Don’t fall into the trap, read on to discover top secrets boom and crash traders don’t pay attention to
Forex is a very risky business. In fact, any business which involves money and humans always come with a high level of risk.
Hence, to be on the safe side, adequate knowledge is needed. While trying to find out why many traders become unsuccessful, I discovered that trading psychology is one of the issues in which many traders do not pay attention to.
To many boom and crash traders, seeking for a profitable trading strategy seems to be a problem to them. If they can find a profitable strategy, they will succeed in forex trading.
For that reason, they go about scouting for every available strategy that someone will testify about its validity with over 95% profitability. The problem however, comes into play when these same traders realize that the same strategy cannot give them their expected result.
Hence, they go scouting for another strategy. For that reason, many traders (especially) the newbies have not come to realize that success in forex is determined by a complex set of factors (not necessarily a single factor).
These factors work together. They never work in isolation!
Hence, today I will address some top secrets which most boom and crash traders do not pay attention to but it holds more than 50% of their success rate in the forex market. This factor is called RISK MANAGEMENT
Risk management is a complex word in its own. It comprises so many topics incorporated in itself. A lot of professional traders rarely talk about it because it is one of the big hidden secrets of successful trading. In the words of a friend, risk management is the only validated, sustainable, and reliable trading strategy that never fails. Why would someone make such a statement?
Is he trying to condemn the works, publications, strategies and videos of other professional traders? Well, when these words came into my ears, I had to pay attention because often, the results and solutions we seek tends to come from sources we belittle a lot. Hence, after making my research, I believed that what he meant to say was, risk management contributes greatly as the key to every validated, sustainable and reliable trading strategy. This is because, a good risk management holds the key to a strategy’s set up, back testing, sustainability and reliability.
What do I mean by that? With a proper risk management, you can learn, grow and earn perfection at ease and with time.
These three brings rewards called PROFIT. Neglecting these three brings what is called LOSSES. A good risk management takes care of fear and greed; the two emotions that makes us take inappropriate trading decisions.
Risk management considers the following details:
5. Free margin
6. Margin level (%)
7. Lot size
8. Risk to Reward ratio
9. Trading plan
What is Balance?
Balance is simply the amount of money (capital) in which you deposit into your trading account. An increase or decrease on your account balance depends on your profit or loss. After a close position (which ends in profit), your balance will increase. After a close position (which ends in loss) your balance will decrease. Using the picture below, the balance of the account is $11.12. This is because, a balance never increases or decreases until the open position is closed.
What is Equity
Equity is simply the amount of money available for another open position. Your equity increases as your open position (running trade) is in profit and it decreases as your open position (running trade) decreases. Using the picture below, the equity is $13.64. This is because of the realized gain made from the open position is $2.52.
Profit and Loss (P/L)
Profit is the addition in balance realized from closed position(s) while loss is the subtraction in balance realized from closed position(s). Using the picture below, the profit is $2.54. This is because of the realized gain of $2.52 made from the open position.
A lot is the unit of measurement for any position size in all the foreign exchange markets. Lot size is always standardized and calculated to suit an open position that a trader can take in forex.
1 lot size is called ‘a standard lot’ while 2 lot sizes is called two standard lots.
0.10 is called a mini lot while 0.20 is called two mini lot sizes
0.01 is called a micro lot while 0.02 is called two micro lot sizes
0.001 is called a nano lot while 0.002 is called two nano lot sizes.
An increase or decrease in lot size(s) SHOULD depend upon three factors: Equity, margin and leverage. This is a secret most boom and crash traders do not pay attention to.
For Deriv.com which offers a leverage of 1:100 in demo, the smallest amount of equity that can support a lot size of 0.20 is $23.00. However, when a real account is considered, $6 account balance can successfully permit an open position with a lot size of 0.20. This is because of the leverage ratio of 1:500; a trading leverage that permits little margin that can allow a real account to risk five times (5x) of what cannot be risked in a demo account.
Using the picture below, one can easily know where (the circled zone) to either increase or decrease the lot size of the trade.
Leverage enables a trader to take open positions with a comparatively small amount of capital; a capital that appears too small for a trade. For instance, it is impossible to have Boom and Crash open position with $10 in demo account. This is due to the leverage of 1:100 in which the broker offers for demo accounts. However, with a real account which has a leverage of 1:500, a $10 account can accept an open position of 0.20 in Boom and Crash.
The equity in which a trader must deposit to enable him have an open position. For Boom and Crash, the margin requirement varies depending on the market. The table below shows the margin requirement for each of the Boom and Crash markets using 0.20 lot size.
A request for additional funds from a broker to a trader/investor when open position(s) are running. It is the first signal that a broker gives to inform a trader or an investor of an insufficient equity.
Thus, if additional fund is not added, open positions will be closed. But if it is added, such open positions will continue to run smoothly. Margin calls is always given when open positions exceed the margin level (%).
Funny enough, most boom and crash traders hardly look at margin call
This is the difference between balance and margin.
Free margin = Balance – Margin
Using picture above, balance is $11.12 while the margin is $0.43. Thus, $11.12 – $0.43 = $10.69.
Margin Level (%)
This is a measure of the percentage of equity and leverage relative to the margin in percentage. It is calculated thus
Margin Level (%) = (Equity ÷ Used Margin) x 100
What is Risk to Reward ratio?
Risk to Reward ratio simply explains the amount of capital in which a trader should see potential loss relative to his/her potential profit. Risk to Reward is always calculated as a ratio. For example,
1:1. This implies that a trader is risking a loss of $1 with the intention to gain $1 if the market goes favourable.
1:2. This implies that a trader is risking a loss of $1 with the intention to gain $2 if the market goes favourable
1:3. This implies that a trader is risking a loss of $1 with the intention to gain $3 if the market goes favourable.
The choice of a risk to reward ration depends on the personality of the trader and the type of trader in consideration.
Risk to reward ratio has a lot of other terminologies within it. this include terms like PIPs, Stop Loss (SL) and Take Profit (TP). Using the picture below, a trader who desires to short the trend with the entry price (8067.529) may choose to place his stop loss at 8143.930 and take profit at 7953.729 will have a risk to reward ratio of 1:1.5. to some traders, this is a worthy course whereas to others, it is not. My candid advise is, chose an achievable risk to reward ratio.
Stop loss is the price in which a trader assumes as his risk level. A stop loss price could be calculated based on the percentage of risk a trader wishes to subject his account to. For instances, considering the afore mentioned example, the chosen stop loss is at 8143.930.
This is the price in which trader assumes as his reward level. Like stop loss, a take profit could be calculated based on percentage of reward a trader may choose as his target. For instance, considering the afore mentioned example, the chosen take profit is at 7953.729.
What is PIP?
PIP is an acronym for which percentage in profits. It represents the smallest increase in price. PIPs is the best way to calculate profits in forex as it helps traders to determine the percentage increase or decrease in price hence, a good risk to reward ratio. For instance, using the picture above, a trader who desires to short the trend with the entry price (8067.529) and place a stop loss at 8143.930 has about 76.401 PIPS as his risk while his take profit, which is at 7953.729 will have 113.790 PIPs as his reward. a risk to reward ratio of 1:1.5
In Boom and Crash, PIPs could be calculated using an increase or decrease in price. This is relative to the entry price as well as the trend of the market. Using the picture below.
A trading plan is a step to step target of a trader. It describes the daily, weekly, monthly and yearly goal of a trader. A trading plan helps a trader to monitor, access and evaluate the growth of a trading account. It contains details such as trading days, trading lot size, number of pips, daily target, cumulative target etc. An excerpt of a trading plan is given in the page below.
$20 to $1,500+ in 100 Days Game Plan Daily Target 20 Pips/200 Points Daily
|TRADING DAYS||RISK (NUMBER OF PIPS)||REWARD (NUMBER OF PIPS)||LOT SIZE IN DECIMAL||PROFIT||BALANCE||DRAWDOWN||DATE|
HOW MOST BOOM AND CRASH TRADERS BLOW THEIR REAL ACCOUNT
In trading boom and crash, a trader must have a good knowledge of the margin, free margin, margin level and leverage ratio before he/she can avoid blowing up their account. This is because, a good knowledge of these factors will help you to chose an appropriate lot size for your trade.
For instance, a demo synthetic account with $20 will not permit an open position in any of the boom and crash markets with a lot size of 0.20. This is because of the leverage ratio of 1:100 which makes brings the margin requirement of these markets above $20. Hence, the least amount of equity required to have an open position in demo with a lot size of 0.20 is $22. However. This is not so for real life situations as a $20 equity can have an open position of 0.60 due to the leverage ratio of 1:500. This therefore, bring down the margin requirement and enables trading to be done easier. The table below explains everything
MARGIN REQUIREMENT FOR BOOM AND CRASH MARKETS
Thus, with this knowledge, it informs a trader that he/she only needs 100 pips to blow up a $20 real-life account when trading boom 500 and less than 90 pips to blow up a $20 account if he/she is trading Crash 1000.
For that case, how can we prevent blowing up a $20 account? The answer is in proper risk management: by proper lot size management. A good lot size management is the answer.
I know that Deriv.com offers a lot size of 0.20 as the default lot. But, this can be reduced to smaller lots of even 0.01 if any trader desires. For further information on this, kindly search for my Youtube video on how to grow small accounts. To do this, search for Juvirtrades and you will find the video. Watch it again and again and this will bring proper understanding. Do not forget to subscribe the channel. Also, for mentorship, training and coaching, kindly contact me by sending an email to me via [email protected] I will respond immediately. Thank you.