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Four Forex Questions for the New Year
1. How many times will I trade?
As I noted recently this is perhaps the least asked yet the most important question you can answer. The frequency of your trades will determine the amount of risk you can assume. This is not a philosophical discussion but a pure function of statistics and you ignore it at your own risk. The back of the envelope formula I use is to reduce size by 50bp for every 100 trades I take. If my basis is 250bp of risk @ 100 trades I reduce it all the way down to 25bp of risk @ 1000 trades.
Final note: Five adds of the same currency pair at your initial risk level is NOT one trade. It’s five distinct trades. Be honest with yourself to recognize when you do that.
2. What spread will I pay?
If you are paying more than 2 points spread on EUR/USD you are a moron. (So much for my holiday cheer 🙂 Seriously, in an age when most platforms allow you access to 1 -- 2 pip spreads across most major currency pairs paying anything more than that is just sheer idiocy especially if you are trading intra-day.
The spread that really interests me however is the one you will pay on your stop. The smaller the stop the higher the chance that you will lose. A pair can cross the same 10 point range 10 times during the day stopping you out for -100 points before finally making you that 20 pips you are seeking. The key is to make your stop wide enough as to avoid unnecessary exits yet tight enough so you can recoup it in no more than 2 days of trading. My personal favorite for intra-day trading is a 50 point stop
3. Will I trade high probability or high profit?
Remember this. No matter how much you beg. No matter how much pray. No matter how good a boy or a girl you have been, the trading gods will never ever allow to make a high profit trade with favorable odds. If you want to make 2 points for every 1 point of risk consider yourself lucky if you lose only 6 out of 10 times. If you want to win 3 out of 4 times prepare to risk 2 points for every 1 point of profit that you seek. In trading as in life the sweet spot is usually in the middle so I try to keep the odds as close to 1:1 as possible and strive for a better than 60-40% edge.
4. What’s my fail-proof checklist?
If you want even a modicum chance of success in trading you must assume you will fail. To prevent failure from becoming a blowout you need a checklist. Here is mine.
- Always attach a stop
- Never add or double down
- After three losses in a row walk away from the screen for the rest of the day
Happy Holidays to all across the world. May we all enjoy peace in 2012.