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  1. #21
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    Understanding the meaning of “Drawdown” – and measuring the “Loss of return”

    Understanding the meaning of “Drawdown” – and measuring the “Loss of return”

    Drawdown represents the maximum amount of drop in the account from the maximum level and it is generally expressed in percentage. For example, if a trader has a $20,000 account and reduces it with a loss of $5,000, that trader has experienced a 25% drawdown. Interesting fact about the drawdown is that if a trader loses a percentage of the account, he/she has to gain more profit than the percentage lost to come to the previous state. Let us have an example, a trader has an account of $20,000, the trader loses 50% of the fund and the equity now is $10,000, so if the trader wants to get back the account to $20,000, the current $10,000 account has to be doubled. It means, it must gain as much as 100% to compensate the loss of 50% which is hard to achieve.

    Similarly, if the trader has a loss of 10%, he/she has to get 11.11% of profit to compensate the loss.

    The “Drawdown” Table

    Draw down
    Profit to compensate
    3% 3.09%
    5% 5.26%
    10% 11.11%
    20% 25.00%
    50% 100.00%


    Pay enough attention to the above concept, a trader must remember that preserving the fund and not to lose it is the highest priority in trading.

  2. #22
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    The Basics of Risk/Reward Ratio (R/R)

    The Basics of Risk/Reward Ratio (R/R)

    One of the most important concepts in money and risk management is the Risk/Reward(R/R) ratio. You need to know how much probable profit is expected from the trade before entering it and to how much risk you are willing to take for gaining that profit. Does it make sense to risk $5,000 to gain a profit of $1,000? Definitely not. The basics of the money management teach that each single trade should not expose more than half of the return you are expecting as risk. It means that you’re ought to consider 60 points as a target, then you have to set 30 points as risk to be taken. If there is an opportunity that does not let us use this rule, then it’s strongly advised to leave it.

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  4. #23
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    How to calculate maximum draw down based on the fund

    How to calculate maximum draw down based on the fund

    Novice traders usually have their account lose all money with no S/L (stop loss) set or by trading losing strikes consequently.

    In the first case, the S/L plays an important role to prevent losing the whole account, but typically, the novice traders let the loss to advance and to be accumulated by not placing any S/L. There might be several profitable trades happening with no S/L in place, but surely one time or the other they will get caught by the market going against them and taking the whole money with it.

    In the second scenario, the trader is not managing the losses properly and lets the consecutive losing trades waste the whole funds. To prevent such cases, it is advisable not to enter a single trade taking risk more than 3% of the whole account; it means, we need to set the maximum S/L as3% of the equity and total concurrent trades should not engage more than 6% of the equity in S/L. As an example, for a $1,000 account the maximum risk should be $30 when the market hits the S/L and never ever risk of the trades of corresponding account should be over $60. It is advised to consider a specific limit of loss for a period of time. For example, in case of 6% of loss a day or 10% loss for the week, just stop the trading and look for the reasons you are losing based on your trading style (strategy) and money management. After you find the reasons and have the problems causing your losses resolved, just restart trading.

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  6. #24
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    Getting familiar with common mistakes novice traders makes (Part-1)

    Getting familiar with common mistakes novice traders makes (Part-1)

    1. Lack of Knowledge

    One of the major reasons in losing trades is the lack of knowledge of the real market conditions. Trading in FX market, like any other profession, needs enough knowledge and experience.

    2. Emotional Trades

    This is the most damaging thing to the account. Trades which originate without a no plan or trading strategy and work with trader’s emotions, has no intellectual and thoughtful base and ends up in a total loss. There could be lots of emotions involved during the trading process, but most importantly, all of them will end up in loss. The dominant feeling for most of the times is to earn more money, but at the same time, avoiding loss is more important. Try to know your emotions and control them during trading as much as you can.
    3. Over Trading

    This usually happens when the trader desires to catch every move in the market. This is quite impossible and all the great analysts and traders in the world are not trying to do so.

    4. High Volume Trading

    Trading with high volume increases the risk of the investor and raises the vulnerability of the fund. When a trader takes positions with high volume, it could cost him the whole account by few losing strikes.

    5. Rely on what others forecast


    Do not model what others do.Condition of the account, the point of view, trading style and the reasons are different from person to person. Just try to follow your own plan and trade it as much original as you can.
    Last edited by stream1981; 06-06-2014 at 01:04 PM.

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  8. #25
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    Getting familiar with common mistakes novice traders makes (Part-2)

    6. No Stop Loss Set

    Having no S/L means the trader does not imagine any limitation to his/her failure. Every human is subject to commit mistakes and S/L is meant to prevent such disastrous mistakes. Determine your S/L before getting into a trade. Most of the times, traders are overshadowed by their trades and it is hard to accept the S/L psychologically. Do never ever try to displace the S/L; it generally leads to more losses. Never move the S/L level against the trade, it means do not raise the loss.

    7. Inadequate knowledge about trading hours

    Knowing nothing about how volatile would be the market during the day for any pair could result in wrong predictions by traders. European currencies versus Dollar do not have much volatility during Japanese market hours and it is wrong to expect great profits during those hours. Likewise during early New York and London trading session, small and little fluctuations should not cause trader to neglect big moves within the whole sessions.

    8. Trading a pair not a single currency

    While trading a Forex currency pair, we are basically trading the exchange rates of two currencies. We cannot arrive at correct conclusion about which way a pair will go by just getting technical or fundamental analysis of the currency on one side of the pair. May be the aspects of the currency on the other side of the pair create a different condition for the exchange rate, which should not be neglected.

    9. No Trading Plan

    Having no plan or strategy to trade is one of the most major reasons to lose. It usually causes emotional trading, while a trading plan gives the trader a point of view to interpret all market prices. Even if the trader doesn't have access to a computerized plan, still he must have some sort of basic plan. It should have the capability to interpret, to have the past return analyzed (Back Test) and to be consistent with the trader’s condition. Any depletion in the aforementioned capabilities causes the plan to be defective and thereafter losing significant part of the fund.

    10. Trading Against the Trend

    Generally, all programs and trading strategies are based on trading along with the trend. Trading with the trend, would have more profit and lower risk. Do not try to trade against the market unless your back tested trading strategy confirms to trade so.
    Last edited by stream1981; 06-06-2014 at 01:04 PM.

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  10. #26
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    11. Unplanned Exits (exits caused by fear)

    Generally, novice traders exit trades earlier than planned, content with either little profit or small loss. Afraid of getting caught in a big loss, they follow a new route rather than following the main plan. Mostly, the trader leaves the potential for making a decent profit by going for a small profit or loss and will blame himself after the market moves in a direction which could have earned him a handsome amount if he would have waited.

    12. Trades with small targets


    The people who enter into trades for small profit or loss (scalpers), do consider low S/L (stop loss) and T/P (take profit) levels. But most of the times those S/L levels are greater than T/P levels and traders don’t pay attention to the fact that the market can move in other direction affected by momentary trades across the market, this change in direction may lead to loss. Trading with small T/P increases the risk of T/P’s exposure to spread. If a trader sets 10 pips as T/P and also as S/L for a trade, taking into account the spread, a market move of only 7 pips against the trader will trigger S/L, while to reach the T/P level, the market should move 13 pips in favor. Which price do you think is closer and will be the most probable to be reached?

    13. Trading at peaks and troughs


    People who want to catch all the action in the market, end up losing. Although trading at peaks and troughs is a good and valid strategy, but it’s simply not possible to have new peaks and troughs all the time and also it’s not possible to trade on each and every peak and trough. If you can catch the best parts of the market while observing the basics, you would earn good profit in the long term.

    14. Being
    too naive


    It is an obvious fact that generally simple, systematic and practical methods have a good outcome, but being too naive, could lead you to losses. Being a Trader, it’s needed to be alert about the market movements caused by various conditions and by different reasons. To be naive and paying no attention to the affective factors on the market generally leads to loss. Just be aware and responsive to market moving factors.

    15. Trading right before or after the major news


    Trading at the time of a major economic news/event sounds as a perfect recipe for profitable trades, however, a beginner who is not aware of the background and implications of that event could get caught in the wrong price direction. Unless a Trader thoroughly understands the following, it’s better to avoid trading during those volatile times: 1.background of the major economic event that is going to take place, 2.how much it is going to affect his trading instrument, 3.what are the expected outcomes and how the market would react (a) if it meets the expectation and (b) does not meet the meet the general expectations, 5. What action needs to be taken if he gets caught in a reverse price action?

    16. Confidence in the wrong method


    It has been observed many times that traders are content by few and small profits generated by a particular method/strategy, therefore, these traders stick to it and will not change the method or improve it, even if it is generating losses. While that method has lost its efficiency or even has not been fully and correctly back tested to get to the satisfying results, they are always optimistic about that method. Try to know your own strategy and in case of having an issue, get it improved or change it completely.

    17. Having no Stop loss set with the broker


    Novice traders might not specify any stop loss with their brokers, citing various reasons. They may get out of the trade manually, accepting the loss when it reaches the threshold they have in mind. But we have to keep in mind that an unexpected event can occur anytime and market can move suddenly against your trade, and only a stop loss can help in this case to prevent big losses. No access to the trading platform, internet connection out of service and sudden changes in price movements could lead you to lose more than you have intended. So, after the order has been set, immediately specify S/L level with the broker. This way, you will have your trades insured against big losses.

    18. No attention to open trades


    Not watching (following up) trades and open positions could be one of the causes to have your account completely wiped out. We all know that trading and consistent focus on the charts is boring and would make you feel tired. But negligence and having no attention at all, has its own bad consequences to the account. If you have open and active positions, consider the market condition under your own strategy. Do not ever involve yourself in numerous trades, it could take your focus away from some of your active trades, which may present you with an opportunity to make big profits or get away with small losses. Do not ever neglect your trades and never leave them unattended.

    19. Improper news interpretation


    This one could be related to lack of knowledge, but there are many cases that your knowledge is sufficient enough but you don’t have proper experience of market’s reaction to that specific news. Your assumptions on that news could be completely right, but the experience and insight to get the news commented is more important and more critical than the knowledge. Avoid trading based on them, till you get enough experience on the news.

    20. Have your trades entrusted to the chance


    Entrusting your trades to “if, so” is originating from the behavior of gamblers. Try to get your trades managed, improve them continuously and watch them. Be sure that chance has no share in succeeding across the financial markets. Knowledge, experience, and managing your position is one the most important factors to successful trading. Do not ever confide your fund to the fortunes.

  11. #27
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    21. Getting influenced by market volatilities and swings

    It has been observed many times that the Traders show the tendency to get influenced by the volatility in the market which leads them to abandon their own strategy and plan. The more volatile the market gets, the more tempted the Trader gets to benefit from these huge swings. Only after losing a sizeable portion of the Account equity does a Trader realize his mistake. It’s strongly advised to avoid market volatility temptation.

    22. Lack of courage for trading


    Some Traders are very shy and conservative in their trades. When their trading system gives the signal to enter a trade, they delay it in the hope of getting a much better price. Their losses in the past make them more hesitant to open a trade, and they start regretting once they miss the chance created by their trading signal. These types of Traders just satisfy themselves with Technical analysis without entering a real trade most of the time. It is strongly recommended for them to shed their fears and start trading by following a good trading system.

    23. Lack of focus and estimation of time


    Concentration, focus and time are some of the most important aspects of trading and also the most neglected. Lack of estimation of the time, a Trader can spend on a particular trade, can result in a disaster. Some trades, once entered, needs a careful watch till they are closed and Traders fail to estimate the time they can spend on watching these open positions. Many Traders incur losses due to the lack of concentration because of bad estimation of time and neglecting their Trading system.

    24. Justification for deviation from a Trading strategy


    This is another example of emotional trading, wherein a Trader gets influenced by the market and deviates from his trading strategy and justifies his action by pointing to some minor factors, whereas, he is ignoring the major factors his trading system is pointing towards. In many cases the Trader will promise himself to abstain from such deviation in the future. However, he gets tempted again, gives a justification for his actions and promises himself not to repeat it, but the cycle repeats itself again and again until he losses all his money.

    25. Wrong conclusions on relation between currency pairs


    Some currencies and commodities follow each other in a similar pattern and this leads some of the novices to fall in the trap. Though some financial instruments show similar or inversely-proportional price movements and sync, it should never be inferred that they are pegged to each other. These financial instruments do have a common relation or influence that makes them move in the same or opposite direction, but this equation can change any time and the beginners get caught in this change of equation. Example: EUR/USD and GBP/USD move together, U.S dollar and gold move opposite to each other etc. Hence, technical analysis of one financial instrument, should not be applied to other.

  12. #28
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    26. Reacting to Market movements

    The first and the most important job to be done by a trader is to predict which way the market is going to take. You may realize the right direction, but entering in an improper point could lead to losing trades. Try not to react to the sudden swings of market. Let your strategy and your trading plan guide you, not the sudden price swings. It means you might enter the trade with the same direction the market is going, but it will end in loss because you didn’t enter it at a proper point.

    27. Excessive details


    Involving in excessive details, including various analyses and using many indicators, only causes to get the trader anxious and having wrong signals created. Just use 1 or 2 strategy to get your entering signals and as a confirmation for your signals do not use more than 2 indicators at the same time and try to close your eyes on other strategies as much possible as. Just try not to get overwhelmed by many trading strategies, plans and signals. Just keep it simple and check if your strategy is beneficial or not in the long run.

    28. Rejecting the mistake


    Rejecting the responsibility for your mistakes and not to learn from them is the worst thing in this profession. It’s similar to following a proven failing strategy again and again and not realizing the obvious fact that this strategy is a failure. Mistakes do happen and present a very good chance to learn from them by accepting and analyzing them. To blame the market for your mistakes is a childish behavior due to the fact the market does not follow your plans. The key to success is to accept mistakes, learn from then and not to repeat them again.

    29. No one can hit the jackpot in a single day


    How to become rich overnight and how to multiply the account a thousand times in a short period of time, are some of the thoughts that run continuously in the minds of beginners. Though it’s very much possible to get rich by trading, there is no shortcut to success. Patience and hard work is required to get rich in trading as is the case with every other business. There is a very odd chance of someone converting their $10,000 account into $100,000 account in a short period of time. The beginners assume that every trade will result in a huge profit, thus enabling them to get rich very soon. Although possible, but it requires patience, self-control, a good plan/strategy and hard work to get successful in trading.

    30. The fear factor


    Fear is a natural and useful feeling in the humans which has protected him from harm. But to let this feeling takeover your other instincts is a dangerous behavior. Be fearful but do not let the fear control you. Fear from the losses in the past should not cause you to stop trading and abandoning a proven strategy, unless the loss was generated by getting deviated from your own plan. As the most successful trader once said, “Be fearful when others are greedy, and be greedy when others are fearful”.

  13. #29
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    31. No consideration for Risk/Reward ratio

    You will never trade an instrument which is several times more likely to incur loss than make profit, especially when there is no leverage to help you. But when we are talking about leverage trading and making profit on targets, we are going to involve the risk anyhow. Trading with T/P (Take Profit) target less than its S/L (Stop Loss)target is going against the trend. Just try to trade with the Risk/Reward ratio at 1:1.5 or more.

    32. Wrong assumptions


    Wrong assumptions are one of the major factors for incurring losses. Markets involving high volatility (like Foreign Exchanges) follow a particular rule and hypothesis for a time, but they are not constant and forever. There is no guarantee for something to happen directly or indirectly in the future, if that incidence has happened in the past. The market is a composition and reconciliation of the past and the present. Do not try to theorize it. Just follow your own rules and strategy. Find out the market’s incoherence and do not go after assumptions which have not been proven.

    33. Rumors affection


    Rumors sometimes drive the market. However, many times the market will not follow the rumors. Stay away from the rumors, even if you doubt them to be true. Try build your assumptions based on the facts. Match all your perceptions with those facts, and then enter the market. This way you will not to worry even if you lose, because you took all the precautions.

    34. Getting caught by the rapid movements of the market


    Sometimes market rallies in one direction, but that does not guarantee the same extended flow. This scenario is seen in most of the markets and reduces many novice trader’s account to zero. If you forecasted that the market will touch your target within two days and it did in few hours, therefore there is no guarantee it will continue going that way with the same speed or in the same direction. Try to get out of the market on the loss or the profit you have been waiting for. Do not get caught by the rapid and quick movements. Most of the trends which last long time have 45 to 50 degrees slope.

    35. Revenge


    Revenge is the feeling that comes to us after each failure. Do not consider your loosing trades as a failure. Do not ever try to get your lost money back emotionally. Only novice traders will be adding the volume after a failure (decisive or current) to compensate the loss. Just accept your loss. Look for the reason(s). Do not trade at least few hours after your loss and do not add to volume as the new trade.

  14. #30
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    36. Having no rest during trading

    Give a break to yourself and enjoy your life sometimes. Uninterrupted working hours makes us tired and bored. I’m not saying do not look after the market, but occasionally stay away from the market taking a rest and refresh your mind, then review the market again. Do not forget to give a rest even to your own trades. If your strategy needs to have the market under consideration, just stay away from your desk. At hours you think the market will not be moving a lot (low volatility) just rest and then get back to the market. Do not risk your health on earning money. Your mind is the most important tool you have got to be in the market, increase its performance and efficiency by giving it enough rest.

    37. Dreaming


    One of a novice trader’s common mistakes is not observing Risk/Reward ratio, but that’s not all, there is an opposite group for that too. Traders who keep reward level more than reality. Those people are looking for a very big fish while using small baits. Mostly their R/R ratio is beyond 1 to 4. Generally, they do not close out their deep-in-profit trades, so it will be closed in loss at the end. They keep losing small pieces till they realize that they don’t have enough bait for big fishes in a long shot.

    38. The overconfidence


    You definitely have been facing people who thinkthey are always right because they have done something correct in the past. They imagine the market is under their control, but they are being deceived by the past profits and are headed for a total failure. If the market doesn’t move the way they like, they get stubborn or will get mad at the market and the trade. But they won’t find a way out of the crisis. The only way to redemption is avoiding overconfidence. Just forget any past profitable trades for the time being and only try to make the best and the most wise decisions for your current open/active trades.

    39. Lack of relaxation


    Relaxation is one of the most important and obvious factors of the trade. Do not ever trade when you have problems or issues in your personal life. Never touch the market. The market is not a place to get rid of your bad feeling. Your negative feeling may be even intensified by taking more losses. As it always has been advised that beware of your pride and frustration caused by profiting and losing trades.

    40. Using lagging tools


    Using lagging tools simultaneously with technical and fundamental methods could have terrible consequences for your account. Every affecting factor mostly has momentary effect on the price in the market. Therefore, if we are using a tool which will be signaling buy/sell entries after a period of time, then it is never going to make any sense. The major tools generating delayed signals are lagging indicators.

    41. Taking no notes of the trades


    If you believe in your success and aim to reach your goals in the market, you need to take note of you trades. You will be avoiding repeated mistakes and will make it easier to identify your success factors as much as you can. Writing down all important elements from the view of a trader while trading, is a quantitative method to have a look at the quality of your trading style.

    42. Lack of Adviser


    An advisor is the one who reminds your mistakes and show you the right way. With an advisor to explain and answer for each trade, you will not trade emotionally anymore. I hope you understand that the advisor will not forecast the market for you, but he will be warning you about the possible mistakes. There is no need for your adviser to be a trader. A brief knowledge on currency exchanges is enough as well. However, it would be great value if your advisor is an experienced trader too. The advisor should be aware of all your condition and your account and committed not to compromise your privacy. An advisor has a considerable effect on preventing mistakes and correcting them. Find a trustworthy advisor for yourself.

  15. ARIONFORXtarder
 

 
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