Second day of trading Forex - I love stop losses!

[NickF]

Sorry to hear that, Nick

Did you mean $2500? And how did you determine these resistance levels?


My first thought reading this is that your leverage must have been extremely high. As mentioned in the article I linked to in my post yesterday, stats show that traders who use 10:1 leverage or less tend to have more success than those who use more than 10:1 leverage.

Hi Jason,

In the end, I was trading a total of 25 microlots of $1000 each, in total trading $25000. The resistance levels were lines that were previous highs or lows in the past or lines where the price was hesitating a long time.

So, I had over $2900 in my account and for a 10:1 leverage, if I understand correctly the leverage, I could have used up to 29 microlots at a time. In the last twelve months I've never reached 10:1, I always used less. I probably reached 5:1 quite rarely as well. Two days ago I also used less than 10:1 leverage and despite this, I managed to lose almost 30% of my account in only one day, the majority on GBYJPY. During the day and night, from my net short (around 130.963), the price went against me over 250 pips.

I thought about what should I do next. The day after I lost the money I was considering to take out all the money and stop trading. But now I think that would be a waste of the effort I put since 24-April-2015, when I first opened the account.

My focus for the future should be to trade at a level where I am capable of showing some consistency every week if possible. If I have a few weeks where I can get to be 1% up, that would give me confidence that I probably hope to make 1% ($20 per week in profits) per week long term (which is still very high anyway, it amounts to 52% per annum) and I can target a higher profit. If I can't do that, then my target will drop to 0.5% per week or whatever needs to be to show some consistency.

I will try to use maximum of 3 microlots in total at any time. I will also move my funds into my other account, where I can use the MT4 scripts and if I am happy with any of my scripts, I will run them, one microlot per transaction. I still have $2145 in my account and that is more than what I have when I first started. Despite having five consecutive losing months, I still think I can turn a profit. I was probably too aggressive. We'll see.



Nick

 

[Jason Rogers]

Hi Jason,

In the end, I was trading a total of 25 microlots of $1000 each, in total trading $25000. The resistance levels were lines that were previous highs or lows in the past or lines where the price was hesitating a long time.

So, I had over $2900 in my account and for a 10:1 leverage, if I understand correctly the leverage, I could have used up to 29 microlots at a time.

Hi Nick,

You have understood correctly. Your leverage was within 10:1 which is good. The reason I thought your leverage might have been higher is because you said you lost $800 in a single day. I found that hard to believe on your account size unless your leverage was extremely high, and I was correct.

When I look at the Closed Trade List from your report, I can see that you did not lose $800 in a single day. Rather, your losses were accumulated over several days with your first trade opened a week ago. This highlights an aspect of risk management where you can improve. While it was good that you kept your leverage below 10:1, you neglected another important aspect of risk management which is a stop loss.

Two days ago I also used less than 10:1 leverage and despite this, I managed to lose almost 30% of my account in only one day, the majority on GBYJPY. During the day and night, from my net short (around 130.963), the price went against me over 250 pips.

That's kind of like a driver with no brakes in his car saying, I crashed despite never exceeding the speed limit. When you trade, your brakes are your stop loss, the point at which you cut your losses on a trade and move on. A good rule of thumb is to try not to risk more than 2% of your account on any trade.

With $2000 in your account 2% of your equity is $40. Since you can trade micro lots in your account and risk as little as 10 cents per pip, you have the ability to risk up to 400 pips on a single trade. Whether you risk that much will depend on other factors, however.

First, its a good idea to plan in advance how much you must seek as a reward (profit target/limit) compared to how much you are willing to risk (stop loss) in order to justify the risk of placing the trade. Our data show that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent.

Some traders use a ratio of 2:1 which means they seek twice as much profit as they are willing to risk on a trade. They would only be willing to risk 400 pips on a trade if they saw 800 pips of potential profit. That might work for a long term trader, but a short term trader could apply the same ratio by risking 40 pips and seeking 80 pips potential profit.

The important thing is to make this decision before you open the trade. If you only intend to seek 80 pips profit, you have to be willing to close the trade for a 40 pip loss and move on. You can't change a short term trade into a long term trade simply because you don't want to take the 40 pip loss. That means you end up taking on more risk that you had initially planned throwing off your risk/reward ratio.

Ask yourself, would you prefer to place long term trades risking 400 pips to seek 800 pips? If so, you can trade 1 micro lot per trade and risk 10 cents per pip. If you would prefer to risk 40 pips to seek 80 pips profit, then you can trade 10 micro lots and risk $1 per pip. If you make these decisions before you open your trade and set your stops and limits in advance, then you can reduce the chances of suffering 30% losses like the one you just had.

• How to Create a Stop
• How to Create a Limit

 

[NickF]

Hi Nick,
When I look at the Closed Trade List from your report, I can see that you did not lose $800 in a single day. Rather, your losses were accumulated over several days with your first trade opened a week ago. This highlights an aspect of risk management where you can improve. While it was good that you kept your leverage below 10:1, you neglected another important aspect of risk management which is a stop loss.

I lost $806 in less than 24 hours. Around 11 am, my open trades were about $40 in profit. From 11 am till 4:20AM when I decided to close all trades. I obviously didn't have a good night, I could not sleep, wondering if I should close all of them or not. I was considering to close just a part of them, but in the end I closed them all. It turned out it was a good decision, because the next day GBP increased even more.

That's kind of like a driver with no brakes in his car saying, I crashed despite never exceeding the speed limit. When you trade, your brakes are your stop loss, the point at which you cut your losses on a trade and move on. A good rule of thumb is to try not to risk more than 2% of your account on any trade.

It was in no way an excuse. Out of the all things I am doing bad and need to be corrected, the high leveraging is not a problem for me. As you pointed out, I need to focus on setting stop losses and take profit points, as well as finding good entry points.

In fact, I already moved my funds into my other FXCM account and now I will make a script that will monitor every open trade for stop loss and take profit limits and if I didn't set any limits myself when I entered a trade, it will use a default value (like 80 pip/120 pip from the entry price, while always staying under 2%) and close my trades for me. In case I only set SL or TP, it will calculate the other limit. Later, I will calculate the limits automatically based on support and resistance levels and also, on not exceeding the 2% limit.

If I can not be disciplined myself, this does not mean I can not accept a supervising system doing what's right.

I am yet to decide what ratio I should have between SL and TP. I will probably based it on optimizations, perhaps even for every currency pair. Even my Expert Advisors show the most profitable parameters are the ones where the TP greater than SL.

With $2000 in your account 2% of your equity is $40. Since you can trade micro lots in your account and risk as little as 10 cents per pip, you have the ability to risk up to 400 pips on a single trade. Whether you risk that much will depend on other factors, however.

First, its a good idea to plan in advance how much you must seek as a reward (profit target/limit) compared to how much you are willing to risk (stop loss) in order to justify the risk of placing the trade. Our data show that 53 percent of all accounts which operated on at least a 1:1 Reward to Risk ratio turned a net-profit in our 12-month sample period. Those under 1:1? A mere 17 percent.

This is extremely valuable information (I find most of the statistics you provided is important).

Some traders use a ratio of 2:1 which means they seek twice as much profit as they are willing to risk on a trade. They would only be willing to risk 400 pips on a trade if they saw 800 pips of potential profit. That might work for a long term trader, but a short term trader could apply the same ratio by risking 40 pips and seeking 80 pips potential profit.

The important thing is to make this decision before you open the trade. If you only intend to seek 80 pips profit, you have to be willing to close the trade for a 40 pip loss and move on. You can't change a short term trade into a long term trade simply because you don't want to take the 40 pip loss. That means you end up taking on more risk that you had initially planned throwing off your risk/reward ratio.

Ask yourself, would you prefer to place long term trades risking 400 pips to seek 800 pips? If so, you can trade 1 micro lot per trade and risk 10 cents per pip. If you would prefer to risk 40 pips to seek 80 pips profit, then you can trade 10 micro lots and risk $1 per pip. If you make these decisions before you open your trade and set your stops and limits in advance, then you can reduce the chances of suffering 30% losses like the one you just had.

It looks like if I want to improve myself as a trader I can not avoid the parts I don't like and only to what's exciting. I'll work on what I need to improve.

Thank you very much for your mentoring.

Nick

 

[NickF]

And how did you determine these resistance levels?

Hi Jason,

I have now the opportunity to show how I identify a support level (resistance for me, when shorting). In this case, I looked for it after I accepted a loss of $29 or 231 pips. This morning I was watching the GBPJPY - I expect it is a matter of time before it will start falling again (I think it bounced back too much). I noticed that it's been falling for the last twelve hours, and the fall was accelerating (or so I thought).

Because of known high volatility I decided for a SL of -$30 and a TP of $60.

Within minutes after I shorted, the price went up. When I looked further to the left of the chart, I saw the price hesitated for a long time around 136.19. To me, now (after I got wiser), that looks like an example of a support line.

I made another mistake when I entered this trade. I thought the price could go back to the level of 139.33, but I was expecting it will go down. What I didn't calculate is what would be my loss if the price raised from my buy 136.478 if the price reaches 139.370 (289 pips). I didn't expect there were so many pips in between the two levels.

Nick

 

[Jason Rogers]

I lost $806 in less than 24 hours. Around 11 am, my open trades were about $40 in profit. From 11 am till 4:20AM when I decided to close all trades. I obviously didn't have a good night, I could not sleep, wondering if I should close all of them or not. I was considering to close just a part of them, but in the end I closed them all. It turned out it was a good decision, because the next day GBP increased even more.

Hi Nick,

I stand corrected. We have seen heightened volatility in both the British Pound and Japanese Yen post Brexit. It might be worth considering trimming your effective leverage (perhaps to 5:1 or even 3:1) given present conditions.

I have now the opportunity to show how I identify a support level (resistance for me, when shorting).

I made another mistake when I entered this trade. I thought the price could go back to the level of 139.33, but I was expecting it will go down. What I didn't calculate is what would be my loss if the price raised from my buy 136.478 if the price reaches 139.370 (289 pips). I didn't expect there were so many pips in between the two levels.

If I understand your charts correctly, you are using a combination of moving averages to determine your stop and resistance levels. It's still possible to place these trades with wider stops but it requires using a smaller trade size. For example, if you trade one micro lot of GBP/JPY (1000 pounds) then you are risking less than AUD 13 cents per pip (at the current AUD/JPY exchange rate of 80.12). That means 289 pips on this trade size would equate to risking $36 which is less than 2% of your current account balance.

 

[Wharris]

Hi nick, are you still trading? How are you travelling?

 

[cynic]

According to Nick's profile page, there's been no activity for over three weeks.

I do hope that you are still with us Nick, as I am sure that I am not alone in having enjoyed and benefitted from this thread.

In the meantime, perhaps others might like to share their respective experiences.

For those (like myself) who have gripes with their forex provider, it might be worth noting that this thread has already attracted the participation of a representative of one well known forex provider and one never knows who else might be reading.

Anyhow, these past few weeks, I broke with my traditional aversion to forex and dabbled with the EUR/USD.

I just closed my last remaining short position about an hour ago, and haven't decided yet, if and when, I shall resume trading forex.

I am interested to hear from others that have traded that particular (or similar) beastie and what their experience of stop orders was like.

Have you ever loved stop orders?

Do you still love them?

Or are you, someone like myself who has , after seeing them trigger in mysterious and inappropriate ways, come to avoid them like the plague?

 

[Wharris]

According to Nick's profile page, there's been no activity for over three weeks.

I do hope that you are still with us Nick, as I am sure that I am not alone in having enjoyed and benefitted from this thread.

In the meantime, perhaps others might like to share their respective experiences.

For those (like myself) who have gripes with their forex provider, it might be worth noting that this thread has already attracted the participation of a representative of one well known forex provider and one never knows who else might be reading.

Anyhow, these past few weeks, I broke with my traditional aversion to forex and dabbled with the EUR/USD.

I just closed my last remaining short position about an hour ago, and haven't decided yet, if and when, I shall resume trading forex.

I am interested to hear from others that have traded that particular (or similar) beastie and what their experience of stop orders was like.

Have you ever loved stop orders?

Do you still love them?

Or are you, someone like myself who has , after seeing them trigger in mysterious and inappropriate ways, come to avoid them like the plague?

I don't really use stop orders, although i did close out my eurusd position around the same time at 1.11433.
I'm quite the control freak and if I am unable to see what is happening on my chart I tend to be hesitant using an order! Today has been a relatively positive day, 5 out of 6 positions closed positively although positive news out from the U.S helped to to put the perverbial nail in the coffins.

 

[cynic]

I don't really use stop orders, although i did close out my eurusd position around the same time at 1.11433.
I'm quite the control freak and if I am unable to see what is happening on my chart I tend to be hesitant using an order! Today has been a relatively positive day, 5 out of 6 positions closed positively although positive news out from the U.S helped to to put the perverbial nail in the coffins.

It was a good day for me also. I closed a total of 6 trades. 4 had been opened that day and the others were old trades that I had waited on patiently for weeks. My drawdown a week or two ago, might have been daunting, if it weren't for the fact that these trades were only microlots.

Anyway it's nice to have a clean sheet again.

 

[Wharris]

Indeed, I still trade micro and mini lots, all of my trades were entered this afternoon, I have 2 trades now going which ill let run and hopefully hit my target overnight.

I usually scalp, however I gravitated back to the 1 hour chart for convenience which has paid off, I pulled 62 pips from gbpaud today, ordinarily scalping would probably have yielded the same, however I most likley would have had losing trades, I tend to trust the longer time frames so I probably won't dabble in the "noise" anymore (so to speak).

On that note I've burned enough midnight oil, time to hit the sack!

 

[cynic]

Nice one!

I exited my weakest short for a mere 2 pips just to get rid of the durned thing!

My other trades averaged a meagre 6 pips. My percentage profits, on cash deployed, for this past fortnight would be the envy of many, if only they had been generated on larger sized possies!

 

[minwa]

Or are you, someone like myself who has , after seeing them trigger in mysterious and inappropriate ways, come to avoid them like the plague?

Trading the exchanged traded FX futures on CME solves this mostly. Only downside is you have to convert funds to USD. But if you are actively speculating you are looking to make return higher than any potential loss(or gain) on AUDUSD exchange rate from funds conversion anyway.

 

[cynic]

Trading the exchanged traded FX futures on CME solves this mostly. Only downside is you have to convert funds to USD. But if you are actively speculating you are looking to make return higher than any potential loss(or gain) on AUDUSD exchange rate from funds conversion anyway.

Thanks for the tip, minwa. Should I find myself wanting to scale up into larger position sizes, I may well consider brushing the dust off some of my earlier trading systems and availing myself of the real deal.

 

[Wharris]

Trading the exchanged traded FX futures on CME solves this mostly. Only downside is you have to convert funds to USD. But if you are actively speculating you are looking to make return higher than any potential loss(or gain) on AUDUSD exchange rate from funds conversion anyway.

Hi minwa,

I haven't looked at fx futures much so my understanding of it is minimal, does it work in the sense that if the current price for audusd is 75200 and i sell a futures contract at 74000 would i lose money until price reaches that level? And once price reaches that and below I would be profiting from further decline? Or have i got that wrong? I just read the CME intro to futures and am puzzled ha. Time for my coffee i think!

 

[minwa]

Hi minwa,

I haven't looked at fx futures much so my understanding of it is minimal, does it work in the sense that if the current price for audusd is 75200 and i sell a futures contract at 74000 would i lose money until price reaches that level? And once price reaches that and below I would be profiting from further decline? Or have i got that wrong? I just read the CME intro to futures and am puzzled ha. Time for my coffee i think!

Na, that is a options contract or similar derivative. Futures are much more straight forward, for most part it behaves the same as trading the spot FX - linear profit/loss based on simple difference of whatever price you bought and sold at.

 

[Wharris]

Na, that is a options contract or similar derivative. Futures are much more straight forward, for most part it behaves the same as trading the spot FX - linear profit/loss based on simple difference of whatever price you bought and sold at.

Ahh ok got ya, I'll keep researching as time go's on i think, thanks for your response!

 

[cynic]

Na, that is a options contract or similar derivative. Futures are much more straight forward, for most part it behaves the same as trading the spot FX - linear profit/loss based on simple difference of whatever price you bought and sold at.

Please correct me if mistaken, but I was of the impression that those were quarterly forward contracts (as opposed to cash/spot).

 

[minwa]

Please correct me if mistaken, but I was of the impression that those were quarterly forward contracts (as opposed to cash/spot).

Probably ! Not familiar with those which is why I said options or similar derivative :

 

[peter2]

Yes, all futures contracts expire at specified periods, most quarterly. At expiry they can be settled by cash or by delivery of the commodity. It's important to know when the contract you're trading expires or it's first notice day. Positions bought to be held for long periods need to be rolled over to the next contract before expiry.

Retail traders are not expected to need delivery and most brokers will automatically close open trades before expiry or 1st notice day.

Futures markets operate like any other, there are bid and asks and market depth. The major difference with futures markets are that every futures contract contains specifications that describe quantity and quality of the commodity to be delivered.

Currency futures contract have differing quantities. EUR $125,000, GBP $62,500, AUD $100,000 etc.. This makes the value of each tick or price movement different. You cannot buy/sell part of a futures contract.

Forex uses a standard lot size of 100,000. The forex market allows the standard lot to be bought/sold in smaller parcels eg. 40,000, 10,000, even 1,000.

 

[cynic]

Thanks for that info peter.

Another important distinction between the cash/spot derivatives, and their forward/futures equivalent, is that those annoying daily rollover adjustments do not occur when trading the forward contracts.