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Slippery Slope: What is Slippage? With the unfortunate demise of the prop firm My Forex Funds, the issue of slippage has recently become a hot topic. This educational post takes a look at the slippery issue of slippage, beginning with the basics all the way to addressing popular theories and speculations about slippage. Something to remember is that every trader, regardless of expertise, will encounter slippage during their trading activity. What exactly is slippage? Slippage is the term used in the forex market to describe the difference between the requested price at which you expect to fill your order and the actual price that you end up paying. Slippage most often occurs during periods of high market volatility, when market conditions are very thin due to low volumes traded or when the market gaps; all of these scenarios then lead to market conditions being such that orders cannot be executed at the price quoted. Therefore, when this happens, your order will be filled at the next available price, which may be either higher or lower than you had anticipated. Understanding how forex slippage occurs can enable a trader to minimise negative slippage while potentially maximising positive slippage. Market Gap High Market Volatility Slippage is part of trading and cannot be avoided. This is due to forex market volatility and execution speeds. When a market experiences high volatility, it generally means there’s low liquidity. The reason for this is that during this time, market prices fluctuate very quickly. Where this affects forex traders is when there’s not enough FX liquidity to fill an order at the requested price. When this happens, the liquidity provider will complete the trade at the next best available price. Another cause of slippage is execution speed. This is how fast your Electronic Communication Network (ECN) can complete a trade at your requested price. With market prices changing in fractions of a second, having faster execution times can make a difference, especially on large trades. What is the difference between positive slippage, no slippage, and negative slippage? When slippage occurs, it is usually negative, meaning you paid more for the asset than you wanted to, though at some times it can also be positive. When slippage is positive, it means you paid less for the trade than you expected and therefore got a better price. To get a better understanding of this, let's see the image below. How do you calculate slippage? Let's assume that the price of the EUR/USD is 1.05000. After doing your research and analysing the market, you speculate that it’s on an upward trend and long a one-standard lot trade at the current price of EUR/USD 1.05100, expecting to execute at the same price of 1.05100. The market follows the trend; however, it goes past your execution price and up to 1.05105 very quickly—quicker than a second. Because your expected price of 1.05100 is not available in the market, you’re offered the next best available price. For the sake of the example, let's assume that the best next price is 1.05105. In this case, you would experience negative slippage (positive for the broker), as you got in at a worse price than you wanted: 1.05100 – 1.05105 = -0.00005, or -0.5 pips. On the other hand, let’s say your trade was executed at 1.05095. You would then experience positive slippage (negative for the broker), as you got in at a cheaper price than you wanted: 1.05100 – 1.05095 = +0.00005, or +0.5 pips. Negative Slippage Example Is slippage a technical glitch in a broker’s software, or is it built and designed to bring in extra revenue? There are popular beliefs that slippage is a software glitch or that it is made just to give brokers and liquidity providers extra revenue. This is not true, as slippage is something that is unavoidable. There are times when the markets are extremely volatile and price movements are too quick due to a lack of liquidity. Slippage does bring in extra revenue for brokers and liquidity providers, but you need to remember that slippage goes both ways; while brokers and liquidity providers will generate profits from negative slippage, they will also generate losses from positive slippage. Though there are times when brokers (very rare) use price manipulation on their clients to generate additional revenue (more on this later).  How can a trader avoid or minimise slippage? While slippage is impossible to fully avoid, there are a few things you can do to minimise the impact of slippage and protect yourself as much as possible in the markets, including using stop-loss orders to limit their exposure and placing orders during less volatile times. Stop-loss orders are instructions to your broker to immediately exit a trade if it reaches a certain price. By using stop-loss orders, you can limit your losses if the market moves against you. High liquid markets such as Forex enable you to take advantage of market swings to enter and exit trades rapidly, limiting your exposure to the market but also increasing the risk that your stop-loss order may not be executed at the price you expect if the market moves quickly against you. Additionally, there are some brokers that offer traders guaranteed stop-loss orders called 'Guaranteed Stop Orders' (GSOs), meaning that the stop-loss price is guaranteed, which makes the trader unaffected by slippage when getting stopped out. Another way to reduce the impact of slippage is to trade during less volatile times. The forex market is open 24 hours a day, but not all hours are equal. There are times when there are hardly any trading volumes being generated, and you want to avoid trading during this time at all costs as trading spreads will be wider and you will most likely get slipped due to the lack of liquidity in the markets. The best times to trade are usually when the market is most active, which is typically during specific trading sessions such as the Eurpoean or US trading sessions. To summarise, to minimise slippage, you should: What is slippage tolerance, and how should you factor that into account with regard to your stop-loss and risk-to-reward calculations? Some brokers will enable a feature called the 'Market Order Deviation Range' where the trader can adjust the slippage's maximum deviation. This is done so a trader can estimate his or her tolerance to slippage. For example, if you set the maximum deviation to 3 pips, the order will be filled as long as the slippage equals 3 or below. If the price slips beyond the set maximum, the order won't be filled. This is an effective way of managing your risk-to-reward calculations because if you have a strict risk-to-reward set-up and do not have much leeway to give in terms of slippage, you can adjust the slippage tolerance setting so that if the trade comes with more slippage than your trade can afford, it will not enter you in the trade. How can a trader tell if his or her broker is being predatory with regard to slippage? Although rare and illegal now that regulators are prevalent in the industry, in some cases, brokers may manipulate prices to cause slippage. This usually happens during times of high volatility when there are a lot of market orders. By creating a large amount of slippage, brokers can increase their profits. Forex brokers that are not regulated by the major governing bodies are more likely to do this. For a broker to gain the regulation of a major governing body, they must adhere to very strict guidelines set out by the regulating authority. Firstly, if you suspect that your broker is manipulating prices, you should immediately look for another broker. If you have evidence of your broker manipulating prices, you should report that broker to the financial authorities. A good way to gauge if a broker is potentially manipulating prices is by requesting a trade journal from them. A good and reputable broker usually offers trade journals to their clients. Trade journals show execution times of trades and will have a comment on the journal if the trade was slipped. On a standard trade journal, slippage comments should not appear there often (unless you are trading at times when the market is volatile, thin, or trading outside liquid hours). A broker that manipulates prices to their clients is usually hesitant to offer trade journals to their clients because it shows this on the trade journals. So if your broker is not willing to share the trade journals with you, you might want to think twice about continuing to trade with them. To add to that, you can also check if your broker is either a market maker or directly connected to the interbank market, as they will handle slippage differently. To recap, slippage is a part of forex, and no trader is immune to getting it. It occurs most often during periods of high market volatility. Though slippage is almost impossible to avoid and can impact your profit and losses, there are a few things you can do to minimise slippage and its impact. This includes the use of limit and stop-loss orders, placing orders outside of volatile market times, avoiding major economic and news events, and only using brokers that are regulated by the major governing bodies. BluetonaFX
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Education
by BluetonaFX
14
Fundamental Analysis in Forex In forex trading, fundamental analysis looks at the outlook of a whole economy to determine the actual value of a currency. The value is then compared with the value of other currencies to assess whether it will strengthen or weaken relative to those currencies. This post will further discuss how fundamental analysis is used in forex, what to look out for, and how you can incorporate it into your trading. What is Fundamental Analysis? Fundamental analysis is a way of looking at the forex market by analysing economic, social, and political forces that may affect currency prices. The idea behind this type of analysis is that if a country’s current or future economic outlook is good, its currency should strengthen due to an increase in demand for that specific currency. The better shape a country’s economy is in, the more attractive it is, which will lead to foreign businesses and investors investing in that country. This results in the need to purchase that country’s currency to obtain those assets. There are a multitude of factors that determine the intrinsic value of a country’s currency. Factors covering a whole range of economic data, social trends, and political developments come together to generate a broad view of the outlook for the country. This will subsequently drive the outlook for the currency. Due to this, forex fundamental analysis allows traders and speculators to take a longer-term view of whether the current value of a currency will likely increase or decrease towards its actual worth. Fundamental Analysis Information So, what information is used in the fundamental analysis of forex markets? There are several fundamental factors and components that analysts use to value a currency. From an economic perspective, the most important data are interest rates, inflation, economic growth, homes, and employment. Central banks and governments will use all of this information to formulate their monetary policy and fiscal policy, respectively. Changes to interest rates will impact the outlook that fundamental analysts have on a currency. As such, central bank policy decisions and governments' fiscal policy decisions are critical factors in the valuation of a currency. (More on this later.) Key Fundamental Data Let’s go into further detail on some of the most important fundamental data and how they impact the valuation of a currency: Interest rates Interest rates are a tool that central banks use to control an economy. Depending on how a country's economy is performing, central banks will adjust the general interest rate level to bring the economy back towards its respective targeted levels. When the level of one country’s interest rates is compared to another, this is a driver of the relative attractions of the currencies. A higher interest rate level will generate a better return for the holder of assets in that currency since higher interest rates draw capital from around the world as money seeks a higher rate of return, thereby increasing the demand for the currency as foreigners convert their domestic currency into the investment. Thus, the currency will strengthen relative to the other currency. Additionally, government bond yields are an indicator of the market’s outlook for central bank interest rates. Bonds pay a fixed income, so fluctuations in a bond’s price will determine its yield. If a central bank raises the interest rate, traders can get a better return on their money at the bank; therefore, the fixed-income government bond will likely be sold. So, if yields reflect the expectation of interest rate moves, fundamental analysts can compare the government bond yields of various countries to assess the relative valuation of the currencies. That is why fundamental analysts will look at interest rate differentials in their valuation to determine whether a currency is mispriced. Inflation Inflation is caused by an excess supply of money in a country's economy. This then leads to more spending, which then leads to an increase in prices. If the inflation rate is higher in one country than in another, then the relative value of its currency will decline. It is possible for inflation to get completely out of control, and in fact, there are some countries that print so much money that their currency becomes almost worthless as money. Because money has such an important function in all societies, people will often find substitutes when the domestic currency becomes worthless—even using the currency of another country, in what is also known as 'dollarization.' Inflation is a crucial driver of central bank interest rates. High levels of inflation eat away at the underlying value of an individual's assets or even savings. Furthermore, if inflation is too low or negative (deflation), it will lead people not to currently spend, and this can cause a downward economic spiral. Why would people buy something today if they think it will be cheaper tomorrow? Every month, inflation measures such as the Consumer Price Index (CPI) and Purchasing Price Index (PPI) are assessed by traders and speculators to judge a country's inflation outlook. Central banks use inflation targeting as they set interest rates. Higher inflation levels require higher interest rates to prevent continued price rises. Therefore, if one country has a higher level of inflation, it is likely that the interest rate will also need to be higher, which will also impact the currency’s value. Gross Domestic Product Economic growth is measured almost universally by changes in Gross Domestic Product (GDP). Gross domestic product is a measure of the size and health of a country’s economy over a period of time (usually measured quarterly or yearly). It is also used to compare the size of different economies at different points in time. GDP is the most commonly used measure for the size of an economy. The GDP is the total of all value added created in an economy. Value added means the value of goods and services that have been produced minus the value of the goods and services needed to produce them. The biggest drivers for GDP calculation are: Consumer spending: Also known as personal consumption expenditures, this is the measure of spending on goods and services by consumers. Government spending: It’s everything that is spent from a government’s budget within a public sector on items such as education, healthcare, defence, and more, depending on the country. Business investment: Any spending by private businesses and nonprofit companies on assets to produce goods and services is considered business investment. Balance of trade: The difference in value between a country’s imports and exports is what constitutes the balance of trade. If exports exceed imports, the country is in a trade surplus. On the contrary, if imports exceed exports, it’s a trade deficit. Homes The data on homes is very important due to the sole reason that one of the main aims for most people in life is to own a home. Additionally, a home is most likely the most expensive item a person will ever buy. So most people will work hard for a large part of their lives to own one. Because of this, housing forms an important part of the worldwide GDP calculation, so if a country's housing data is strong, this tends to also show in the country's economic performance. The biggest drivers in housing data are: Pending home sales: This number shows the number of home sales where a contract between the seller and the buyer has been signed. Existing home sales: This number measures the number and value of transactions of existing homes that were sold in a given month. New home sales: This number measures the new homes that were sold in a given month. In a strong economy, the number of new home sales tends to keep rising. Employment A country's employment rate is very important in gauging a country's economic strength. The reason is that employment is very important to a country's economic output. If people have jobs, they will spend money and contribute to economic growth. If employment is low, companies will have a shortage of workers. This will lead to lower productivity and then lower company revenues, which will then lead to companies not being able to pay back loans and even fewer jobs being available because companies can no longer sustain themselves. Also, consumer spending will decrease, and the never-ending cycle continues. The US Nonfarm Payroll employment figure is one of the most important figures that comes out on the first Friday of every month. The figure is an estimate of the number of payroll jobs at all nonfarm businesses and government agencies, the average number of hours worked per week, and the average hourly and weekly earnings. Because labour is an important economic factor of production, the unemployment rate is a good indicator of how closely economic output is to potential output, which measures economic efficiency. A falling unemployment rate is a good indicator of economic growth, while an increasing unemployment rate indicates economic decline. Fiscal and Monetary Policy Monetary policy is very important in fundamental analysis. Central banks vary in philosophy and economic stance; some central banks are 'hawkish, meaning that they prefer higher interest rates to encourage saving and investing, whereas others are 'dovish, meaning that they prefer lower interest rates to encourage consumer spending and borrowing. Economic data can help a central bank formulate its monetary policy, but there is another aspect to consider. Fiscal policy (government spending and taxation) is also relevant to the fundamental economic outlook of a country. While governments and central banks tend to be independent, they are not mutually exclusive. The fiscal actions of a government can have implications for the central bank (for example, the response of the Bank of England to the unfunded spending cuts of the UK Government in September 2022). Therefore, politics are also important. The type of government ruling a country can affect its economic outlook and, more importantly, its perception of future prospects for the country’s economy. A government that favours high spending might be seen as fiscally irresponsible. However, if the view is that this will generate more growth and a larger economy, it might be viewed positively. How fundamental analysis is used in forex trading Fundamental analysis is widely used to generate potential bull and bear markets in forex trading. Technical analysts will discuss trends; however, the medium- and longer-term fundamental outlook mostly, if not all of the time, generates the source of those trends. Fundamental traders will generally position themselves according to where they see a big trend. There might be some near-term fluctuations within the trend that can be taken advantage of using technical analysis. However, broadly speaking, a currency will move in a particular direction due to an economy’s longer-term prospects and interest rates. How traders perceive fundamental economic data is very important. On a longer-term basis, it is all about what the data means for the future outlook of the country's economy. Is a central bank on a path of raising or tightening interest rates? Does a country's government have to raise or cut taxes? Is consumer borrowing and spending too high? For short-term trading, it is all about expectations. Day traders usually look at the economic data for their signals. How did the data perform relative to market expectations? Did it beat the consensus forecast? Fundamental traders will examine how data announcements compare to the market’s estimates. Better-than-expected data should drive a stronger currency; if the data is less than expected, it tends to lower its value. Dangers when trading using fundamental analysis Though fundamental analysis can be useful in predicting the direction of currency prices, there are dangers that you need to be aware of. First, important figures like the nonfarm payroll and interest rate announcements are extremely volatile and can wipe your account instantly if you end up on the wrong side of the market. Additionally, there are times when markets are 'priced in', meaning that the move has already happened in anticipation before the fundamental data or announcement; therefore, the market is already priced in, and the market tends to go the opposite way. For example, if traders have been strongly anticipating that a country's central bank will cut interest rates, they will short the markets all the way prior to the central bank actually confirming the interest rate cut, so now the market is priced in and the market will tend to go the other way due to those traders exiting their early short positions. Forex fundamental analysis can sometimes be very complex and time-consuming. However, a general understanding of its principles will not only help you in your journey to finding consistency in the markets but will also improve your economic knowledge and awareness. BluetonaFX   
Education
by BluetonaFX
2
Hedging in Forex When done correctly, hedging is a great method to help protect your position(s) against big price fluctuations. This post will delve further into hedging and discuss how you can use it to not only protect your position(s) but also how to potentially use it to your advantage in turning losing positions into profit-taking opportunities. What is hedging in Forex? Hedging implies protection against the risk of future price fluctuations for assets arranged in advance. It is a financial strategy used to protect a trader from losing trades resulting from adverse moves in currency pairs. Hedging is used in almost all types of financial industries; however, it has a more specific form in the foreign exchange market. Direct Hedging Direct hedging in forex normally takes place by the trader opening a position in the opposite direction of an existing trade. This is done in order to reduce the risk exposure of the existing position. Normally, the trader or investor carries out his or her risk analysis and quantifies the risk levels involved before instituting both the original and hedged trades. They would subsequently be responsible for controlling the level of change in their positions that takes place due to the ensuing price volatility of the market instrument(s) being traded. For example, let's assume you open a sell position on GBPUSD, and while your position is running, the market suddenly goes up, so now your open P&L (profit and loss) number is going down. Let's continue to assume that you are still confident in the original sell position; however, you are wary that the market is likely to experience adverse price movements. To prepare for this, you open a buy position to fully hedge the trade. In a fully hedged trade, the P&L number will not move because there is both a buy and sell position open. Now that the trade is fully hedged, if the market continues to go up, the trade's buy position will continue to profit while the sell position will continue to take a loss. However, if the market reaches a resistance level, you can exit the buy position at a profit and hold the original sell position while the market comes back to your original entry point. While many traders would close out the initial position and accept any losses, a direct hedge would allow you to profit from the second trade, which would avoid the loss. To get a further understanding, let's see this in the example below. Hedging with multiple currencies Another strategy would be for a trader to utilise two different currency pairs that are highly correlated, either in a positive sense or a negative sense. For example, a long trade can be opened for the USDJPY currency pair, and a short trade can be opened for its USDCHF counterpart. Because it is highly likely that both pairs move in the same direction due to the USD factor, any drawdown or loss on one of the trades would be made up for by gains and profits in the other trade. Though the risk is usually mitigated with this hedging strategy, for this method to work successfully with different currency pairs, it is essential that the trader does his or her research on both pairs involved in the potential hedge to ensure that the correlation is high between them through their respective movements in the market. This is to guarantee that when market volatility does ensue, whether it is based on a news update such as a major central bank meeting or some other unexpected event, then the two current pairs in question will move as expected in the market. Hedging with commodities Commodities are popular to hedge with because they are usually seen as safe haven products. Gold is usually the go-to product hedge for traders who especially want to protect themselves from rising inflation. When inflation becomes uncontrollable, gold prices tend to rise. Gold, in contrast, is a hedge against a lower US currency. In other words, gold prices and the US dollar tend to have an opposite relationship. When gold prices rise, the US dollar tends to fall, and vice versa. Gold has long been seen as a form of currency, which is why it's a strong hedge against a dollar crash or hyperinflation. Another popular commodity to hedge with is oil. Some currencies are particularly vulnerable to the impact of oil prices (these forex pairs are commonly known as 'commodity pairs'). Both the Canadian dollar and the Australian dollar are notable examples. The price of oil and the exchange values of the Canadian dollar and Australian dollar usually have an inverse relationship. When the price of oil rises, the USD/CAD and AUD/USD exchange rates tend to fall, and vice versa. You can use the oil hedging approach to hedge your USD/CAD and AUD/USD trade risk in this scenario. For example, you can go short AUD/USD and long oil as a hedging position, and vice versa. Advantages and Disadvantages There are significant advantages and disadvantages to engaging in hedging activities in forex: Advantages The biggest advantage is that it protects the trader against unpredictable price movements. If your account experiences high volatility or unexpected price swings, your hedged position may be able to help protect the total worth of your account by generating a profit on that position, which can help stabilise your account balance until the other position gains value. In other words, hedging gives the opportunity to profit on a position that would maintain the account balance during a volatile or unexpected price swing before a reversal takes place, leading to other positions going back to their original value. When hedging is incorporated properly, your risk-reward ratio is better within your control. This is because a hedge acts as a helpful counterbalance to your other position(s), thus providing support in the form of price gains even when your other position(s) are moving in the opposite direction. Hedging can broaden your portfolio's diversification. If you are hedging multiple products, this can spread out your open positions to reduce the chance of a single variable or event wiping out all of your positions. Disadvantages On the other hand, a hedge can also very likely reduce the potential for profit. If a trader has an open position in profit and the price continues to move in a certain direction after the trader implements a hedged trade in the opposite direction, then the hedged trade would be at a loss, nullifying the gains made by the original trade after the hedged trade was opened. Additionally, traders must be aware of additional trading costs such as commissions and overnight swap charges (if the hedge is held overnight). To add, hedging is not an ideal practice for beginners in trading, as it requires the proper practice and education needed to handle opposing trades at the same time in what could be an unfamiliar market, reflecting both the numerical and positional complexities of the hedging mechanic. There is also the risk of hedging, resulting in increased losses to the trader's account due to some hedged trades not being correlated directly to initial positions; this could be because of leverage, margin, or other reasons. This has the potential for huge drawdowns in the overall position when price volatility ensues. Another disadvantage is that, unfortunately, not all forex brokers or trading providers offer the hedging function to their traders, so traders will usually have to inquire if this function is possible before proceeding to trade with the respective broker or provider. While you can make money from hedging, it is very important to note that before that, forex hedging should first be about mitigating risks. A trader's primary aim when hedging should always be to protect their capital against adverse moves in the currency markets. Hedging can also be very complex and costly, especially if the trader does not have much experience with this trading method, so it is not recommended to use this method in a live trading environment until you understand the mechanics of hedging, as it requires a great deal of planning and understanding. BluetonaFX
Education
by BluetonaFX
4
The Power of Risk ManagementRisk management is one of the key topics in forex trading that is not emphasised enough. Instead, there is too much emphasis on solely focusing on being on the right side of the market to consistently make money while ignoring proper risk management in the process. This post will completely debunk this, so after you have finished reading, you will hopefully have a completely new mindset on how to actually succeed long-term in forex. Absolute Uncertainty The forex market is a place where the majority of people struggle to find consistency. This is due to the nature of the market, where uncertainty is constant. What I mean by this is that the market is completely irrational and neutral; when you want to buy, there is somebody else on the other side that wants to sell, and vice versa. The market is filled with millions of other participants with their own goals, beliefs, and motivations; therefore, the market will go where it wants to go. Unfortunately, not enough people really grasp what this means and are obsessed with how many trades they can get right to make money. The main purpose of risk management in forex is to reduce your trading risk and grow your trading capital safely. It is great to have good skills in determining the market's direction, but more importantly, you need to have good risk management skills too. Two different traders, Same Trades, Two different outcomes Let's put this into practice. Let us assume that two different traders both took the exact same ten trades and both won five of the ten trades taken. Let's call these traders 'Trader A' and 'Trader B. Trader A is just obsessed with being right in the market. The trader is quite skilled in understanding the market, but the trader is just focused on how many trades are closed at profit. Trader A risks about 2% per trade; however, trades are usually cut short, and thus ends up taking profit at about half of the initial risk (2% risk per trade and 0.5:1 risk-reward). Trader B understands that the market is completely irrational, where anything can happen at any time, and to trade the market succesfully, must treat trading like a business, causing the trader to have strict risk management rules (2% risk per trade and 2:1 risk-reward) that are stuck to at all times. As you can see from the above image, Trader A ended up with a 5% decrease to the account and Trader B ended up with a 9.98% increase to the account after both traders taking the same ten trades, why did this happen? The answer is simple Trader A cut the profits short and ran the losses whereas Trader B ran the profits and cut the losses. It does not matter if you are right or wrong in trading what matters is how much you make from your right trades and how much you give back to the market on your wrong trades. Forex Journey Ends Before Getting Started Due to many people not understanding the power of risk management, their journey in forex ends before it even gets started. To explain further, a lot of traders either do not calculate their risk before they trade the markets or they are aware of their risk but decide not to place high importance on it (a fatal mistake). This is one of the biggest killers of forex traders, and all it takes is one bad trade before the market takes all your hard-earned money and you are out. The market is an unforgivable place that will not care if you are blown out; it will continue to go on with or without you participating, and you must give it respect. The higher your risk, the lower your long-term survivability probabilities are. Remember, if you don't have funds to trade, you can't participate! It is as simple as that, so you must treat trading as a business and not as a casual hobby if you aim to consistently make money over the long term. Let's see how your survivability chance decreases the more you risk. Position Sizing Now that you understand how crucial it is not to risk too much of your account in a trade but do not know exactly how to calculate how much you should be risking per trade, how do we calculate this? In forex, a pip movement on a one-lot contract is approximately $10, so if you enter a trade on a forex pair and it moves 20 pips against you, you will be approximately $200 down. It is very important to understand this because if you do not, you will not know how much you should be risking per trade, and you may end up overexposed in the market with a high chance of blowing your account. For example, if you have a $10,000 account balance and want to risk 2% ($200) of your account per trade on a one-lot contract, that is 20 pips; therefore, your stop loss should be around 20 pips. However, on the same account balance, if your stop loss is 100 pips, let's say, and you are not aware of pip calculations, you are potentially risking 10% of your account in that trade alone, which is extremely dangerous, and as seen in the above example, it only takes 10 trades in a row to blow your account on 10% risk per trade. But what if your strategy requires a 100-pip stop loss, as that is where your stop loss level is, and you really want to enter the trade? You just have to trade a smaller position size! 2% of $10,000 is $200, and we know that 1 pip is equal to around $10, so $200 is equal to 20 pips. Now how do we trade this with good risk management if we want a 100-pip stop? Let's see the image below: So as you can see in the above image, if you are on a 2% rule, which is good risk management, all you need to do is reduce the position size if your strategy requires a larger stop. There is nothing stopping you from entering the position. In the forex market, safety must come first at all times. To add, it is not worth having a smaller stop loss just to be able to trade a bigger position size, as this can be very detrimental to your trading due to the fact that in forex, there is a lot of market noise due to so many participants, and it is very easy to get whipsawed on a small stop loss and get taken out of your position. The next time you are about to enter a position, ask yourself if it would be better to have a larger stop to protect yourself from getting squeezed out of the position. If so, just reduce your position size accordingly and have a larger stop. Always remember that the market does not limit you from trading your opportunities if you have a larger stop but do not want to risk a large percent of your account in the trade; you just have to trade smaller. Plan, Analyse, Assess, Review 1. Plan Before you take a trade, always have a plan for your risk management. The 2% risk per trade rule is always a safe rule, and the best traders tend to use this rule. Always know what your account balance is, what your risk amount should be, and exactly where your stop-loss needs to be. Always remember that if your stop is too tight, try trading a lower position size to give you more leeway. 2. Analyse When you get a trade setup, before you pull the trigger and enter the trade, ask yourself, "Is there enough reward in this trade setup that it is worth entering the trade?" If the answer is no, do not take the trade! Remember, trading is not just about being right or wrong; it is also about how much you take or give to the market when you are right or wrong. The reward must always be worth the risk, and you must constantly analyse this before entering the market. 3. Assess Make sure you often assess your current risk management, especially when you are in a trading position. For example, if your position is about to reach your take-profit target but the market looks like it wants to keep going past your target, instead of coming out of the position completely, why don't you instead take some of the position out and keep the rest of the position in? You can trail your profit to your original target and potentially make extra profits this way with nothing to lose. The same goes on the other side: if you enter a trade and at some point are no longer comfortable with the position, do not be scared to cut the position short and exit the position. Always listen to your gut instinct, as it may be telling you something for a reason. 4. Review Always review your risk management. Take a look at your past trades and try to learn from them. Was your stop-loss too tight in a lot of your trades? Was your stop not tight enough in a lot of your trades? Are you cutting yourself short, and could you have a higher risk-to-reward ratio in a lot of your trades? There is always room for improvement, and the only way to improve your risk management is to review your previous trading history to see what possible adjustments you could make to your risk management. Remember, you should treat trading as a business if you want to succeed long-term, and most, if not all, successful businesses constantly review their risk management. The power of risk management is absolute. If this post has not done enough to convince you of this, always remember that you are always one bad trade away from being put out of business. The majority of beginner traders blow their accounts in the first three months of trading; this is not due to them not understanding the markets but due to poor risk management and not treating trading as a business. Always remember to maximise your profits and cut your losses. All trading involves risk, and there is no 'holy grail' strategy that can eliminate risk entirely. However, by managing your risks effectively, you can reduce the impact of risk on your trading and increase your chances of long-term success. BluetonaFX
Education
by BluetonaFX
4
I need help please...Hey guys... I'm tying to back test a strategy that I think might be beneficial for me, and I use vertical lines to count how many times I have been back testing so far. But I wanted to know if someone could create an indicator or at least tell me if its possible for me to see how many vertical lines I placed so far without having to count all of them. I feel like this is the biggest reason why people don't back test because it takes quiet a long time to count and write everything down. So whoever helps me on this, is basically a hero in the entire tradingview community. please somebody answer this as fast as possible thank you so much.
Education
by Benjaminkhan
It's Time.Deadweight momentum while holding 440 level.. This will flush and retest 400 and under very soon. MRNA and BIIB should not be anywhere close to each other. Magnet repellent rug pull is coming and it will quickly chop meat. I see a random tiktoker and youtuber die everytime I scroll in my leisure time. Eventually when everyone's favorite time killer gets executed by vaccine, anti vaccine rallies and protests will combust on MRNA. Do you trust online graduated interns working at a biomedical lab? These bonobos are getting massive funding to start new projects and even has brand labeling secured. Pretty bullish honestly but I'm holding puts so this will retest the pits of oblivion. TLDR; MRNA short term put play retest ocean bottom 425p based on flushing momentum at stagnant price level Entry: 444 (My Grandma's favorite number) Stop loss: Don't need it, Good night MRNA
NASDAQ:MRNAShort
by sangsin
1
It's Time. It's time for a correction before the real correction and GME will prepare for it. Not only will hedge funds get the full package flash crash but it will also include short sell margin call. Bullish on GME but need one more retest on the SMA which may happen within 7 daily candles. Notice how every bounce off SMA it proceeds to penetrate every barrier of resistance in the following week or next. $AMC (Ahyaya My Calls) failed to hold fort at $50, I wouldn't feel safe with GME camping a tent at $200. Target mid 180 zone into 160 and a quick bounce off previous low. S-Tier triangle breakout formed this way. Target $300+ but first stop $150. Tldr; Weakening momentum at $200 level = flush Current positions: GME 185p entered 9/14 EOD
NYSE:GMEShort
by sangsin
5
APRN possible drop then rise. (New trader please help)Hello, I am new to trading and have watched a couple of videos demonstrating and teaching about price action trading and how to accurately use price action in order to have a better idea in to what you are trading. I would just like some feedback and some correction as to whether I am going in the right direction with the strategy and investing in general. From the knowledge that I have gathered from these videos, it seems that this stock will eventually come back down to the support, then rise once again to the resistance, making this a good short term stock to invest in.
AShort
by sebislame
Head and Shoulders Pattern and How to Trade them. (and Inverted)A head and shoulders pattern is a chart formation that appears as a baseline with three peaks, the outside two are close in height and the middle is highest. In technical analysis, a head and shoulders pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal. The head and shoulders pattern is believed to be one of the most reliable trend reversal patterns. It is one of several top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing its end. A head and shoulders pattern is comprised of three component parts: After long bullish trends, the price rises to a peak and subsequently declines to form a trough. The price rises again to form a second high substantially above the initial peak and declines again. The price rises a third time, but only to the level of the first peak, before declining once more. The first and third peaks are shoulders, and the second peak forms the head. The line connecting the first and second troughs is called the neckline. An inverse or reverse head and shoulders pattern is also a reliable indicator that can also signal that a downward trend is about to reverse into an upward trend. (As we can see in the above example) Like all charting patterns, the ups and downs of the head and shoulders pattern tell a very specific story about the battle being waged between bulls and bears. The initial peak and subsequent decline represent the waning momentum of the prior bullish trend. Wanting to sustain the upward movement as long as possible, bulls rally to push the price back up past the initial peak to reach a new high (the head). At this point, it is still possible that bulls could reinstate their market dominance and continue the upward trend. However, once price declines a second time and reaches a point below the initial peak, it is clear that bears are gaining ground. Bulls try one more time to push price upward but succeed only in hitting the lesser high reached in the initial peak. This failure to surpass the highest high signals the bulls' defeat and bears take over, driving the price down and completing the reversal.
by FXKing009
Up,Up, and Away! (LTC Edition)COINBASE:LTCUSD Looks like were finally making the comeback we've been waiting for. Over the course of a week, LTC has been up-trending at the pace of a snail... or maybe it just felt like that because of the way the market does suicides (going up then back, then up a little further, and back a little higher than before). Nevertheless, LTC has done it, the bulls smashed through the descending trendline, so onward to our resistance level at $243. Hope you werent hoping to hop back in at the mid-lower $180 area, because those days are like getting BTC Sub 30k... behind us. Whether you hodl, scalp, or swing from here on out LTC will be bread. Side note: Im expecting the minimum cutoff of $200 per LTC to be in about 36 hours. do with that what you will. Feel free to comment, let me know if you agree, hell, if you know a couple tricks of the trade, you can comment those too. Its all about sharing the knowledge, so lets all get some Queso! PS this is not financial advice, jsut my thoughts, im not telling you what to do with your money, dont sue me, blah blah blah, Im not responsible for your L if you have one. Do your research, and stay on the market. Goodlucc trading fam, Lets get this Bread
COINBASE:LTCUSDLong
by KingCryptoMike
Do you trade stocks? Our strategy can help you!Not only does our strategy trade forex but also trades stocks! Example here is our BUY open on GOLD! WHAT A TRADE! What is our strategy? Our strategy is a trend following strategy - that is coded in pine script to use with the trading view platform - the entries are shown automatically! NOTHING is done manually, it can be used on any instrument and time frame. However, we have hard coded specific parameters for when trading the H1 time frame, so we can back up over 4200 previous trades to confirm our edge from previous data. This gives us confidence in execution and belief in our trading strategy for the long term. The strategy simply sits in your trading view, so you will see exactly what we see - the trade, entry price, SL and multiple TPs (although we hold until opposite trade as this is the most profitable longer term plan), lot size, etc. This could be on your phone trading view app, or laptop of course. The hard work is done, so we have zero chart work time, no analysis, no time front of the chart doing technical analysis - technical analysis is very subjective - you may see different things at different times - how do you have a rigid trading plan on a H&S shoulder pattern? Your daily routine, diet, sleep, exercise can affect what you 'see' and your decision making, this doesn't happen when a strategy is coded like this; what we do have is a mechanical trading strategy... What does this mean? It means, we are very clear on our entry and our exit and use strict risk management (this is built in - put in your account size, set your risk in % or fixed amount and it will tell you what lot size to trade!) so we have no ego with our position and we are comfortable with all outcomes - its simply just another trade. This free's our mindset from worry and anxiety as we take confidence from knowing our edge is there and also that we have used sensible risk management. The strategy itself can be used as a live trading journal too!
NASDAQ:AAPL
by congibb
1