So my masters started (part 2)

Hello everyone.

Continuing from my last post, there are often people who claim to be traders, but all they are doing is gambling - risking too much of their equity (money), and being led through an emotional roller-coaster as the market moves.

What made me attracted to Forex is the fact that you can protect yourself from losing more money than you are comfortable with.

Let's imagine another situation. Imagine I sold 1 lot EUR:CHF (Euros:Swiss Francs) at the exchange rate 1:0.8000. This means I have effectively exchanged 100,000 Euros for 80,000 Swiss Francs (For more clarification on how a trade works, look at the table in this post for a clear explanation of trade dynamics).

I sold 1 lot because I anticipate CHF to strengthen, which means that 1 Euro be able to obtain less Swiss Francs. If the CHF strengthened to 1:07932, and I then closed my trade, I would have made a profit of 680 Swiss Francs.

There is something important to note here - I have just risked 100,000 Euros to just make 680 Swiss Francs. This is clearly not a smart strategy, and is similar to the scenario that I described in my previous post.

The beautiful thing about Forex is that it allows you to set exactly how much equity you want to risk. I can indirectly tell my trading program to close my trade if I've lost a certain amount of money. This is called a 'stop-loss' - as it is the position at which you stop losing money in a trade. Most people say you should risk anything between 0.1% to 5% in each trade, but in my opinion it depends on your ability as a trader.

What this means is that you will never risk more money than you are comfortable with, and also it eliminates the ability for you to make huge losses. You can still lose out on trades, but your losses will not be great.

I have a confession to make. The situation I asked you to imagine was actually something that happened. Although I'm not going to discuss the strategy behind my prediction (it is quite sophisticated), I did execute the exact trade described, and I predicted that the exchange rate would fall to 0.7932. It actually fell to about 0.7934, upon which I closed the trade early.

The yellow line is my stop loss. the first red line is where I opened the trade (0.8000) on the 21st of September, the second is where I predicted the price to end up (0.7932). I was almost exactly correct, and I closed my trade around 0.7934 on the 25th of September.

So you've seen a real life profitable trade, which earned over 600 Swiss Francs.

Thanks for reading,

Jr

www.twitter.com/jr_dot