Last week we discussed developing our trading plan and then following our plan. This week we will discuss 3 common “rookie” mistakes that all traders must avoid.

The first mistake many traders make is to risk too much per trade.  A good rule of thumb is to trade between 1%-2% risk per trade maximum.  The first thing to do is to determine what that risk per trade is in dollars.  If we have a 10k account we can then risk up to $200 per trade. (10k account X 2 %)  The next thing to determine would be the total share to trade or the position size based on the $200 maximum risk.  The way to calculate the position size is to calculate the risk per share. To determine the risk per share we calculate the difference between the entry price and the initial stop loss level.  For example, if our entry price is $25 per share and our initial stop loss is set at $24 (I believe that a stop loss level based on support or resistance is better than a predetermined set stop loss level.) based on this example the risk per share would be $1 per share so we could trade up to 200 shares and limit our risk to a 2% maximum.  This will help us limit our risk and not accept more risk than is prudent per trade.

The second common mistake is to enter a trade late.  If we pass up or miss a setup and the market moves in the direction of the potential trade, a trader often has the inclination to enter the trade late.  Fear of missing a big move plays an emotional role on our trading. We must avoid this mistake to enter a trade late because often when we enter a trade late we have already missed some or, perhaps even the entire move.  So the rule is: don’t enter a trade late!

The third mistake and maybe the most common one, is the inclination, when the trade in going against you, to widen your stop loss level.  One of the hardest things for a trader to do is to sit and watch a trade go against us and be taken out by a stop loss.  If the set up was solid and the stop loss was set at a recent support or resistance level, depending on going long or short, then we have a predetermined risk for that trade.  If we widen our stops we only increase the risk or exposure in that specific risk.  This is a very bad habit to get into.   So the rule is:  Don’t move a stop unless it is in the direction of the trade, only move a stop loss to REDUCE the risk in the trade, never INCREASE the risk in the trade.

If we can avoid any or all of these common mistakes we will be much more disciplined traders.  Successful disciplined traders avoid over trading, chasing trades, risking to much per trade and staying in a trade after it has failed to move in the direction expected.

Traders Challenge:  Don’t let emotions take control of our trading; avoid the temptation to make these common trading mistakes.

Hi everybody,

I get this question from my students all the time: “How much do I need in my account to start trading forex?” It’s a valid question, especially for beginner forex traders, but the answer can be complex since it can vary wildly from person to person. For starters, it really depends on how much money you have to invest. Obviously the bigger your initial investment, the bigger your returns are going to be. But jumping right into trading standard sized lots with a $30,000 dollar trading account might not be the best choice for a beginning trader.

If you’re just starting off with forex trading, then I suggest you trade $0 at first. Instead, open up a demo account and trade with their pretend money first. This serves a lot of different purposes.

1. It allows you to test (risk-free) several brokers to see which one works best for you and your trading style.
2. Using a demo account is also a great way to “test out” a new trading method or system you happen to be using to learn how to use it and to make sure it performs to your liking (you are using a trading system, right?)
3. Using a demo account can help you gain some disciplin by seeing how the market moves. Again, this goes back to having a trusted trading system before you even place your first trade, but a demo account is a great way to learn how the market moves WITHOUT destroying your trading account.
4. Trading a demo account lets you make mistakes. Let’s face it, you’re going to lose trades. Always. It’s part of the business. Some losses are calculated. Some are because of poor judgement, inexperience, or even just a dumb mistake like putting in an order wrong. A demo account is where you iron those issues out so when you go live, you already have all the “bugs” worked out.

Now after you’ve done what I call “paper trading” on a demo account, and you’re comfortable and confident with your new trading system, then it’s time to graduate to live trading. AND, that takes us back to the original question: “How much to do I start off with?” Unfortunatly, my answer isn’t a hard and fast one. So my response is always: “It depends.”

If you have a great system. You trust it. It’s worked wonderfully in your demo account paper trading thus far, and you have the funds to trade larger lots, then I say go for it. Open up a standard sized account. But remember: A standard lot is a 100k unit lot. That is a $100,000 trade if you are trading in dollars. The average pip size for standard lots is $10 per pip. This is better remembered as a $100 loss when you are only down 10 pips. Standard lots are for institutional sized accounts. That means you should have $25,000 or more to make trades with standard lots. That’s the big leagues folks. So when I say “confident” in your methods and systems, then you better not be lying to yourself. This is where things can happen in a hurry… good or bad. So just be carful, consistent, and disciplined.

Moving down in lot sizes are mini lots. For many traders our there, these sized lots make a lot more sense.

A mini lot is 10,000 units of your account funding currency. If you are trading a dollar based account and trading a dollar based pair, each pip in a trade would be worth about $1. If you are a beginner and you want to start trading using mini lots, be well capitalized. $1 per pip seems like a small amount but in forex trading, the market can move 100 pips in a day, sometimes even in an hour. If the market is moving against you, that is a $100 loss. The ultimate choice in account size is up to you, but if you’re serious about trading a mini account, you should start with at least $2000 to be comfortable.

Now while some brokers have been known to let you trade “nano lots,” a micro lots are the smallest tradable lot available with most brokers. A micro lot is a lot of 1000 units of your accounting funding currency. If your account is funded in US dollars a micro lot is $1000 worth of the base currency you want to trade. If you are trading a dollar based pair, 1 pip would be equal to 10 cents. Micro lots are very good for beginners that need to be more at ease while trading. It’s a great way to easy out of a free demo account and into a real live trading situation. This is extra helpful I believe because you it allows you to feel the real emotional highs of winning and lows of losing and helps you work on your discipline, yet still being relatively safe since the pips are only worth a dime. In fact, I even have a few students that were able to start off with a micro lot and move up via their profitable trades up to mini lots and beyond. If you hava  great system, you’d be surprised how fast an account can grow… which at the end of the day is one of the biggest attractions of trading forex. The possibilities are almost endless!

So at the end of the day, there really is no clear answer to how big of an account you should use, but just remember: trade only what you can afford, manage your risk / reward ratios, always use a trusted method, system or several systems and make sure you stay disciplined and stick to your trading plan. No matter how much you’re trading, if you follow those rules you’re chances of successful forex trading skyrocket.

 

Good Trading,

Bill Poulos

Today I want to spend a few minutes discussing the topic of routines in our day trading.  As forex traders we need to be prepared for the trading day and trading week.  One way to become prepared is to have a routine that we go through on a daily and weekly basis.  This routine does not need to be extensive or time consuming but it does need to have some elements that will make your trading day a bit easier.

A routine that we do on a daily and weekly basis needs to help us in becoming better traders.  It should be set up to prepare us for the upcoming week and each day.  I would suggest having both routines written down so you can approach them as if they were a checklist of things to do.  Below I have listed some of the things you might want to consider placing in each one of these routines.  This is a suggestion of topics to be included in each routine, not an exhaustive list.  You can add to, adjust or modify it to fit your specific needs.  Remember, the purpose of a routine is to help you become more proficient as a trader and to make your day a bit more organized.

DAILY ROUTINE

1. Check current positions – I put this at the top of my list for several reasons.  First, it is what I’m most interested in checking.  I want to see if they have hit my targets or stops.  I want to know if I need to make any adjustments to them.  It is the top priority, something I need to look at before I do any new trading.
2. Check account risk – I want to then look at the amount of funds that I have available to trade.  If I am at my maximum risk level then I need to know I cannot trade.  If I am at my limit of risk I need to make sure I do not add to it even if it looks like a good trade.
3. Check news – I want to know what reports and new may come out that can impact my positions.
4. Look for new trades – Once I know my current positions are taken care of and that I have available risk capital for trading, I want to spend my time looking for new opportunities.  As part of this I have a routine for analyzing trades that I would start to use in order to find new trades.

WEEKLY ROUTINE

1. Review past trades –  I will take some time on the weekend to review my trades of the past week.  I want to know if I followed my rules or not.  I want to know what I should have done better and what I did well.  I use that information to help me know where I need to improve.
2. Review Stats – I will take an look at things like my win/loss ratio, my average wins vs. my average loss, consecutive wins and losses and my expectancy to make sure I am trading well.  I will also determine what my actual reward to risk ratio is.
3. Weekly news – I will review the upcoming news for the week and mark it on the calendar so I don’t miss any important releases.

OK, so that should give you an idea of what you should be looking for when creating your routines.  Take some time to sit down and write out what you are going to be doing each day before you trade and each week before the market opens.  If you can do that you will be setting yourself up to become the most successful trader you can.