Money Management

Question 1

What are the three areas of FX trading

Answer 1

1. Money Management
2. Trading Psychology
3. Trade Entry

Question 2

Why is Money Management the most important?

Answer 2

Money management determines whether your trading account goes up or down

Question 3

Money Management - for each trade, what must I know

Answer 3

1. How much risk (% of trading account) I want to take per trade
2. How many pips am I willing to risk per trade
3. How to manage the trade (SL/TP/Add)

Question 4

Why is keeping a Trading Journal important?

Answer 4

From a Journal you learn from your mistakes - Remove trading mistakes / Minimize the things holding you back

Question 5

How should you measure your gains/winnings?`

Answer 5

Rate of Return - %
Never monthly - 6 and 12 months
10 is OK, 15 is great, if you can beat 20 per annum year a rock star

Question 6

What is Dollar Cost Averaging

Answer 6

You buy 1000 stocks at 50 dollars
Price drops to 40 dollars
You buy another 1000 at 40 dollars
Now, you have 2000 shares at 45 dollars - decreasing the per share amount dropped

Question 7

Is and Why is Dollar Cost Averaging in Stocks more understandable than in FX

Answer 7

Yes, Shares have Intrinsic Value / Real valuations, so the chance of recovery is there.
In FX - No, Big Banks and FX has no intrinsic value

Question 8

What is the best indicator

Answer 8

ATR - Average True Range

Question 9

How does the ATR work and how is it used in Money Management?

Answer 9

• ATR is used in Money Management when determining how much to risk on the specific FX trade.
• Tells you how many pips the instrument has moved, on average in the past X amount of periods

Question 10

When Entering A Trade - How is the amount Risk being taken described?

Answer 10

“How much money PER PIP are you trading?” (What is your PIP VALUE?)

Question 11

What is the BEST time to take your ATR reading?

Answer 11

30 Minutes before end-of-day

Question 12

Money Management ATR - What is measure by the ATR?

Answer 12

Volatility

Question 13

Money Management ATR - Where do you use the ATR?

Answer 13

When calculating how much you are trading and risking on a pair - you use ATR to determine pip value for the pair.
ATR used for Risk % of Balance
ATR used for Stop Loss
ATR used for Profit Take

Question 14

Money Management ATR - What do you calculate when determining Risk for the trade?

Answer 14

Calculate how much money, per pip, you are willing to risk / trade for this pair during this trade

Question 15

Money Management ATR - How is the ATR calculated?

Answer 15

True Range is measured on three levels: 
1. High - Low
2. High - Prev Close (ABS)
3. Current Low - Prev Close (ABS)
True range is the max of the three
ATR is the average True Range for the period

Question 16

Money Management ATR - What is the formula for ATR to get PIP Value?

Answer 16

Pip Value = (One Pip / Exchange Rate) * Lot Size

One Pip: 0.0001
Account Base Currency: EUR
Currency Pair: EUR/USD
Exchange Rate: 1.08962 (EUR/USD)
Lot Size: 1 Lot (100000 EUR)

Pip Value = 0.0001 / 1.08962 * 100000
Each Pip is worth €9.18

Question 17

Money Management ATR - What is PIP Value

Answer 17

The pip value is the price attributed to a one-pip move in a forex trade

Question 18

Money Management - Risk - What has the biggest impact on trading account?

Answer 18

Risk Management

Question 19

Money Management - Risk - What is best risk percentage?

Answer 19

2 % of Trading Account

Question 20

Money Management - Risk - How to set your ENTRY stop loss?

Answer 20

1,5 X ATR

Question 21

Money Management - Risk - What are the steps for Risk Management during trade entry?

Answer 21

1. Risk Percentage and Risk Amount (Risk) (2% of Trading account) - RISK
2. What is the ATR pips of the FXPair
3. What is the Stop Loss pips (1.5 X ATR)
4. Get PIP Value = (RISK / 1.5 ATR)
5. Get Position Size
6. What is the entry stop loss value

Question 22

Money Management - Risk - Give an example of Risk Management during trade entry.

Answer 22

Balance = 50 000
Risk at 2% = 1000
ATR = 0.0086 (86 pips)
Stop Loss = 86 * 1.5 = 129
Get Pip value
Get Position Size
Entry stop loss value = Pip value * Position Size

Question 23

Money Management - Risk - What is Position Size

Answer 23

Your position size is determined by the number of lots and the size/type of lot (a micro lot is 1,000 units of a currency; a mini lot is 10,000 units; and a standard lot is 100,000 units) you buy or sell in a trade. Your risk is broken down into two parts⁠—trade risk and account risk.

Question 24

Money Management - Risk - What is account risk

Answer 24

This is the most important step for determining forex position size. Set a percentage.Most professional traders risk 1% or less of their account. No Nonsense = 2

Question 25

Money Management - Risk - What is trade risk

Answer 25

Pip risk on each trade is determined by the difference between the entry point and the point where you place your stop-loss order.

Question 26

Money Management - Risk - What is the formula for Position Size

Answer 26

Pips at risk x pip value x lots traded = amount at risk

Question 27

Money Management - Risk - A good Exit indicator will do what

Answer 27

A good exit indicator will let you exit before your stop loss is hit. A good indicator will keep you in trades as well as minimize losses.

Question 28

Money Management - Risk - How can you over leverage during Risk setup / And you should never do

Answer 28

Over leverage can occur if you trade more than one trade, say 2, both at 2% risk, both on the same currency but different pairs - e.g. EUR/USD and AUD/USD and both at 2%

Question 29

Money Management - Risk - What are better options than Over Leverage

Answer 29

1. Split/hedge the risk at 1% each if you are trading 2 trades etc. 2. Pick one, and go all 2% - consider factors i.t.o risk, e.g. News, Global conditions, Volatility, Volume

Question 30

Money Management - Risk - Should you split across Brokers

Answer 30

Yes. Long Term you'll be trading FX, Metals, Oil and Indexes. Split Brokerage risk across Brokers for different Instruments.

Question 31

Money Management - Risk - What happens to RISK management once you're split across brokers

Answer 31

Risk remains as it - Risk is calculated based on your trading amount/full exposure - it is not based on the amount on how much is in that one specific trading account - but the amount across all trading accounts

Question 32

Money Management - Risk - Example of Risk across Brokerage Accounts

Answer 32

20 000 to trade. Broker A 10 000 Broker B 10 000. | Your risk on a trade is not 2% of 10 000, but 2 % of 20 000

Question 33

Money Management - Risk - Trading different markets - how do you go about getting good at them

Answer 33

For each market - FX, Metals, Oil and Indexes - Each is treated as its own when putting together their Algorithm. Each own indicator. Each their own Back Testing, Forward Testing, Demo etc.

Question 34

Money Management - Risk - How does Split Brokerage and Risk impact Leverage / Margin

Answer 34

So, you've split your trading capital across brokers - which is good. Now, 2% per trade Risk on total capital. But now, with leverage at 20:1, on account level, you might need a little bit more leverage to enable enough margin

Question 35

What is needed at minimum for Trading Journal?

Answer 35

1. Date 2. FX Pair 3. Long or Short 4. Pips Gained/Lost 5. Screenshot 6. Comments

Question 36

What is the purpose of a Trading Journal?

Answer 36

Eliminating mistakes - Learn from it.

Question 37

Should you be using Risk Ratios - Why

Answer 37

No. Risk ratios like 2:1 and 3:1 limits your loss and your gains. It caps your winnings.

Question 38

Explain the concept of the Risk ratio 2:1 or 3:1

Answer 38

It is a ratio whereby traders tries to take profit at 2 X their Stop Loss or then 3 times their stop loss in pips, e.g. Stop loss is 80 pips, Take Profit at 160 pips.

Question 39

Why is using these ratios mostly not the best approach

Answer 39

1. Caps your winnings 2. Most traders first determine where they want to take profit and then work back where the stop loss must be for a ratio like 2:1. The take profit is usually determine by something like support and resistance or reversals and based on that level they set their stop loss then.

Question 40

What is scaling out and should you use it

Answer 40

Yes, you should be using it. Scaling out is a method of taking profit and reducing risk. For example, say your strategy is to take your first profit at the ATR value, 50% profit, and you move your stop loss onto break even, and let the remaining 50% run. Hence, you've taken some profit but you've made the risk of losing ZERO

Question 41

As a standard - what should you set your leverage at

Answer 41

On account level - set leverage at 20:1 or, if by example you have 50 000 then put 25 000 in trading account and up the leverage to 40:1. The higher the leverage the higher the margin you have available

Question 42

What are some limits re. leverage globally

Answer 42

EU: FX - 30:1 and Gold - 20:1 USA: FX - 50:1 and Gold - 1:1 (The Dodd-Frank Act was passed in 2010)

Question 43

What are the four scenarios in which you will Exit a trade

Answer 43

1. Stop Loss hit which was set at order entry 2. Stop Loss hit at break even (scaling out) 3. Stop Loss of Trailing Stop set 4. EXIT Indicator

Question 44

Should you EXIT using Exit Indicator even with Trailing SL set

Answer 44

YES - if EXIT indicator indicates EXIT, you EXIT regardless of trailing SL

Question 45

Describe general EXIT indicator

Answer 45

``` Similar to TREND indicators, three types 1. Zero 0 Cross 2. Two lines Cross 3. Chart Indicators For EXIT, usually it will not be a Zero cross indicator ```

Question 46

What are the two requirements of a good EXIT indicator

Answer 46

1. It must let the trade BREATHE - keep you in the trends, regardless of small retracemends 2. It must get you of of a trade, more often than not, before hitting your trailing stop loss. Good one will let you EXIT prior to hitting trailing SL

Question 47

Give and overview of the Heiken Ashi

Answer 47

1. If White then Go Long 2. If Red then Go Short 3. Heiken Ashi should not be used for Trade Entries

Question 48

Where can you find value in Heiken Ashi

Answer 48

Heiken Ashi can be used as an Exit indicator. If you do not have an Exit indicator then start with Heiken Ashi. Also - Use the Heiken Ashi as a benchmark - your Exit indicator must outperform the Heiken Ashi

Question 49

How can you use the Heiken Ashi

Answer 49

Once you've taken profit, and moved your SL to break-even, then you can use the Heiken Ashi as an Exit Indicator (Zero Risk), but with a trailing stop / Scaling Out

Question 50

What is scaling out

Answer 50

Taking some profit off the table once your trade is winning

Question 51

How do you scale out

Answer 51

1. Use ATR and get Risk Amount per pip 2. Enter two half trades (halving pip risk amount) 3. Put SL as per usual on both at entry using ATR (1.5) 4. On ONE of the trades, enter Take-Profit at initial profit (ATR). This will close the trade automatically when it gets there. 5. Once this happens, on the other trade, move your stop loss to break-even, AKA where you initially entered the trade. Trailing SL

Question 52

What is Scaling In

Answer 52

Adding onto a winning trade / trend

Question 53

Should you be adding onto winning trades (Scaling In)

Answer 53

No. Each trade must be a brand new trade - based on a set of indicators as per your system - Not FOMO

Question 54

Where would adding into a trend be acceptable (Scaling In)

Answer 54

Adding onto a winning trade must be based on indicators - Continuation Indicators

Question 55

Trailing Stop - On a high level - what is a Trailing Stop

Answer 55

Trailing Stop is like a normal Stop - should cater for when the price goes Crazy. Your Exit indicator is still most important and should exit you out of a trade more often Trailing stop is for once you've already taken profit, and in a zero risk/loss situation

Question 56

Trailing Stop - What are the rules for a Trailing Stop

Answer 56

Price should have moved and CLOSED 2 X ATR from Entry. e.g. ATR = 100. Price Moves 100. Take 50 pips off and move Stop forward as per normal, if the remaining increase another 100 then add trailing stop. Place trailing stop at 1.5 X ATR from current (CLOSED) price. Keep using the ATR value which was recorded during Trade Entry. Manually Manage the Trailing Stop as a Normal Stop daily. Only move the Trailing Stop forward, never back, and only once the price closes forward.