Are These Simple Trading Mistakes Costing You Money In The Forex
Market
The 2% rule is a powerful tool in Forex trading. By adopting
this rule you're using a strategy that decreases the size of
your losses during losing streaks, an important consideration.
There is, however one small caveat that you need to be aware of
when using the 2% rule to calculate how many Forex shares you
are going to buy. As you know, the number of shares you can
purchase is determined by your maximum loss and the size of your
stop. This means that by increasing your risk, you can also
increase the dollar value of the position you open. By simply
shrinking your stop size, that is by setting a tighter stop
loss, you can increase the dollar value of the position you open.
To avoid a situation where you could end up with excessively
large positions that may put your Forex trading float at risk,
you can choose to introduce an extra rule. This rule would limit
the dollar value of a position to be no more than a set
percentage of your entire Forex trading float.
For example, you might decide that you'll never open a position
that has a dollar value of more than 25% of your entire Forex
trading float. This rule would only be executed if, after
calculating the formula that determines how many shares you buy,
you find the dollar value of that position would greater than
25% of your float. If this happened, you would scale down the
position to make sure it did not exceed that 25%.
The percentage that you decide upon will depend on the type of
system you're trading, the size of your float, and your personal
tolerance for risk. Generally, smaller Forex trading floats
might use 25%, and larger Forex trading floats might use as
little as 10% or even 5%. There are no definitive numbers, and
the percentage that you choose will depend on your personal
circumstances.
Once this tendency is corrected for you will have all your money
management rules in place, ready to control your risk in the
Forex market. Now you need to take the next step. Test your
system to find out which of the variables best suit you,
remembering always that position sizing is the most significant
part of any system design. It is the lynchpin of money
management. Once you've tested your system, and fine-tuned your
rules, you will be well on your way to becoming a successful
Forex trader.
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