Showing posts with label TUTORIAL Success Forex. Show all posts
Showing posts with label TUTORIAL Success Forex. Show all posts

Sunday, November 21, 2010

Forex Trading Mistakes

T2. Not Having a Money Management Game Plan

I am constantly amazed at the number of Forex traders and brokers that have no concept of ‘money management.’ Money management is controlling risk through the use of protective stops or hedging, while balancing the potential for profit against the potential for loss.

Here is an example of poor money management that I see almost daily... many traders refer to a trade that might lose $500 if they are wrong and make $1,000 if they are right as a two-to-one risk/reward ratio. This is usually considered a “decent” trade. What is wrong is that it is just as important to know the proper win/loss ratio as knowing how much you are going to lose if you are wrong and how much you are going to make if you are right, but what are the odds of making money... of being right? What are your odds of losing money, or being wrong?

Good money management means knowing a trade’s profit objective and the odds of being right or wrong and controlling the risk with protective stops. You are better off with a trade where you might lose $1,000 if you are wrong and make $500 if you are right, if the trade works eight times out of ten, than to take a trade where you make $1,000 if you are right and lose only $500 if you are wrong, but the trade works only one time out of three. Developing and testing money management concepts is the way to overcome this problem. An entire book could be written on money management principles, but the key is to know your win percentages along with proper risk/reward ratios.

3. Not using protective stop loss orders.

This mistake fits right in with the lack of a trade plan and money management. It is the failure to use protective stop orders once you enter a trade – not mental stops, but real stops that cannot be removed. All too often, Forex traders use mental stops because they have been stopped out in the past and subsequently watched as the market moved in their direction. This does not invalidate the use of pro tective stops – it means that the stop was most likely in the wrong place, as it was likely not a good technical stop. When a protective stop that was determined before a trade was entered is hit, it means the technical analysis was probably incorrect... your trade plan was wrong.

With a mental stop, as soon as the market has gone through the protective stop price, you no longer act like a rational human being. Now, you are likely to make decisions based on fear, greed and hope. How many times have you had a mental stop and tried to make a decision whether or not to take a loss? Typically, by the time the decision is made and acted upon, the market has run further against you. Invariably, you decide to hold onto the trade hoping that you can get out on a Fibonacci retracement to your previous stop price.

Unfortunately in many cases, it never touches that price again and you end up taking a large loss. Or, you
make the mistake of holding the trade an extra day because you hope the market moves higher the next day. But the next day, the market is lower yet and by then the loss is so large you cannot “afford” to get out of the position – and what should have been a small loss turns into a disastrous loss.

There is an old saying that ‘the first loss is the smallest.’ It is also the easiest to take, even though it may seem hard at the time. The only way to overcome this mistake is to have an unbreakable rule with the discipline to follow it that a protective stop loss order or hedge must be placed on every trade.

I have found the easiest way to take a loss is to place the protective stop order or hedge limit order the moment or immediately after entering the trade. Do your homework when the markets are slow. Place your
orders while the market is still quiet. Another rule to follow – under no circumstances should an initial protective stop order be changed to increase the risk on a trade, but only to reduce it.

Continued : Not using protective stop loss orders

Analyzing Forex Trading Learn to Make Money

Takes a look at common mistakes made in Forex trading that cause traders to lose money. He also
shares strategies that can be used to avoid making these mistakes

Huge amounts of money can be made trading Forex. While profits are definitely there for the taking,
this article was written to help you learn how NOT to make the common mistakes of a losing trader. Being
aware of these mistakes, combined with a solid trading plan can lead you to success more quickly. We see traders make these mistakes time and again. If these losing traders would just take a step back and consider why they are making these mistakes, they could turn the corner and become profitable. The following list contains the most common trading mistakes that we will cover in this article :

 1. Not using a “Forex trading plan”

2. Not having a money management game plan

3. Not using protective stop loss orders

4. Closing winning trades early and letting losing trades run

5. Overstaying your position

6. Averaging a losing trade

7. Increasing your risk with success

8. Overtrading your account

9. Failure to take profits from your account

10. Changing your trade plan in mid-trade

11. Not having patience

12. Not having discipline

Now, let’s dive into each one of these areas one by one.

1. Not using a “Forex trading plan”

Any coach in any sport will tell you, “You must have a game plan!” Well, the same thing is true in trading. I am
in constant contact with hundreds of traders and I am truly baffled that, trade after trade after trade, one of the most common mistakes a trader makes is not having a defined trading game plan.

A trader who thinks a market is about to go up will usually say something like –“I think the EUR/USD is going up to $1.3000. Where do you think I should buy it?” My response is usually something like, “What are you risking on the trade? In other words, “Where are you going to get out if you are wrong?” Often the response is silence, or perhaps a puzzled “Huh?” No thought was ever given about being wrong or where to place the stop. My next question, “If it does go up, how and where are you going to get out?” I often receive the same response. More than 90% of the Forex traders that I come in contact with have no trade plan. 

That means that they do not know what to do if they are wrong and they do not know what to do if they are right. The large paper profit they made often turns into a large realized loss because they did not know where to get out. The most important move a Forex trader can make is to develop a trade plan, before entering the trade. The trade plan should consist of these guidelines.

• Know how and where you are going to enter a trade.
• Know how much money you are willing to risk on the trade.
• Know how and where you are going to get out if you are wrong.
• Know how and where you are going to take profits if you are right.

• Know how much money you are going to make if you are right.
• Have a protective stop loss in case the market does the unexpected.
• Have an approximate idea of when a market should meet your trade objective. When should the market
begin to make its move, and if it does not move as expected, get out!

Continued : Not using a “Forex trading plan”

Monday, November 1, 2010

Study FOREX WithThe Role Of FOREX Automation And Hedging

TStep-4, To Change Forex

As a first step in our move towards STP of FOREX hedging we undertook a detailed review of the existing manual process flow, with the overriding rule/objective for the new process that we would key in data only once.

For each manual step in the current FOREX hedging process we asked ourselves a number of questions: what value did the manual intervention provide, what calculations were required, and were we just checking FOREX pricing? Depending upon the answer we would then decide whether or not it was possible to eliminate that manual step.

For example, while we could not eliminate initial data entry, we could certainly dispense with the manually re-entry of static data, such as settlement instructions. By the same token, decisions such as whether or not to hedge required a human element, while repetitive calculations such as netting did not. We also considered the investment in technology that would be required to automate the FOREX hedging process. It became
immediately apparent that this was smaller than might be expected – FOREX hedging process, we designed and executed an STP replacement. This starts by obtaining information on the various FOREX exposures online, via Web based templates that feed directly into our treasury (FOREX) workstation, Green River Computingor example, relatively simple programs using Web technology could be used to collect, collate and net subsidiary data.

The new FX hedging process

 Based upon our analysis of the existing largely manual’s Orbit. Orbit then aggregates the exposure information and sets up the appropriate trade(s). These are pushed via a secure ADI data transfer to an online FOREX multibank web portal, where they are executed with approved counterparty banks. Juniper currently uses FXall for this purpose, but any one of a number of multi or single bank portals, such as Bank of America’s FXtransact, would also be suitable for this purpose.

These completed trades are downloaded back into Orbit via the same secure ADI route, with any transfer errors being automatically flagged by Orbit. Once these trades have been downloaded to Orbit, they are locked and saved and therefore cannot be changed by the trader.

FXall’s “Settlement Center” module is used to record all trades, whether they are done online with FXall or over the phone, and thus effectively acts as a third-party trade confirmation agent. Orbit automatically recognizes those trades executed.

Treasury Best Practice Forex

Step-3 Forex Proses

Another important STP incentive for Juniper or any other growing company is the need to institute processes that are scalable, but that do not require a commensurate scaling up of headcount. The ideal situation is to be able to accommodate expanding transaction throughput without expanding payroll. Furthermore, given a certain amount of planning, achieving this scalability through FX STP is not extortionately expensive.

The Starting Point

Juniper’s existing FX hedging process involved a large number of manual steps. FX exposures were manually aggregated from spreadsheets e-mailed into treasury, before being manually rekeyed into the cash forecasting and balance sheet modules in the treasury workstation. Grouping and netting of these exposures were also done manually, as were the actual resulting trades – which were transacted over the phone, with the resulting trade details also being manually keyed in. Trade confirmations (phone and e-mail) and settlements were also manual, as were the recording and posting of the resulting accounting entries.

Obviously, a process as manually intensive as this had a number of major drawbacks. Firstly, it was extremely slow, with month end hedging typically taking three days to complete. It was equally error prone – perhaps unsurprising when you consider that data entry involved no fewer than six keying in activities. The energy expended on this inefficient process (and related corrections and reconciliations) could instead have been applied to the far more important task of determining a strategy for dealing with long-term FOREX economic risks.

Apart from absorbing too much of the time of a leanly staffed treasury team, knowledge of this type of manual process is not easily transferred to other personnel. This inevitably created problems around holidays, sickness, or personnel moving to other jobs. Finally, the existing process was simply nonscalable and would have been unable to accommodate the company’s global growth and expansion.


Step 2 Study Forex With Hedging

FOREX STP for international bulk payments, we also wanted to focus our efforts on improving our FOREX hedging process. There were a number of reasons for this. One of the most important was that FOREX hedging is already relatively complex so if numerous manual operations are also required then the whole process becomes extremely unwieldy. This unwieldiness results in a number of quantifiable additional costs.

The more predictable of these costs include the time taken to input data manually, which results in more value added treasury activities being neglected. (Just making it through the month end close becomes the singular goal of all treasury personnel). Less predictable, but much more alarming, are the potential losses that can be sustained in the case of human error, such as accidentally mis-keying a trade for the wrong amount and/or currency.

This reduction in manual activity, coupled with system features such as the locking of completed trades, also represents a significant improvement in internal controls as regards Sarbanes-Oxley compliance.

The integration of systems possible in an automated environment has also streamlined both settlement and accounting. Orbit has been configured so that, where necessary, settlement dates automatically trigger the release of the appropriate wire transfers to Bank of America for execution. At the same time, Orbit automatically writes accounting entries to a flat file that is in turn automatically uploaded to Oracle ERP system, which spares accounting personnel from having to re-key this information.

Overall costs have obviously been reduced both within and outside treasury, and treasury personnel have also been freed up to devote time to strategic value added tasks, rather than mundane operations. This in turn has obviously benefited staff motivation and retention. Finally, the new FOREX hedging process is scalable and therefore ready to accommodate future growth in FOREX volumes and the range of currencies traded.

Apart from the benefits outlined above, one of the most gratifying points about the FOREX hedging STP
project was how little it cost – less than $20,000. Furthermore, the annual costs of system maintenance and FOREXall access are minimal. As a result, the annual time saving for traders, treasury analysts and accounting personnel has resulted in a payback period of no more than six to eight months. These savings could also be reproduced for most treasuries with more than minimal FOREX activity, making this sort of an STP project an eminently worthwhile undertaking.

As a modest first step, if a treasury group does not have any budget for a treasury workstation, it could still implement some straight-through processing in FOREX hedging by using spreadsheets to upload trades into an online FX portal. Apart from more efficient order execution, this will also offer other benefits such as the ability to auto-confirm these trades using the confirmation and settlement center feature provided by portals like FOREXall.

Tutorial Step By Step And Study Forex

Step One Study Forex

For most corporations of any size, improving STP in payments and receivables has long been a major
objective. By contrast, introducing STP into FOREX transactions has historically been a rather lower priority. However, for corporations with even a relatively low level of FOREX exposure there are a number of areas of FOREX activity that can benefit from STP, including international payments, subsidiary funding and of course FOREX hedging.

At Juniper we have implemented STP for all three of these processes. (An illustration of FOREX STP in the international payments process is in the July 2005 issue of e-Forex - "Integration of FOREX STP and automation into other processes).

The three FOREX activities in question inevitably involve extensive interaction with banking systems, so consultations with banking partners - especially Bank of America - have been a key ingredient in determining the most efficient way of achieving this interaction.

And greys them out to indicate that manual confirmation is not required. The ability to use FOREX all as a trade confirmation agent (even for any manual trades) means that it is no longer necessary to check trades in two separate systems in order to submit confirms. Particularly where trade volumes are substantial, this not only saves time, but also significantly reduces the risk of errors.

To ensure appropriate segregation of responsibility, a member of treasury who is not authorised to trade confirms any manual trades. In Orbit this is done in a trade confirmation screen, and in FOREX all via the Settlement Center.

The member of treasury authorised to confirm also issues settleructions ment instto the counterparty bank via phone or FXall as appropr settlemeiate. Allnt instructions are standard repetitive approved delivery instructions, which cannot be changed without the written approval of senior management.

The Benefit Forex

The new FOREX hedging process has netted a number of significant gains, both for Juniper’s treasury and the corporation as a whole. Prominent among these gains has been the drastic reduction in the time taken to complete the monthly FOREX hedging process – down from sixteen hours to one hour. The time required to complete confirmations, netting and settlement has contracted even more dramatically – from four hours to ten minutes.

Data is now keyed once, rather than six times, so the probability of keying errors has also been reduced.