They get into the “guts” of the method only looking for that big, mysterious, slap-your-forehead, jaw-dropping “secret” which will suddenly unlock the mysteries of the Forex universe and make them Master and Commander of every Forex pair. All too often, they find themselves completely disappointed or the “guts” reveal something they’d already heard about (but had not practiced). Amateur traders will then dismiss the method as ‘too simple’.

Or, the amateur trader will look for that complicated formula, cryptic combination of indicators and all too often what they actually discover is a set of simple indicators working together in an uncommon way, and they say, “Well I could have done that!” — and they become disappointed or frustrated, because they wrongly assume that any method MUST BE complex, it can’t possible be SIMPLE! So, they shelve the method or return it and complain that it’s “not complicated” enough.

This is a serious mistake – because the amateur trader will then repeat this error method after method and they will never take the time to learn and understand the full process of trading.

Don’t make this mistake. Understand that most trading methods out there are not complicated. They weave a smaller set of rules together in a simple manner (simple enough that anybody can apply them) but apply them in an uncommon way. Complex systems are for computer geeks and big banks — if you can’t understand something, you can’t possibly apply it.

Never skip ahead when learning a powerful new method for trading Forex. Make certain you learn the setup, entry and exit rules (which should exist in a good trading method); that you learn how to protect your trade with stops; and that you learn how to apply your method on a timely basis (be it hourly, daily or weekly) to get the most out of the method and to learn how all facets of what you learn work cooperatively to make you a better trader.

Remember, Simple but Powerful — using just a few indicators or rules applied in a non-textbook approach — is the key to getting an edge in the markets.

Related posts:

1. So many forex traders are NOT succeeding? Why? Today I had a conversation with Bill Poulos, I posed...

Let’s assume the current bid/ask quote for the EUR/USD is 1.3802/05 and you want to take a long (or Buy) position because you believe the Euro will gain on the Dollar.

We’ll also assume that you are only buying 1 Standard Lot.

When you buy this pair, you are actually buying 100,000 Euros for $138,050 US Dollars. Using leverage, at 100:1, you would need to have an initial margin deposit of $1,381 for this trade to take place.

Let us then assume that the Euro indeed gains on the Dollar and trades now at 1.3865/68 and you decide to sell and take your profits. You would sell you 1 Standard Lot at a profit of 60 pips (1.3865-1.3805).

When you sell this pair, you are selling 100,000 Euros for $138,650 US Dollars. Since you bought the 100,000 Euros for $138,050 and sold them for $138,650, you made a cash profit of $600.

If on the other hand the Euro went down to 1.3775/78 and you sold at 1.3775, you would have a loss of 30 pips, or $300. ($138,050-$137,750).

When using margin and leverage, it is imperative that you employ sound risk management rules to ensure that your account equity never falls below margin requirements — if it does, your position will be automatically liquidated and you will sustain a significant loss.

Related posts:

1. Learning to trade Forex – Learn To Trade It THIS way… Our research and surveys have confirmed too many new, inexperienced forex...

Today, I want to add to that by talking about risk management. This is perhaps the area where 95% of Forex traders make mistakes and lose money. Managing risk is about reducing your losses AND about protecting trade capital by employing specific strategies to accomplish each of these simultaneously.

What do I mean by that and why is it important?

First, most Forex traders make simple trading mistakes: they take too large of a position and expose themselves to serious and steep losses should the markets move against them. Second, they fail to protect their ENTIRE account by allowing ONE trade to put their full account balance at risk.

Here’s a quick and perhaps extreme example:

Suppose a forex trader has a $10,000 account balance. The forex trader takes a 5 standard lot forex trade on the EUR/USD pair. The forex trader now has at least $5,000 ‘margin’ at risk (or 50% or more of the forex trader’s account balance).

For every 1 point that this forex trade moves against the forex trader, the trader loses  1/2% of the total account balance. At first glance, that may not seem like a steep loss. However, should the Forex trade move a total of 50 pips against the Forex trader, and the trader subsequently exits the position, the forex trader’s total loss would be an INCREDIBLE $2,500! (25% of the trader’s account balance). This is poor risk management and it frequently leads to complete wipeouts of Forex trading accounts.

How did we calculate that loss? 1 pip for the EUR/USD pair is equal to $10 (on a standard lot trade). A 50 pip loss equals a monetary loss of $500; and remember our example forex trader had traded 5 standard lots — for a whopping loss of $2,500!

Instead, any trading method should teach you very specific guidelines for incorporating money management and risk management into every forex trade you take.

Money Management should involve the distribution of a forex account among the various trades a forex trader takes. For example, forex traders should never trade their entire account on a single trade, and should rarely have more than a few open positions. By utilizing multiple positions, the forex trader distributes the risk among each of the forex trades they have taken.

Risk management should involve the maximum risk in any SINGLE Forex trade, and should limit the impact of a losing Forex trade on the trader’s account balance.

Here are two quick examples:

Money Management: A theoretical forex trader takes 4 separate one lot trades on four separate pairs. Assuming here that each of the pairs have a pip value of $10 on a standard lot, then the total amount of the account being margined across all four trades is about 40% (it may be higher depending upon the actual pairs traded. With proper stop loss management, however, in conjunction with risk management, it is UNLIKELY that the forex trader would incur a complete 40% loss.

Carrying forward to risk management: In each of the theoretical forex trades above, the forex trader risks no more than 2% of the trader’s total account balance on each forex trade. That means a maximum loss of $200 per forex pair traded if ALL FOUR trades are stopped out. Total loss in this case would be $800 — a much more recoverable scenario than the $2500 in the first forex trade example.

Furthermore, Risk Management has the capacity to make loss recovery easier. For example, in the first case, where the Forex trader lost $2500, the trader would need a nearly 250% gain on their next trade to recover the lost value on the first trade.

In the second example, however, the forex trader would need only an 8% gain.

A second part of Risk Management not typically discussed in poor trading methods is protecting gains. Though this begins as a discussion on Exit Strategy rules, it is also an element of risk management. Once a forex trade turns profitable, it is imperative that the forex trader manage the gains with smart stop loss management. The worst thing a forex trader can do is allow a profitable position to reverse and become a losing position. Thus, managing risk extends to the protection of gains on a forex trade, just as it does protecting against deep losses on a forex trade.

Therefore, in considering any trading method for use in your Forex trading, you must ensure that risk management is not only discussed, but clearly explained in conjunction with the use of the trading method. If risk management is not present, unclear, or not specific to the trading method, you should avoid using that trading method.

Related posts:

1. Forex Trading Methods – Finding the right one – part 1 Today I want to take a few minutes to talk...
2. Forex Trading Methods – Finding the right one – part 3 Technical Analysis: In my last articles, I shared that for...
3. Forex Trading Methods – Finding the right one – part 4 End of day trading: In my last articles, I shared...