The Key to Success in Trading Forex

03/10/2014 10:06 am EST

Focus: FOREX

Javier Paz

Author, The Forex Trading Manual

SPEAKER 1:  My guest today is Javier Paz.  We’re talking about trade size and why it’s important for Forex traders, especially beginners, so Javier, why is trade size so important, especially for the beginner FX trader?

JAVIER:  Well, the reasons are various.  I think one of the main reasons is that individuals, when they first start trading currencies, or just on any other asset class, but specifically currencies, it’s something new to them.  They understand the concept of the pricing action being pretty fluid.  They learn about pips and at the same time, they don’t quite understand the amount of risk that is embedded into the leverage of trading currencies.  In the US, it’s 50-to-1, which is higher than most other asset classes, so as a result of that, you have to be very careful about the amount of exposure that you put yourself in.  A typical standard contract is a contract for $100,000 US – well, $100,000 of the base currency that you’re trading.  A lot of people think, well, I’ll just go easy with one of those contracts and maybe I’ll use a stop loss, maybe I won’t, but that’s where the problem begins when you are first starting to trade currencies.

SPEAKER 1:  Now, do you recommend maybe starting with a micro account even, to keep your account small, or is the leverage so high there that it’s not worth doing?

JAVIER:  Well, I recommend starting with a demo account equal to the size of the real money that you would like to manage, and then to only trade 1% of your account at any given point, and how is it that you can measure 1%?  You may say well, it’s by using a stop loss.  I use, personally, one for 30 pips, so the trade size has to be no more – well, if my trade looses, it cannot be more than 1% of my account.

SPEAKER 1:  so 30 pips has to be no more than 1% of what you have?

JAVIER:  Yeah, so the 30% kind of is the guide – the 30 pip is the guide for knowing how much – how big of a trade size.  For example, for a $50,000 account, that would be maybe 2.7 mini-lots that you’d be trading.

SPEAKER 1:  Is a pip the same if it’s the British pound, if it’s the US dollar, Canadian dollar?

JAVIER:  Just about, yeah.

SPEAKER 1:  All right, so is a pip – if I’m new to Forex, is a pip related to, say, a penny in stocks?  Something similar to that?

JAVIER:  On a mini account, one pip equals $1, but in a standard account, it equals $10, so those are the little things that you first need to make money on paper, treat it like a real account, and have the right settings for that account, so that then when you make the transition to a light account, it’s a fairly smooth, seamless transition.

SPEAKER 1:  Now, just because I can get 50-to-1 leverage, should I?  Should I maybe start with 10-to-1 or 20-to-1 to be more careful?

JAVIER:  Well, I think you can start with 50-to-1, as long as you keep – you respect the 1% rule; maybe 2% in an unusual situation, but never more than that really, and what you are earning in FX potentially is – so you’re risking 30 pips, but you’re aiming for 40 or 50 pips, so as long as your win ratio is better than 50% and your stop loss is less than your potential target, then you should be making money over time thanks to that leverage in the order of 2% to 4% a month, if you’re doing it, again, very conservatively.

SPEAKER 1:  Now, you did mention not having a stop loss.  Do you recommend always putting in a hard – in the program 30 pips and not changing and not have a mental stop, because you could get out of hand with that.

JAVIER:  Right, I think it’s important to have a structure plan and notion of how much you’re going to risk, because if you start choosing when to put the stop loss and when not to, the 1% rule goes out the window, then you’re risking your whole account anytime you don’t use a stop loss.

SPEAKER 1:  All right, and then finally, how about the currency I should try?  If I’m going to kind of use my trade size to minimize risk, what about the currency?  Should I stay away from certain currencies that are too volatile?

JAVIER:  Well, stay away from bitcoins, but other than that, the euro is a good way to go; that’s what I usually trade, but I also trade the majors, the dollar, yen, the cable dollar, and also one cross, the euro yen in Japan, well, I personally trade in the evenings, and that’s the Asian station, so the euro yen is one of the two most favorite currencies in Japan, and the other one being the dollar yen, so those two currencies have a lot of volatility among the Asian station and are good.  If you want volatility, which is the blood of trading, those are good currencies.

SPEAKER 1:  Javier, thanks for your time.

JAVIER:  Yeah, thank you.

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