The remainder of the FAQ

From Volatility.RED
Jump to navigationJump to search

What is money management?

Money management is a form of risk management and is arguably the most important aspect of your trading when it comes to long term survival. You should always enter trades with a stop loss - the distance of the stop allows you to calculate how large of a percent of your account balance will be lost if your trade stops out. You can run a monte carlo simulation to figure out the risk of having a number of trades go against you in a row to drain your account. The general rule is that you should only risk losing 1-4% of your account per trade entered. More on this here:

Should I start by trading demo, or go live?

This is highly debatable. You should definitely demo trade until you have mastered how to use the trading platform on desktop and mobile. After that it’s up to you. Many think that the psychology of trading live vs demo trading is massively different. So it may pay to learn to trade live. Just be warned that most FX traders lose almost their entire first account, so start with a low affordable balance. For those who have a nest egg but are not willing to expose it to loss while they learn, the best recommendation is to scale down to a decimal of that nest egg in a broker like Oanda. Example: Great Aunt left you $/€/£10,000? When you go live, open an account at $/€/£100.00 and trade as if it were the whole thing; it makes the math easy to scale up. After you demonstrate to yourself a modicum of success (say, several months to a year of gains), evaluate whether you are ready to scale up. Then go to $/€/£1,000.00.

What about automated trading/EAs?

Retail FX traders have been known to program “Expert Advisors” (EAs) to automate trading. It’s generally advisable to stay away from that until you’re very experienced. Never buy an EA from a developer because the vast majority of them are scams.

What is the best indicator?

That’s up to you to test and find out. Many in this forum dislike oscillating indicators since they fail to capture the essence of what moves price. With experience you will discover what works best for you. In my experience indicators that are most popular with professional traders are those that provide trading “levels” such as pivot points, fibonacci, moving averages, trendlines, etc.

What timeframe should I trade?

Price action can vary in different timeframes. In longer term timeframes the price action and fundamentals are much more clear. Unfortunately it would take a very long time to figure out whether or not what you’re doing is successful on longer timeframes. In shorter timeframes you can often tell very quickly if what you’re doing is profitable. Unfortunately there’s a lot more “noise” on these levels which can prove deceptive for those trying to learn. Therefore the best bet is to use a multi-timeframe analysis, working from top-down to come up with trades.

Should I trade using Fundamental Analysis (FA) or Technical Analysis (TA)?

This is a long standing argument in these forums and elsewhere. I’ll settle it here - you should have an understanding of both. Yes there are traders who blindly ignore one of the other but a truly well rounded trader should understand and implement both into the analysis. The market is driven in the longer term through FA. But TA is necessary to give traders a place to enter and exit trades from a psychological risk/reward standpoint.

I found the martingale system, and I want to use it while trading! I can't lose!!

Martingale is a great way .... to lose your ass. Seriously, don't do this. Martingale works until it doesn't. And when it doesn't, you will lose everything. We have said repeatedly that martingale has probably been around since the first dice, card, or chicken bone was thrown for money. Its a gamblers illogical thought process that relies on the false belief that chains of losses indicate that a win is coming. It actually has the name the gambler's fallacy. It is entirely possible to have a string of losses that stretches into the hundreds. Your account cannot, unless you are taking such small positions to mitigate risk that I would have to ask: what the hell was the point anyway? Move away from martingale, learn to trade and most importantly learn to take losses and move forward.

I've heard trading binary options is an easy way to make money?

The general advice is to stay away from binaries. The structure of binary options is so that when you lose the broker wins. This incentive has created a very scammy industry where there are few legitimate binary options brokers. In addition in order to be profitable in binaries you have to win 55-65% of the time. That’s a much higher premium over spot FX.

During a news release the market did the opposite of what I thought it would.

This often happens because the market does not blindly react to numbers but rather to the numbers vs. what was expected. For example the market for a currency might react negatively to a rate hike if a higher rate hike was priced in already. News calendars and news sites listed above are your best resources for finding out what is priced in if you don't have access to the various interest rate futures or swaps markets.