Date: November 3, 2005 15:00GMT 10EST
Expert: John S. Alesia, President and founder of Brown forex
Topics:
- Finding an entry is great but is the trade worth the risk?
- Now that I have a good risk reward ratio how many lots should I trade?
- Should I trade multiple ccy pairs at the same time?
- Some real trade setups and examples.
Who is John S. Alesia?
John S. Alesia founded Brown Forex after a successful career on Wall Street. Recognizing an opportunity to capitalize on an untapped retail trading market, Mr. Alesia left an executive post with Deutsche Bank to start Brown Forex. Leveraging his years of capital markets experience with hedge funds, investment banks, and institutional money managers enables Mr. Alesia to provide sage guidance and powerful resources to the retail trader.
Session Transcript:
Finding an entry is great but is the trade worth the risk?
I get a lot of questions when talking to new traders like "Should I buy or sell EUR/USD." Well I usually have an opinion but not necessarily a trade. What I want to look for when trading is one finding the direction to go in but just as important I need to know where my risk is in the trade. Knowing your risk is knowing where your stop loss is first off.
Most new traders worry more about how much they can make and never worry about how much they can lose. So firstly find the stop loss. Second find your target. Now determine whether the trade is worth the risk. Personally I like to set up trades at a 1:1.5 risk reward ratio. So when risking 30 pips I will want to try and target at least 45.
Now that I have a good risk reward ratio how many lots should I trade?
Second aspect of managing your risk is knowing how many lots to trade. Too often I see traders who trade 1 lot no matter what. The size of your trade should be determined by the amount you are willing to risk. Lets assume your risk tolerance is per trade is 2% of your total account. That means with a $10,000 account you are willing to lose a max of $200 per trade. So your stop now determines the number of lots you will place on that trade. A 30 pip stop loss will mean you can open a position for a max of 6 mini lots on EUR/USD or $180. A trade with a 100 pip stop loss will allow you just 2 mini lots to be traded.
Should I trade multiple ccy pairs at the same time?
We like to advise new traders to stick to one currency pair at a time.
But if you are trading multiple pairs be aware of which pairs have a correlation. Understand that a long position in EUR/USD and a short position in GBP/USD may have an offsetting effect. Conversely going long both pairs may double your position. It is not impossible to trade multiple pairs, even those that correlate to each other, but understand you may want to lower the lot sizes on the trades because a move against you in one may cause twice as much in losses as you were willing to risk.
Some examples of real trades
A daytrader using pivots sees support in the way of the pivot point at 1.2005. Price is consolidating around 1.2015/25. Resistance is at 1.2076. We are willing to give about 10 pips below support of room for the price. So that means to get the 1:1.5 ratio we want to enter at a max of 1.2027 giving us a 32 pip stop loss at 1.1995 and a 49 pip target at 1.2076. If we enter at 1.2027 we can then trade a max of 6 mini lots risking $192 based on a $10,000 account and a 2% max risk per trade.
A swing trader who is looking for a longer move, over a few days may be bullish the pair as well. But that trader is looking for a longer move and thus giving themselves more room on the stop. This trader sees support at the daily low of 1.1935 and is targeting a high from a couple of days prior of 1.2268. The trader may want to give 20 pips of room on support for their trade so place a stop at 1.1915. The trader can then buy, based on the stop and target up to 1.2057 giving them a 1:1.5 ratio.
So the trader now knows if they get a signal to buy below that level of 1.2057 they can go ahead and place the trade. Let’s say the trader gets the buy signal on the break of 1.2000 and enters at 1.2010. Then a max of 2 mini lots can be placed on this trade because the trader is risking 95 pips on 2 mini's or $190.
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