For many new foreign exchange traders, the promise of getting rich quickly is hard to resist. So every day,
Many people from all walks of life began to trade in the foreign exchange market.
although this is;; give your eyes to the commodity “; mentality is a necessary condition for traders to tide over difficulties.
Every given trading day, people should pay attention to other things first.
Considering all types of transaction settings, no matter how perfect the settings are
There may be problems, and the deal may eventually fail. It doesn’t matter — everyone does.
The foreign exchange market is inherently random to a certain extent, which does not mean that the market is completely random – no-
However, it is too complex and requires a certain degree of randomness.
We cannot get all the information that all market participants are responding to.
Or, predict the reaction of any of them to the information
This randomness is necessary for the normal operation of all financial markets.
If everyone knows the direction of the market, there will be no market. Because there are always buyers and sellers in the market.
Randomness cannot be removed, but it can be managed.
Back to the perfect setting of our failure: How could this happen? Very good.
Fortunately, as part of the quarterly internal accounting process
Some random multinationals just bought the currency you sold to increase its value. in other words,
Move the price according to your position and trigger the stop loss order. If you are smart, you can control this randomness,
Or, risk can calmly accept losses in a logical way and live an extra day.
This is just a part of what every trader can experience on a dog day afternoon.
How do you deal with this “problem”? “Danger”;? There are many books on this topic, and there are many ways to achieve it.
But in fact, what we said is: “If it is unfavorable to you, how much do you want to lose in this transaction?”
The answer should come from your money management rules. This is a slightly different topic.(We will discuss this in the next article.)
You may say that most traders follow the rules, and the risk of any position cannot exceed 1-2% of your account.
So, what we need to deal with now is, how do you ensure that your account only bears x% risk?
Many novices believe that x% margin should be used for every transaction.
However, this is very dangerous and not suitable for proper risk management for simple reasons.
These calculations do not even take into account your transaction settings.
If you are doing a long-term transaction to prevent loss of 1000 points,
Before the price reaches the stop loss level, you are likely to face additional margin.
On the other hand, if you make 15 points in after hours trading, your profit will be negligible.
You must consider the correct transaction settings and select the location size based on these settings.
Transaction settings must determine the size of the warehouse, not vice versa! This is one of the most important aspects of retail foreign exchange trading.
Many traders don’t understand. The following example illustrates:
Suppose that MT4 intermediary has a mini account of 10000 US dollars and can trade 0.01 hands(the minimum transaction size is 0.01 x 10000=100 units).
Your margin requirement is 1%(i.e. the maximum leverage ratio is 100:1).
Assuming the current Euro/USD price is 1.2600, you will see the following good settings:
You want to do more at 1.2500. Because this is a strong support position. Your analysis tells you that you are likely to move up there.
Your analysis also shows that if the price is less than 1.2050
The trend is unfavorable to you. You should issue a stop loss order to exit the trade.
1.3500 Strong resistance was found and all indications indicated that prices would reach this level in the coming weeks.
So you take it as your exit goal and set your interests at this level.
You continue to set your limited purchase price order at 1.2500, but before you do so, you must calculate the best warehouse size.
How much do you want to spend 1.2500?
Invalid method:
And you will remember that someone said that using 1% of the available profits in a certain place is equal to taking 1% of the risk.
If you calculate quickly, you will find that your position should be a mini hand or 10000 euros/dollar. Make yourself happy
The input buying limit is 1.2500, and the stop loss is 1.2000(slightly lower than the threshold of 1.2050, so the transaction is unimpeded).
Unfortunately, investors’ interest in Spanish bond holdings has risen sharply, bringing an unexpected blow to the euro.
Unable to maintain support level. EUR/USD fell to stop loss level. You just lost the deal.
Nothing, just risk 1% of your account. The EUR/USD points for 10000 units of transactions are 1 USD. You lost 500 points.
That means you lost $500, and now your balance is $9500. But wait, $500 is not 1% of your account.
5%！ “; risk amount”; if the transaction is unfavorable, the maximum amount that may be lost…… So if you risk only 1% of the account,
How can you lose 5%? Obviously, your calculation has a big problem. Aren’t you glad you’re doing a trade presentation?
Otherwise, it would be a very expensive lesson.
Correct method:
You understand now; risk amount “; ” is different. Use blank;. In fact, they are two different things.
The amount at risk is the amount lost when the price conforms to the loss prevention letter. Fortunately, this is easy to calculate. The method is as follows:
Position size formula
where?
X is the warehouse size(base currency unit) and the value we want to calculate.
R is% of the account you are willing to take risks
B is the account balance.
T is long/short indicator: short is – 1, long is+1
P1 is the entry price
P2 is the price of loss prevention(termination)
By changing these values, you can:
Positional dimension equation, use instead of example number
We get the following values:
X=2000 units
Therefore, the ideal position size is 2000 euros per dollar.
We know that all currency pairs in dollars have a fixed value of $1 per 10000 units, so we can quickly check.
Therefore, the fixed point of 2000 units is 0.20 dollars. Multiply by 500 to get “0”. Risk amount “; 100 USD value;
This is 1% of our $10000 account, so everything is going well. The above formula applies to all dollar/XYZ and XYZ/dollar pairs.
The value of the intersection depends on the price of the default USD/XYZ pair, so it is not applicable to the intersection(ABC/XYZ).
We can also use variations of the above formula for calculation; “Compensation”; or, if the transaction goes as planned, you will get:
Calculate compensation amount
(Note: The positions of P1 and P2 are opposite to the risk formula.)
where?
W is Win. Compensation “; quantity and quantity we want to calculate
X is the position size we calculated.
T is long/short indicator: short is – 1, long is+1
P1 is the entry price
P2 is the price of loss prevention(termination)
Knowing the amount of risk and compensation, we can determine the proportion of risk and compensation.
We can also determine our mathematical expectations for trading systems or strategies. This is the most useful,
although the information we collect is often not statistically reliable.
We will do so in a future article. “;” Mathematical expectation of foreign exchange “;
The above example also assumes that a highly liquid market exists at all times.
This means that the order is completed at the correct price you want, which is not always the case.
If the order does not decline a few points, additional losses may occur, or it may not be large.
It depends on how big your account is; “Some ideas”; yes
If you are a trader who trades in a relatively large position in the short term; “Some ideas”; that adds up to quite a lot.
On the other hand, if you are a trader with swing or warehouse, you can use a small warehouse to get hundreds or even thousands of points for each transaction.
In the long run, then, the points here and there will not have much impact.
How large is the resulting difference, which is “relevant” to the average. Risk amount “; trading system or policy
The higher; “Risk Amount”; slipping will bring you more pain.
In addition, there are many other ways to manage foreign exchange market risk.
Including the use of foreign exchange options and other means to offset unexpected price fluctuations.
These functions are slightly different and complex, which is beyond the scope of this article.
