Real time ... Practical FX trading rules ....
1. As we discussed, a Currency will always have a pair and the First currency is called as Base Currency. When we have a Pair, it will have two markets / economies. For example, EU (EuroUsd) has Euro and US markets. AJ (AudYen) has Australian and Japanese markets. We should always trade a pair, if at least 1 market of the concerned pair is open. For example, to trade AJ, either of Australian or Japanese markets should be open and to trade EU, either Euro or US markets should be open. The reason is ... Then the currency will have more liquidity / momentum / opportunities ... As no one can run a 5 * hotel in a smaller city / village due to lack of funds / liquidity, we should also not trade when the pair does not have sufficient liquidity / momentum. By the same law, as USD is the Biggest influential factor on Gold, we should not trade Gold before US market opens.
2. Now that we know when to trade a pair, we should decide on the quantity / lot size to trade. Lot size on a pair is directly influenced by the account / equity size. Other things being equal, on a leverage of 100, .1 lot size will be worth 100$ margin on a currency pair. Note that this goes up by 50% for Gold and 100% to trade Crude Oil. As we discussed in an earlier post, as RMS, we should not expose more than 20% of the total account size, with all the open positions and the loss thereof. Keeping this mind and other things like momentum in other pairs, time frame and the rules of that particular trade, one should decide on the lot size of a trade.
3. Stop Loss ... Do not use SL for the sake of using it. Be flexible with it. Know your trade's entry rules, risk appetite for that trade before deciding SL. But, we should not have a SL which will erode the total margin on that trade itself. For example, margin on .1 lot sized trade will be 100$ on a currency pair. If the SL is set for 100 pips and SL gets HIT, you lose all the 100$ margin on that trade ... Does it make any sense? NO NEVER ... Here even the leverage has a say. WHY? As I said 100$ margin on .1 lot size is on 100 leverage. If you have 200 leverage, margin will come down to 50$ and if you have 500 leverage, margin will come down to 20$. Can you see the relation NOW between the leverage and SL. Higher the leverage, lesser the margin, tighter should be the SL, higher chances of SL being hit. Even time frame should ideally help you for SL. Higher TF’s will give you more breathing space to have wider SL and shorter TF’s should always have tighter SL. Will cover that more on Time Frames …
Enough to munch with early morning coffee / tea I guess ….
"People create their own questions because they are afraid to look straight. All you have to do is look straight and see the road, and when you see it, don't sit looking at it - walk."