Money Management Flashcards
What are the three areas of FX trading
- Money Management
- Trading Psychology
- Trade Entry
Why is Money Management the most important?
Money management determines whether your trading account goes up or down
Money Management - for each trade, what must I know
- How much risk (% of trading account) I want to take per trade
- How many pips am I willing to risk per trade
- How to manage the trade (SL/TP/Add)
Why is keeping a Trading Journal important?
From a Journal you learn from your mistakes - Remove trading mistakes / Minimize the things holding you back
How should you measure your gains/winnings?`
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
What is Dollar Cost Averaging
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
Is and Why is Dollar Cost Averaging in Stocks more understandable than in FX
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
What is the best indicator
ATR - Average True Range
How does the ATR work and how is it used in Money Management?
- 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
When Entering A Trade - How is the amount Risk being taken described?
“How much money PER PIP are you trading?” (What is your PIP VALUE?)
What is the BEST time to take your ATR reading?
30 Minutes before end-of-day
Money Management ATR - What is measure by the ATR?
Volatility
Money Management ATR - Where do you use the ATR?
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
Money Management ATR - What do you calculate when determining Risk for the trade?
Calculate how much money, per pip, you are willing to risk / trade for this pair during this trade
Money Management ATR - How is the ATR calculated?
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
Money Management ATR - What is the formula for ATR to get PIP Value?
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
Money Management ATR - What is PIP Value
The pip value is the price attributed to a one-pip move in a forex trade
Money Management - Risk - What has the biggest impact on trading account?
Risk Management
Money Management - Risk - What is best risk percentage?
2 % of Trading Account
Money Management - Risk - How to set your ENTRY stop loss?
1,5 X ATR
Money Management - Risk - What are the steps for Risk Management during trade entry?
- Risk Percentage and Risk Amount (Risk) (2% of Trading account) - RISK
- What is the ATR pips of the FXPair
- What is the Stop Loss pips (1.5 X ATR)
- Get PIP Value = (RISK / 1.5 ATR)
- Get Position Size
- What is the entry stop loss value
Money Management - Risk - Give an example of Risk Management during trade entry.
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
Money Management - Risk - What is Position Size
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.
Money Management - Risk - What is account risk
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
Money Management - Risk - What is trade risk
Pip risk on each trade is determined by the difference between the entry point and the point where you place your stop-loss order.
Money Management - Risk - What is the formula for Position Size
Pips at risk x pip value x lots traded = amount at risk
Money Management - Risk - A good Exit indicator will do what
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.
Money Management - Risk - How can you over leverage during Risk setup / And you should never do
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%
Money Management - Risk - What are better options than Over Leverage
- Split/hedge the risk at 1% each if you are trading 2 trades etc.
- Pick one, and go all 2% - consider factors i.t.o risk, e.g. News, Global conditions, Volatility, Volume
Money Management - Risk - Should you split across Brokers
Yes.
Long Term you’ll be trading FX, Metals, Oil and Indexes.
Split Brokerage risk across Brokers for different Instruments.
Money Management - Risk - What happens to RISK management once you’re split across brokers
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
Money Management - Risk - Example of Risk across Brokerage Accounts
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
Money Management - Risk - Trading different markets - how do you go about getting good at them
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.
Money Management - Risk - How does Split Brokerage and Risk impact Leverage / Margin
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
What is needed at minimum for Trading Journal?
- Date
- FX Pair
- Long or Short
- Pips Gained/Lost
- Screenshot
- Comments
What is the purpose of a Trading Journal?
Eliminating mistakes - Learn from it.
Should you be using Risk Ratios - Why
No. Risk ratios like 2:1 and 3:1 limits your loss and your gains. It caps your winnings.
Explain the concept of the Risk ratio 2:1 or 3:1
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.
Why is using these ratios mostly not the best approach
- Caps your winnings
- 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.
What is scaling out and should you use it
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
As a standard - what should you set your leverage at
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
What are some limits re. leverage globally
EU: FX - 30:1 and Gold - 20:1
USA: FX - 50:1 and Gold - 1:1 (The Dodd-Frank Act was passed in 2010)
What are the four scenarios in which you will Exit a trade
- Stop Loss hit which was set at order entry
- Stop Loss hit at break even (scaling out)
- Stop Loss of Trailing Stop set
- EXIT Indicator
Should you EXIT using Exit Indicator even with Trailing SL set
YES - if EXIT indicator indicates EXIT, you EXIT regardless of trailing SL
Describe general EXIT indicator
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
What are the two requirements of a good EXIT indicator
- It must let the trade BREATHE - keep you in the trends, regardless of small retracemends
- 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
Give and overview of the Heiken Ashi
- If White then Go Long
- If Red then Go Short
- Heiken Ashi should not be used for Trade Entries
Where can you find value in Heiken Ashi
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
How can you use the Heiken Ashi
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
What is scaling out
Taking some profit off the table once your trade is winning
How do you scale out
- Use ATR and get Risk Amount per pip
- Enter two half trades (halving pip risk amount)
- Put SL as per usual on both at entry using ATR (1.5)
- On ONE of the trades, enter Take-Profit at initial profit (ATR). This will close the trade automatically when it gets there.
- Once this happens, on the other trade, move your stop loss to break-even, AKA where you initially entered the trade. Trailing SL
What is Scaling In
Adding onto a winning trade / trend
Should you be adding onto winning trades (Scaling In)
No. Each trade must be a brand new trade - based on a set of indicators as per your system - Not FOMO
Where would adding into a trend be acceptable (Scaling In)
Adding onto a winning trade must be based on indicators - Continuation Indicators
Trailing Stop - On a high level - what is a Trailing Stop
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
Trailing Stop - What are the rules for a Trailing Stop
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.
