different targets.

  • Withdrawing at a certain percentage of profit: Long term sustainable forex trading means that your return on investment will be a bit better than benchmark indices (especially in bearish markets).However, doubling, tripling or quadrupling your account in a short time is not a realistic goal. Setting a target around how the indices for a good year in the stock markets have performed is a good way to set you own profit.
  • Withdrawing at a certain account size: similar to the above, but with a small twist: preventing your account from growing too much will help you avoid the earlier mentioned overconfidence.
  • Withdrawing on a monthly basis: The target can remain profitable on a monthly basis and withdrawing the profits. This will be lower and higher each month, but it will still provide a time framework – a timely goal for withdrawal.

When do you withdraw your forex profits? How do you set your targets? Let us know!

Further reading: 5 Most Predictable Currency Pairs – Q4 2011

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Carry Trading? Beware of Overweight!

For some time before the crisis the carry trade was popular but eyed by many.  Are we seeing the return to long term carry trading in the future? Probably not.

The carry trade was usually done by buying AUD/JPY or NZD/JPY. You sit on a position for some time and cash in on the interest rate differentials. A traditionally low or non existent rate is seen in Japan, while very high rates exists in Australia and New Zealand. The high rate remain even after the crisis and cuts.

The Yen was, during the crisis period, sought after as a safe haven currency. The “risky” Aussie and Kiwi were dumped. The interest rate differential was not enough to cover the loss in exchange rates.

Is it back?

Although the yen has regained strength, it seems to have reached a bottom against the dollar. A few times during the past year and an intervention to weaken the yen took place. It is understandable that Japanese officials are “closely monitoring”  the current foreign exchange rates.

Sitting on AUD/JPY may not only provide a profit through the carry trade, but may also ride on the next intervention. When that will be no one knows.

Well, let’s slow down.

There is nothing that says that an intervention in Japan is certain to happen.  The Japanese authorities already intervened when USD/JPY was at higher levels, only to see their short lived action result in an even lower rate. Even when coordinated with other countries the intervention was short lived. The Yen may stay at its current standpoint or strengthen slightly.

Further, the Aussie and the kiwi pose greater risk now as both these countries rely heavily on demand from Asia. This demand is also the reason that helped boost their economies and currencies after the crisis. A demand so strong that it helped Australia avoid an official recession.

A new direction can now be seen as Asia is unable to decouple from the rest of the world and will need to decrease their growth. This, however, paves the way for weaker currencies for the countries involved.

Relying on interests rates alone can be tricky as rate cuts can happen in either country.

Did you carry trade in the past? Are you using this method now? Let us know!

Further reading: 5 Most Predictable Currency Pairs – Q4 2011

 

Posted in Educational Material, Forex Trading, White Label | Tagged , |

Transparency, not more regulation, is the way forward in FX trading: Tim Haman

Writing in the FX-MM’s September, 2011 issue, Fair Trading Technology CEO and co-founder Tim Haman poses the question of how the trading world should face the future, where increasing market regulation and attempts to control the flow of money ultimately stand in the way of free markets.

Instead, Mr. Haman writes in ”Forex Regulation now and in the future: what to plan for”, we should demand transparency from our brokers, banks and regulators, because transparency results in honesty and self-regulation and the healthy route to the future in FX markets. Mr. Haman writes that since the crises we have had since 2008, there has been a blame game waged in the media, with the result being that more and more groups, from politicians to central banks, calling for more regulation.

The level of due diligence performed on funds, as a result of American legislation like the US Patriot Act or Anti Money Laundering Act, has become time consuming, taking months to complete, and risks growing into its own industry. Ultimately Mr. Haman is unconvinced that it does much to address the issues of laundering and criminal activities  these DD rules are in place to counter. ”I don’t see that reduces any of the shady activities money can have. It can get counter productive if it goes too far.”

Even once money is invested, Mr. Haman also questions regulators’ attempts and motivations to control leverage under the guise of protecting investors. ”When it comes to the liquidity on the spot markets and the leverage that is applied, should politicians and big bankers really decide the levels, or should the market itself regulate and decide what is appropriate for its customers?”

Regulation about how big your position will be, which pairs you choose to trade and in which order to open or close positions should be up to the trader to decide, he argues. And ultimately it is the free market, governed by demands for transparency in trading, that will lead the way forward rather than more regulation.

You can read Mr. Haman’s full article, as well as other articles, in the News Centre section of our web site.

Posted in Forex News, Forex Trading | Tagged |

First issue of Forex Currents coming soon!

Fair Trading Technology is proud to announce that the launch of the company’s newsletter will take place on October 3rd, 2011.

The newsletter will offer readers interviews with industry experts, answers to frequently asked questions, product reviews and input from traders such as yourself! Dont miss out on the opportunity to learn more about forex trading in general and Fair Trading Technology in specific.

If you are not already signed up to receive the newsletter please sign up today by entering your email here.

We look forward to sharing the Forex Currents newsletter with you and welcome feedback!

Posted in Forex News | Tagged , |

Position Based vs. Order Based

Jforex (the trading platform used by Dukascopy) us a position based system while the Metatrader 4 platform is an order based system. To learn more about the difference and uses of the order and position based system we have put together an informational video.

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A Jungle of Brokerages: What is What?

To someone that is new, or perhaps even experienced, to the game of forex, understanding what broker to use is not always that easy. What is a Market Maker and how will this option give you something different than an ECN broker or STP? This blog post aims to give you a brief overview of the differences between the different kinds of brokerages.

Market Makers

A market maker can be a bank or a brokerage firm that offers to buy or sell currency even though they don’t have a buyer/seller lined up. The market maker has a set ask and bid price and when the market maker sells or buys currencies, they are actually making a market.  Every time you purchase or sell currency pairs the market maker is the counterparty. To explain it a different way: if you earn money, the market maker loses money, and vice versa. Thus the broker can be seen as having an interest in you losing money in order for them to make money.  The spread that market makers take on the trades may not look like much on one transaction, but considering a $4 trillion daily trading volume they are able to get a large share on their small spreads.

ECN brokers

An Electronic Communication Network (ECN) is an order routing technology that directs the clients’ trades directly to the interbank market. The money that they earn is different from that of a money maker. The ECN provider gets a commission per round turn lot traded. Most ECN brokers have minimum deposits above $1,000, although you may find those with lower minimum deposit requirements. Because of the ECN ‘s interbank nature, traders are usually required to trade much larger lots and the minimum deposit requirements range from $50,000 to $100,000.

STP brokers

An STP broker offers interbank quotes and passes the trades directly to a bank or ECN. An STP brokerage does not take the other side of your trade, but rather passes your trade onto another, often anonymous, counterparty. An STP broker earns its money not by trading against their clients, but by adding small markups to the spread quote.

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