Do not over trade. One of the most common mistakes that traders make is
leveraging their account too high by trading too much of their account at one
time. In other words, over – leveraging.
Leverage is a Doubled – Edged Sword!
Just because one lot (100,000 units) of currency only requires as low as $250
as a minimum margin deposit (400 to 1 leverage,) it does not mean that a
trader with $5000 in his/her account should be able to trade 20 lots.
One lot is $100,000 and should be treated as a $400,000 investment and not the
$1000 put up as margin. Most Forex traders analyze the charts correctly and place
sensible trades, yet they tend to over leverage themselves.
As a consequence of this, they are often forced to exit a position at the wrong time or
become too emotionally charged to be in a constructive frame of mind to trade profitably.
Another form of over trading is to get in and out of too many trades in 1 session.
If you’re using a Scalping System you should only look to do 3 trades maximum. If
you are using a Day Trading system you only should be looking to do 1 trade a day
but NO MORE than 2 setups.
If you use this trader mentality you’ll avoid over trading known as gambling
when you try and trade 5 to 10 trades in just a few hours… However, a good
rule of thumb is to never use more than 5% of your account at any given
time, especially with a leverage of 400 to 1.
Particularly for new Forex traders or when learning a new system such as this one,
I recommend using an account with a more conservative level of leverage of no
more than 100 – 200 to 1 and you might want to risk even less like 2% or even less 1%.
Let’s Do The Math Fellow Traders:
Say on a Day Trader System we use a 1 to 1 ratio? So in
this case we will use a 10 trade scale with 80% wins and 20% losses: For
the sake of this explanation let’s say we are using a 100 pip stop loss and a
100 pip win ratio.
So on 8 of the trades we win 800 pips then on 2 of the trades we lose 200 pips. So think
about this now…is this actually an 80% winning average? It is in the terms of actual trades
won but is it actually 80% in the terms of pips made?
Is 80% Of The Trades The Real Overall Percentage?
If you answered no to this question you are 100% correct! You see, in reality, you made
800 pips but you lost 200 of those 800 so what are we left with? The answer is 600
pips…so doesn’t this sound more like a 60% win loss ratio than an 80% win rate?
Indeed it does folks!
Okay let’s try a 2 to 1 ratio where the stop loss is 200 and the take
profit is 100. The same applies just the numbers are different. So on 8 of the
trades we win 800 pips then on 2 of the trades we lose 400 pips. So think
about this now…is this actually an 80% winning average?
It is in the terms of actual trades placed but is it actually 80% in the terms of pips made?
If you answered no to this question you are 100% correct! You see, in reality,
you made 800 pips but you lost 400 of those 800 so what are we left with?
The answer is 400 pips…so doesn’t this sound more like a 40% win loss
ratio than an 80% win rate? Indeed it does folks! So now let’s do this the
best way possible and let’s reverse the win loss ratio. Instead, now we are
going to use a 100 pip stop loss and a 200 pip take profit and see what we
end up with.
So on 8 of the Forex trades we win 1600 pips then on 2 of the trades we lose 200 pips.
So think about this now…is this actually an 80% winning average? It still is in the
terms of actual trades placed but is it actually 80% in the terms of pips made?
If you answered no to this question you are 100% correct!
You see, in this example you did far greater than the last 2
examples above, in fact, you made 1,600 pips but you lost 200 of those
1,600 so what are we left with? The answer is 1,400 pips…so doesn’t this
sound more like a 140% win loss ratio than an 80% win rate?
Indeed it does folks! There is so many ways people have tried to fudge the numbers over
the years trying to make it look more appealing than it really is. I just laid it
out for you in an easy to read format with no BS! In the end it’s not the
percentage of wins you make it’s how many pips did you make…
So many Forex traders alike try to twist money management theories…
It only makes sense that if your win to loss ratio is greater than your lost pips you’re
going to be ahead of the game. So many Forex traders alike try to twist money management
theories that it isn’t funny!
Stick with the last example I showed you for this system as it’s traded on a 5 minute
time frame and if you try and shoot for 3 to 1 or 4 to 1 in the terms of pips made like for
example 50 pip stop loss to a 200 pip take profit this may not be achievable on a daily
basis trading this on such a small time frame.
On the EURUSD we certainly don’t have 200 pip ranges on a daily basis do we? So now
that we covered the win loss ratio as far as stop loss and take profit is concerned
lets now take a look at what happens when we add more positions as we
progress when our account size grows.
When Trading Forex Money Management Is Key!
This is yet another part of money management that a lot of traders either fail to
understand and or take seriously. Let’s say we have 8 wins in a row and we make 1,400
pips like stated above. Let’s say we were trading 100,000 worth of currency which
equals to $10.00 a pip.
So let’s say we had a starting balance of $10,000 and we told our self that for every
$1,000 gained we were going to add another $10,000 to our position. So when we
reached the $11,000 level we now are going to trade $110,000 which equals $11.00 a pip
so for every pip gained on each trade we will be making an extra $1.00 so as you can see
as time goes on if we made another 100 pips we also would have added another
$100 and say we were successful and we were winning 80% of our trades
with a 2 to 1 win loss ratio in no time we would double our account and make 100%.
But! And this is a BIG BUT! What if we had a bad streak of Forex
trades which happens from time to time, but now we are trading $200,000
worth of currency which equals to $20.00 a pip. Can you see the horrific
consequences this can cause?
For example, we will be losing double the amount of money on a single trade which can
cause all your profits to be eaten up quicker that you can say oh NO! What took you 20
trades to accumulate $10,000 can wipe out all your profits made in just a handful of
bad trades.
So please be careful when adding on lots and remember to decrease your lot size as you
lose so the impact won’t be so painful! To avoid a situation like this, simply trade the
same amount of lots from start to finish – yes it will take longer to grow your equity
but you’ll be practicing strict money management practices. Especially, when learning a new
system like 4X Pip Snager 2.0…
