Ninja Trading

If there is one sure thing in this world it has to be that forex trading is much more difficult than it seems.

In reality, when you trade currencies, you are in effect buy or selling one currency against the other. This means that in essence there are only two possibilities. Price will go up or price will go down. In theory it is a 50-50 call.

Why is it then, that as higher percent as 95% of all forex traders lose money?

Perhaps it has something to do with the way price moves. You see price can only go up or down and that is a fact. But it can make long or short staccato movements. It may go up just a few pips and then down just a few. This should not really matter to the trader at first glance, but when you add in the fact that most traders, and especially those in the 95% category, are using very high levels of leverage, then those small movements in price are actually quite large from the traders’ perspective.

Understanding leverage is quite complex but here is a simplified view:

When you trade currencies in standard lots you are in fact contracting to buy or sell in multiples of $100,000 worth of currency. Each $100,000 is 1 regular or standard lot.

Because of the leveraged nature of retail trading, you will never need to put up $100, 000 to finance the transaction because you will secure the transaction with a proportion of your money based upon how much leverage you are using.

Leverage is in essence the amount of money you are contracting to buy or sell verses the amount of money you are actually using to secure the transaction (margin).

For example, if you buy or sell 1 standard lot at leverage of 100:1 you are contracting to buy or sell $100,000 worth of currency but you are only using $1000 of margin to secure this transaction.
What this means in real trading terms is that the higher the leverage, the greater the return on a small movement of price in your favour but also the greater the risk should price move against you.

It is very usual for retail traders to use a leverage of 100:1 but as your account grows ($100,000 or more) a lower leverage would give you and your account greater protection.

On a standard lot trade of 1 lot at leverage of 100:1 for each price movement of 1 pip you would gain or lose $10.

At a leverage of 200:1 you would gain or lose $20 for each 1 pip change in price and so on.

This means that although on the winning side your profits grow much more quickly, your stop loss requirement (financially) would be twice as high – your risk is twice as high.

Some brokerages offer as much as 250 or even as high as 400 to 1 leverage, but my advice would be to never use leverage greater than 100:1. And to reduce that level as soon as possible.

Most professional account managers would never use leverage in excess of 20:1

If you are trading mini lots (0.1) then all of the figures above would be divided by 10.
If you are trading micro lots (0.01) then all of the figures above would be divided by 100.

So as you can clearly see, it is in some large part, the amount of leverage employed by the trader that makes trading more difficult. So why use leverage at all?

If you had at your disposal a vast amount of money that you were free to speculate with, such as is the case with some famous investors such as George Soros and Warren Buffett, then of course a great deal of money could be made or lost with a relative low element of risk by being what is known as a “real money” Investor. That is to say a trader that speculates on buying one currency against another without any leverage at all.

Unfortunately, the vast majority of traders do not have such deep pockets, and so the only way that they can trade the currency markets is by leveraging their money and taking on board increased risk.

Taking on more risk is to some extent an acceptable strategy, so long as you both understand the nature of the risk, and so long as you have a money management strategy.

If you end up taking the risk, without understanding that risk and making suitable preparations to manage that risk, then you are most likely to end up being one of the 95% of those traders who lose money.

To help you to trade more effectively, click the links below for more information:

Forex Trading Systems

Forex Systems

Forex Trading

Losing really sucks doesn’t it?

From birth, we are trained to win. Win Win Win….. Never lose lose lose!!!

It is therefore not surprising that when you start forex trading you may well be one of the people who find accepting the loss – really, really difficult !

However, when we start forex trading we have to learn to accept the loss, take it on the chin and move one to the next trade. This is all in the knowledge that forex trading is a matter of winning and losing and we have to neither be elated when we win nor devastated when we lose because if we are using a successful forex trading system, and observing money management rules then we shall be successful as long as we stick to the rules and follow the system!

Easier said than done I know!!

Loser, loser, loser! The platform shouts at you in a voice so loud to you, yet no one else can hear it. I am not having that, you reply in your head, I’ll show them…..and before you know what you are doing you have moved your stop loss position to give yourself a potentially even bigger loss – or here’s another one, you have added to the losing trade by entering another lot.

Alternatively, you have entered the trade the in the other direction with a double lot somehow trying to immediately recoup any potential losses…….all traps that at sometime every new trader has fallen into!

The question is, are these personality traits that one can learn to overcome or are they part of ones psyche and we are stuck with it?

Can we re-train certain gut instincts and learn to control our knee jerk responses to losing?

Will we ever be safe, solid, reliable traders if we do not ? When famous banks have been brought down by so called rogue traders, were they always rogue traders who could not accept a loss but it just got out of hand or had they accumulated losses due to their particular forex system which were now too big to handle. Stops must have been moved!!

Of course trading a demo account is to be recommended until one is conversant with any form of forex trading, so that one is not risking any real money, only virtual cash. However, if you consistently make profits for a while and then lose the lot, I would say that there is something wrong with your ability to accept the loss (or your systems’ ability to accept the loss).

There are a multitude of forex robots out there, with many claiming to have very enviable win to loss ratios. However, some of the robot system manufacturers put in such wide stops that one would have to have very deep pockets indeed to withstand the potential drawdown and most “lighter weight” traders would have disappeared in a margin call long before the stop would have been hit. So make sure that you are using a system with affordable stop loss positions!

So how do we learn to accept the loss as part of our every day life and not respond to it in a dangerous way!

Well suppose we think for a moment about your favourite football or soccer team. Do they win every match? Most probably they do not. However when they do lose a match, they will analyze that match and look at where they may have gone wrong and where they could make improvements for the future. Then they move on and prepare for the next game.

The league winning football teams will have a few losing games. They are usually winners, but they will still have to come back after their losing games and be in the right frame of mind to play again to win.

In the same way professional tennis stars or golfers will never win every championship that they enter, but they are still high ranking winning professional sportsmen and women. Overall, they are not losers, even though they lost some games. They train themselves to enter each new game with a clear head and a winning attitude based upon clear appraisal of anywhere that they may have gone wrong in a previous game.

Of course we are conditioned not to like it when things do not go our way. I hate it if I cook a meal and there is a criticism of any small part of it, but with forex trading, winning and losing have to be met with one and the same emotional response, and when we do lose, we must see it as an opportunity to re-appraise our trading and ensure that we are doing everything correctly.