Tag: position size

  • Trading Myths That Need to be Told!

    Trading Myths That Need to be Told!

    3 Trading Myths That Need to be Told!
    Surprisingly, you can find so many myths and misconceptions in trading and get the idea that they have become common knowledge in trading. They can actually hurt your trading.

    By Guy Avtalyon

    When you start trading, you can be faced with too much advice that other people may give you, and some of them might be about trading myths. Yeah, there are trading myths that need to be told. I know you may think that paying attention to some trading myths could give you more profitable trades. But they are myths. They don’t really exist. Some of them might seem reasonable, but you have to check them. What if some profitable trade came randomly? Honestly, you can not take it as a truth. I’ll point out some of them to help you avoid useless behavior and waste precious time.

    You have to understand why they are trading myths.

    Trading myths: Only one winning strategy

    Honestly, I have heard so many times traders saying that one winning strategy is enough for the whole life. Not many traders would admit they are looking for only one perfect strategy that can work in any circumstances, in any market condition, one strategy that never loses. Based on my experience, many traders are looking for that exactly.

    Keep in mind, the majority of profitable traders have approximately 50% winning trades. The point is to have more profits on winning trades and have fewer losses on losing trades. The number of trades you take isn’t important. You might have one winning trade and three losing trades and still be profitable.

    You couldn’t be more wrong if you think that some profitable traders are winning all the time using only one strategy. That’s impossible. Also, it’s impossible to have only winning trades and beat the market all the time.

    What you can find is some scammy platform offering only one but winning strategy. It would help if you were careful because all data they present you are based on past performances and might not work in the future. 

    As I said, all you need is to be right over 50% of the time. That’s exactly how you can produce huge returns. You should forget that one perfect strategy, there are more possibilities not to find it ever. Try to create a strategy that will provide you more wins than losses. That’s the whole wisdom.

    The entry point is more important than the exit

    Traders-Paradise wrote so many times about the importance of the exits. Yes, the entry point is important, but when you know where and when to get out, the trade is more important. The exits show how much you know how to take profits. So, let me know how this doesn’t deserve your full attention.

    What else do you have to take into consideration? Position size. With the wrong position size, your entry points and exits mean nothing. If you have the wrong position size, you’ll drain your account in a few trades. The good entry points are important, but we’re talking about the trading myths if you think they are essential. To make this thing simpler, think about all parts of the trade as the most important. Never underestimate any of them. Being dependent on only one aspect of trading is the worst choice. You’ll need them all if you want to be profitable.

    Trading myths: Trading is gambling.

    Really? If you really think so, you’re wrong. There are some similarities in vocabulary, but that’s the place where similarities end. For example, a gambler places a bet. But traders place trades.

    The main difference comes from the prospects and control. You cannot control roulette, for example. All you can do is to pick from proposed odds and place a bet. The rest is a matter of luck.

    You have more control over the probabilities in trading. Let’s say you notice a pattern that has a 65% of breaking out and a 35% chance of failing in your chart. What would you do? 

    First of all, you should use a risk/reward ratio of at least 1:3. This means you’re willing to risk $1 for $3 in profit. So, you have the control. You’re the one who is going to decide when to sell. For this example, let’s say you place a $2,000 trade. You decide to set a stop-loss at 5%, and your profit target is at 15%.

    Let’s calculate the expected value of this trade (assuming that both the Take Profit and Stop Loss of an asset has 50% chance for both of them. To check for actual stats about assets, please check on our Trading Strategy Planner):

    (2000×0,15)-(2000×0,05) = 300-100=200

    The expected value is $200. But you can improve it if you find better probability setups, for example, 70%, or if you use a better risk/reward ratio, for example, 1:4.

    The odds are more flexible in trading, and you have control.

    You can find a lot of trading myths out there. I pointed out three that are the most common. If you know that something is a myth and not a real issue, you’ll have the advantage in the market. You will not waste your time to examine actually losing strategies or seeking the holy grail. Moreover, you’ll become a profitable trader faster. 

    Just keep in mind, no one has winning trades all the time. 

    You don’t need to win every single trade to be profitable. You’ll need time to acquire the knowledge but investing your time is a better choice than losing hard-earned money. Spend some time to learn and master trading, test your strategy, tweak it if necessary, and do it before you place the trade. Trading isn’t just simply picking the entry point randomly. You’ll have to know the right time to enter the trade, the right point to exit the trade, and the position size. These are essentials.

  • Stop-loss First, Then Consider The Entry

    Stop-loss First, Then Consider The Entry

    Stop-loss First, Then Consider The Entry
    In stock trading, the essential part is to move quickly in and out of the position to profit more.

    Guy Avtalyon

    Everyone who even thinks about trading must understand the importance of stop-loss and why the Traders-Paradise team likes to say stop-loss first. 

    The stop-loss is one of the simplest tools from any trader’s toolkit. This order is connected to the stock’s movement, no matter if the fundamentals for the company have changed. The stop-loss first,  because if you use it you’ll have a greater chance to outperform the market. Let’s explain this. When the price of the stock goes down, the stock becomes more volatile, which means more risk. 

    Correlations between stocks and the market increase more when markets are dropping than when they are growing. So, the portfolio risk rises, and therefore diversification impact reduces. Increased volatility and higher risk, can expose stop-loss order as extremely important in risk exposure control. The gain could be potentially made by reducing the risk and getting a higher risk-adjusted return.
    Using stop-loss strategies you can reduce your emotional reactions while trading, and overcome the volatile market. So, the saying “stop-loss first” covers many situations when it is beneficial and we’ll show you some of them.

    Why stop-loss is the first consideration

    Stop-loss is the primary guarantee for profiting in the stock market. When you set your stop-loss order you’ll avoid risk, protect your principal, and survive the market volatility. It’s like the insurance premium.
    Risk control is the most important. For example, you just learned to ride a motorbike. What you have to know as a must?  You’ll have to know how to control the speed of falling. You’ll be safer.
    But when it comes to stop-loss orders, not every trader is confident where to set this order. Some even avoid thinking about it. Let us explain something. The stock market is a risky one, while you have one winning trade you might have up to ten losing trades. Don’t worry, that’s normal. But you cannot depend on good luck or count on it. What do you need? Skills and capacity to profit consistently. Otherwise, the stock market will dump you out. 

    Why is stop-loss important?

    One of the reasons to use stop-loss is because you trade with limited capital. That’s the rule, no matter if you are the richest trader in the world. Limited capital is required due to the necessity to protect your whole capital from losses. It is possible only if you use a stop-loss order. In other words, you must know what the maximum losses you can take per trade, per day, week, or month. That is trading discipline. You can maintain it only if you set a stop-loss order for each of your trades.

    Moreover, if you consider a stop-loss first, before your entry point, you’ll be able to profit faster and reach your financial goals. In stock trading, you don’t want to hold stock for a long time, and you’ll want to sell them. But if the desired price isn’t reached,  you’ll need to close the losing position as fast as possible and move onto another trade. Of course, you’ll have to compensate for your losing trade elsewhere. That to be said, in stock trading the essential part is to move quickly in and out of the position to profit more. Move your money quickly and with profit, that’s the point. But if you do it randomly you’ll be faced with losses. You have to ensure your trades. How to do that? By using stop-loss first, then you can think about new entries. Also, the bounce backs will be easier in case you have losses. The math can confirm that.

    For example, it is easier for $1000 to fall to $800, but a lot more difficult for $800 to bounce back to $1000. This is a loss of 20%. To compensate for this loss you’ll need about 25% appreciation and come back to the initial capital. But even after a 100% bounce, the stock will be back to its buying price. That’s why you need to use stop-loss orders. If you wait there is a chance for momentum to go more against you.

    What does stop-loss determine 

    In trading, using a stop-loss order is important to overcome the imperfection of indicators. You have to exit a trade if it goes against you. If you’re a buyer, your stop-loss order will be a sell order. Consequently, if you’re a seller your stop-loss order will be a buy order.
    If you’re a buyer, the stop-loss order is a sell order. And vice versa, if you’re a seller, it’s a buy order. For example, if you set your stop-loss order at 3%, you’re actually setting the amount of money you’re prepared to lose per trade.
    Stop-loss relates to indicators, money, or time.  It’s up to you to choose what type of stops you want to use. For instance, you’re buying a stock at $50 because the indicators you use are showing that for this particular stock potential gain could be $100. This means the stock price could reach $150. Your initial stop could be at $25 which is 50% of your initial capital and to get a chance to make $100. Here we come to the risk-reward ratio. In this case, it would be 100:25 which is 4:1. 

    In short, it determines how big a position to take.

    Why to use stop-loss first?

    To avoid the concentration of positions

    As a trader, you’ll run the risk if you extend your exposure excessively. For example, if you keep holding onto positions or average them, then the concentration can occur in your picked stocks.
    For example, you bought a stock at $50 and if it goes down to $45, you might want to average your position. You’ll want that to reduce the cost of holding, for instance. But if the stock price continues to drop, you might be motivated to average your position again. So what could happen? You’ll fall into the loop. You’ll repeat this mistake, and repeat again and again in an attempt to reduce the cost of holding. The better choice would be to use a stop-loss order at the level of the first decline and cut your position. Why would you like to keep a few positions and end up overexposed to their cumulative risks?

    Getting higher leverage  

    In stock, trading leverage is important because it provides you to trade with margin. For example, you put in a margin of $100.000 into your trading account. But you want to trade a stock whose current price is $1.800. So, you could buy about 55 shares. But your broker allows you 4 times more leverage because the company is highly liquid and you now can open positions up to $400.000. Instead of 55 shares, you can buy 220 because it’s the cover order. Let’s assume that the support level for this stock is at $1.750 and you set your stop-loss at $1.700. Let’s calculate your trading risk.

    220 x (1.750 – 1.700) = $11.000

    Since you have a margin of $100.000 in your account, the cover order reduces the risk. Yes, but only if you plan a stop-loss first.

    Advantages of this order

    If you count a stop-loss first, you’ll be able to cut your losses and you’ll be able to protect your trades against bigger losses when the stock price drops sharply. Further, the stop-loss will be automatically triggered if the stock price moves to a certain price. Moreover, you can maintain the risk-reward ratio. For example, you are willing to take a 3% or 5% or 10% risk to get a particular profit. A stop-loss order will help you to achieve that. One of the advantages is that you’ll be able to make trading decisions without emotions and despite the market noise. Also, the stop-loss will help you to execute your trades based on your trading strategy and to stick with it. 

    Disadvantages of using a stop-loss 

    Nothing is 100% sure in the stock trading so even the stop-loss has some drawbacks. For example, you set a limit order and also, you set a stop-loss order, to buy a stock on a particular date. What if your stock opens at a lower price (gap-down) during the pre-opening session? Well, your stop loss will never be triggered. You will end up with losses. Here is a possible scenario. You set a stop-loss at $25, but the stock opens on a gap-down at $23. The stock price didn’t reach your stop-loss so your sell order will not be achieved. 

    Also, a stop-loss can be triggered by short-term fluctuations. For example, the stock price first fell to $24 but then bounced and Increased to $35. But you set the stop-loss at $25 and your holdings will be traded automatically as that price is reached.
    When you calculate where to place a stop-loss order examine what was the range of the historical fluctuation for that stock. For example, you will not place a stop-loss at 3% for the stock with a daily fluctuation of 6%.

    If you want to be a profitable trader, you’ll need to plan every single action. Just like you know the buying price, you must know where to set a stop-loss first and take a profit level. If you don’t do this well, the whole process might end up in big losses. Also, poor stop-loss orders can cause them. The stock trading history is full of both great and ugly stories, so many ups and downs, winning trades and failures.
    Learn stop-loss first, then consider your entry! That’s the whole wisdom.

  • Best Lot Size In Forex – Which to Choose?

    Best Lot Size In Forex – Which to Choose?

    Best lot size in Forex - Which to choose?
    The lot size matters because it has a great impact on how much market movement will change your account.

    To know what is the best lot size in Forex we have to know what lot size is. Particularly if you just stepped to this world of currency trading. The lot represents the smallest trade size you can set on the forex market. Keep in mind that the lot size will reflect how much risk you are willing to take.

    Without a doubt, the forex market can produce unbelievable growth. For beginner traders, it sounds promising but if you don’t understand how the forex market works, your chances to have success are close to zero. Everyone would like to know what is the best lot size in Forex to start the trading. First of all, you have to know that your account must be kept safe. What does it mean?

    If you choose the wrong lot size and have several losing trades in a row, which could happen even for the experienced traders, your account is at risk. It can be closed and deleted. For that not to happen, you’ll have to choose the best lot size in Forex. At least the right one. 

    Everyone will tell you to choose the best lot size, but how to do that? For example, you can use risk management as a great tool. You have to decide what amount you are prepared to risk without consequences. The same comes both for your demo trading account and for your real trades. 

    The lot size affects how much a market move changes your accounts. For example, a 100-pip move on a small trade is not the same as a 100-pip move on a large trade. 

    What is the lot size in Forex?

    Forex is traded in precise amounts that are called lots. The Standard size for a lot is 100.000 units of the base currency. However, there are other lot sizes such as Mini lot size with 10.000 units, Mikro lot size with 1.000 units, and Nano lot size with 100 units. A lot represents the predetermined number of currency units you can buy or sell when entering the forex trade. 

    The standard lot in forex trading represents 100.000 units of the account currency. For example, if you are trading a dollar, this means your trade value is $100.000. Since the average pip value for the standard lot is roughly $10, this means every 10 pip move in the forex market will produce you $100 of profit or loss. Experts recommend trading this lot size only if your account is filled with at least $25.000.

    As we said, the mini lot size represents 10.000 units based on your account currency. If your account is in dollars, the average pip will be about $1. Do you think it is modest? Well, the forex market can move for 100 pips per day and you can profit or lose $100 in your trading in an hour or two. Experts’ recommendation is to trade a mini lot size only if you have at least $2.000 on your trading account. For beginners, they have a suggestion, also: Avoid this lot size.

    The micro lot size was the smallest lot size for a long time. It represents 1.000 units with a pip value of 10 cents. Experts highly suggest to the beginners to trade forex in this lot size. The suggested account value for trading in micro lot size is from $200 to $500, which varies depending on how many pairs you want to trade. 

    Several years ago, arrived the nano lot size with its 100 units of currency and an average pip value of 1cent. Beginners may start trading this lot size at just $25. You cannot find a lot of brokers that will offer you to trade this nano lot size but it can be useful to figure out how your new trading strategy is working, so you can use this lot size for testing it.

    How to choose the best lot size for your forex trading?

    One of the best criteria is to determine your risk. You can calculate it in percentages with regard to the rule of 1%. This means in case you have to close out your trade for a loss but your risk has to be less than 1% of your total account. For example, if you have an account with $5.000, you shouldn’t risk losing more than $50 in any position. If your limit risk is 0,5% then you can lose $25 in any position.

    Trade size is an important factor since larger lots boost profits and losses per pip. To identify how big your position size should be, use calculation cost per pip. Always calculate it.

    How to calculate the trade size?

    As with trading stocks, for every open position, you’ll need a stop-loss to set. In other words, you have to figure out where you want to exit the trade if the market starts to move against you. 

    There are numerous ways to set stops. You can use the main lines of support and resistance to place the order. For example, price action, , Fibonacci, pivots, can help to find these values. The point is to count the number of pips from your open price to your stop-loss order.  

    The last action in discovering the best lot size is to define the pip cost for your trade. Pip cost means how much you will lose, or gain per pip. When your lot size increases your pip cost will do the same and vice versa. So, how big should trade size be?

    Let’s calculate the perfect cost per pip using the 1% risk rule, a $5.000 account, and a stop-loss 10 pips away to find the best lot size in Forex trading. Let’s do some math.

    Starting balance = $5.000
    1% risk x 0,1
    Trade risk is $50
    Trade risk : Stop-loss in pips = $50 : 10 = $5
    5 : 0,0001=50.000

    This means you can trade one lot of 50.000 for $5 per pip cost.

    Determine position size when trading Forex

    In Forex trading, the position size comes before determining entry or exit levels. That is to say, it is more important. What does it mean? Despite the prevalent thinking that the most important thing in trading is to have the best possible strategy, in Forex trading position size is more important. Your position size shouldn’t be too small or too big if you want to avoid taking too much risk. The same comes with taking a too small risk. Taking too much risk could lead you to drain your account to zero and quickly.

    The position size is defined by the number of lots and the size of the lot you buy or sell in Forex trading. The risk you are taking consists of two parts: account risk and trade risk. You’ll have to fit these parts if you want an excellent position size. Your position size doesn’t depend on the market condition or your setups. It even doesn’t depend on your strategy. It is all about account risk limit per trade, pip risk per trade, and pip value.

    You can calculate it. Here is the formula

    the amount at risk = pips at risk x pip value x lots traded 

    The number of lots traded represents your position size.
    Let’s imagine you have a $5,000 account and you risk 1% of your account on any trade. Your amount at risk is $50. If you’re trading the EUR/USD currency pair, you may decide to buy at 1.2051 and place a stop loss at 1.2041. This indicates you’re willing to put 10 pips at risk or $100.

    Let’s imagine further that you are trading in mini lots. Any pip change will have a value of $1 So, put this in the formula.

    $100 = 10 x $1 x lots traded

    Let’s divide both sides of the formula by $10, and you’ll have

    lots traded = 10

    This means you are trading 10 mini lots. But this number of lots is equal to the one standard lot, so you could trade one standard lot, right? But what if the result in this formula is, for example, 7,18? That would mean that you should trade 7 mini lots and one micro lot.

    Bottom line

    The truth is that Forex traders usually trade in mini lots or micro-lots. You might think it isn’t so sexy, but it is a more secure path. When you keep your lot size as small as possible you have more chances to play this game longer and profit. The reason behind this is that these sizes of lots represent the ideal balance between capital you invest and the risk you are willing to take. Moreover, if you use a higher lot size and have less capital on your account, it is more possible to end up with empty hands than to have any profits. In other words, you will have losing trades.

    The beginners should start to trade forex in micro-lots size or mini lot size. After they gain experience and confidence, they can pass to the next level. Also, as in any trading activity, you have to maintain balance in your trading account. One of the most important actions in trading is extremely visible here, in forex trading. The usage of stop-loss and target levels is extremely important. 

    In conclusion, the best lot size in forex trading depends on your capital, experience, goals, risk tolerance. Never risk too much, or the risk you’re not able to handle. Risk management is an essential part of any trade.

Traders-Paradise