As part of your Forex trading strategy, you must be able to
manage the money that you invest in trades and determine
when it is advantageous to enter or exit a trade. Most
trading strategies are good for determining when a trade
should be entered, but not all strategies establish an
exit. If your Forex trading strategy does not provide exit
points, you will still need some method of determining when
to exit.
Profit and Loss (P/L) - Forex trading systems provide one
of the easiest forms of executing and monitoring profit and
loss (P/L) in investments. P/Ls in the spot market are
generally measured in decimal units. A calculation of the
long and short position for a leveraged currency pair will
easily provide you with the amount of profit and the amount
of loss.
Gains to Losses - You also need a method of predicting the
chance of profiting from your trades in order to decide how
much money to invest in your Forex trading strategy. By
calculating the ratio of gains to losses you will be able
to determine if your trades are providing a higher
percentage of gains than losses. If your trades are gaining
then you need not invest more money into already winning
trades.
Risks to Reward - Since Forex trading systems involve risk,
you need to able to measure the risk taken as compared to
reward received. A risk/reward ratio may be determined by
dividing a take-profit spread by a corresponding stop-limit
spread. No rollover or interest rate differential is
required. You are cautioned against allocating more than
10% of your total investment funds into a single trade as
either margin or risk. Your Forex trading techniques should
include enough funds to allow you to engage in multiple
trades. If some trades result in loss, those losses have
the potential to be recovered with other winning trades. If
half or more of your trades result in loss, you need to
analyze and adjust your Forex trading strategy.
Limiting Losses - You may limit the amount of loss by
adjusting take-profit and stop-limit orders relative to the
entry market price. By raising stop-limit orders and
lowering take-profit orders, you may reduce loss potential.
If prices create adverse results, you may eliminate any
further loss by manually liquidating the trade. If price
moves are favorable, you may increase your limits. In some
instances it may be advantageous to raise the stop-limit
order above the market entry price. This guarantees a
profit of at least the originally targeted price and at
most, the newly established price.
If you have taken a long position, you should avoid
lowering stop-limit orders and accept a loss or trade a
different currency pair. Take-profit orders should only be
lowered in long positions if a reversal is anticipated.
Otherwise, you should liquidate. If you have taken a short
position, you should avoid increasing stop-limit orders and
only increase take-profit orders in anticipation of a
reversal. Many large losses are due to moving and removing
stop-loss orders. The Forex trading strategy for uncertain
traders should be to liquidate trades for small losses or
small profits rather than hanging around to suffer a
greater loss.
With most Forex strategies, stop-loss orders are typically
placed below and above previous highs or lows. However, you
may find it advantageous to set your stops according to
market volatility. Using charts of recent currency pairs
you should be able to gauge shifts in volatility. This
information could then be used to set stops and price
objectives. This method may also be used to establish entry
points in the market.
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Andrew Daigle is the creator and author of many successful
websites including ForexBoost at http://www.ForexBoost.com
and http://forex-trading-system.typepad.com , Free Forex
Training Resource for the Novice and Advanced Forex trader.
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