As lead educational strategist for UK broker Admiral Markets, Chris Svorcik has helped thousands of retail traders develop strategies which deliver strong and consistent returns. To mark Admiral Market’s first birthday, Chris explains the importance of clear money and risk management in a trader’s first 12 months.
Profitability within the first year of Forex trading is a realistic and attainable target for novice retail traders. But this outcome is dependant on many different factors. As an education Forex strategist, there is one aspect of trading which many beginners fail to develop: a professional money and risk management strategy.
It sounds daunting, but developing these systems and strategies is much easier than one might think. Those traders who take the time to develop a methodology of protecting their capital are demonstrating one key trait which separates the winners and losers in Forex trading. It’s called ‘professionalism’. Those who treat Forex as their profession always do better than those who dedicate no time to performing the basics competently.
So how does a first-year Forex trader go about developing a money and risk management strategy? The first step is to establish the correct mindset for optimum results.
- Forex trading is a business, not a get-rich-quick scheme
Sometimes people embark on a journey of Forex trading in the hope of making significant money in a short space of time. It’s understandable, as the internet is filled with hundreds of websites from Forex traders who claim to have quadrupled their income by trading the currency markets. But what many people fail to understand is that Forex trading is a skill which takes practice. It can be compared to learning another skill, such as language or musical instrument. To reach a competent level in these areas, people need time to master the fundamentals. It’s exactly the same with Forex trading. When treated as a profession, Forex trading can yield significant profits – but only over time. This leads me to my next point about the importance of mindset when it comes to trading Forex. I always encourage novice retail traders to treat their trading as a business. Establishing this intention from day one is important, as it reminds the trader in question that preparation is everything when it comes to making pips. Believe me when I say that taking short-cuts when preparing money and risk management strategies always leads to negative results. Another way in which traders can set a professional tone when tackling the markets is by evaluating how they use their time. It should always be used as a commodity. Traders who regularly schedule time to learn and master key trading concepts are the ones who experience success. It’s another way in which traders can demonstrate that they are serious about a career in Forex.
Some practical steps when scheduling time include things like creating a consistent daily trading routine to be used on weekdays. The majority of traders I know actually do this to some extent, but what some fail to do is assess how they are protecting their capital and managing risk. Investing time for reflection in this area is of great importance too.
- Identify achievable trading objectives
The first step in developing a money and risk management strategy is to document realistic trading objectives. Not many first-time traders become millionaires in their few first months of trading. Setting goals which are too high or unattainable is sure fire way of creating future disappointment, which may then lead to unnecessary trading risks. Ambitious goals are fantastic, but traders must be able to judge whether they are achievable. Instead, traders should focus on setting a series of smaller goals that still challenge their ability, but that can also build confidence when achieved. Forex trading should be thought of as a long-term career, so setting goals of this nature is a sensible approach that will lead to steady and consistent gains. Those traders who gamble and get lucky with an over-leveraged approach will be punished by the market sooner rather than later. For novice traders, I would recommend setting a target of between 2.5% to 7.5% ROI for the first 12 months. In years two and three, those targets should be steadily increased.
- Establish systems to protect capital
There are a number of systems Forex traders should create to protect their capital. I’ve seen many unprepared traders wipe out their trading accounts by not having those protective systems in place with one or two transactions. Unsurprisingly, this completely destroys their confidence. Needless to say, before any trading can take place, a clear set of rules are needed to protect funds. So how does one protect capital? It’s simply achieved through risk management, which reduces the exposure of losses for an individual in their trades. A system like this means traders can get through losing streaks without wiping out their capital.
The first thing traders should do is set a cap on their trading account. A cap essentially limits the risk traders can take per trade and per day with a maximum percentage. The cap percentages can be anywhere from 0.1% to a maximum of 3% of the capital in a trading account. Employing a protective stop loss is also an important component of a risk and money management strategy. This tool gives traders the ability to determine the maximum loss they are willing to take on a single position for a particular trade.
When a protective stop loss and capital caps are used in this way, the traders in question can rest safe in the knowledge that their capital is adequately protected.
FTSE 100 climbs as recovery bets boost mining, energy stocks
(Reuters) – London’s FTSE 100 rose on Thursday, helped by mining and energy stocks that tracked higher commodity prices, while Standard Chartered dropped after its annual profit more than halved due to the impact of the COVID-19 pandemic.
The commodity-heavy FTSE 100 index was up 0.3% by 0808 GMT, with mining stocks, including Rio Tinto, Anglo American, and BHP, gaining between 1.5% and 3.6% on higher metal prices. [MET/L]
Oil heavyweights BP and Royal Dutch Shell also provided the biggest boosts, with gains of 1.2% and 0.8%, respectively. [O/R]
The domestically focused mid-cap FTSE 250 index rose 0.2%, led by industrials and consumer discretionary stocks.
Standard Chartered PLC fell 3.3% despite restoring its dividend and reaffirming its long-term profit goals.
Anglo American gained 3% as it boosted dividends after strong commodity prices helped the diversified miner recover from coronavirus disruptions suffered in its first half.
Outsourcer Serco Group Plc rose 8.3% as it reinstated dividends and raised 2021 forecasts, after posting a 20% jump in annual revenue.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V)
Asian shares jump after Powell nixes rate hike fears
By Hideyuki Sano and Echo Wang
TOKYO/MIAMI (Reuters) – Asian stocks jumped on Thursday after U.S. Federal Reserve Chair Jerome Powell reaffirmed interest rates would stay low for a long time, calming market fears that higher inflation might prompt the central bank to tighten the monetary spigot.
Powell’s reassurance gave a fresh impetus to reflation trades and boosted risk asset prices while also driving U.S. bond yields back up to one-year highs.
MSCI’s ex-Japan Asia-Pacific shares index rose 1.0% while Japan’s Nikkei gained 1.6%.
Hong Kong’s Hang Seng jumped 1.8% to pare more than half of its previous day’s losses following the announcement of a stamp duty hike.
In a second day of testimony in Washington, Powell reiterated the Fed’s promise to get the U.S. economy back to full employment and to not worry about inflation unless prices rose in a persistent and troubling way.
“Powell said it will take three years for them to achieve its inflation target, essentially reaffirming the Fed will not raise interest rates until 2023,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
“A huge amount of cash investors have to work is flowing into the stock market, and that is more than offsetting any negative aspects of higher bond yields.”
The prospects of a prolonged period of low interest rates came as investors expect a huge U.S. fiscal stimulus and a progress in COVID-19 vaccinations to shore up the economy, especially the sectors hit the hardest by the pandemic.
The U.S. Food and Drug Administration said on Wednesday Johnson & Johnson’s one-dose COVID-19 vaccine appeared safe and effective in trials, paving the way for its approval for emergency use as soon as this week.
Johnson & Johnson rose 1.3% following the news.
On Wall Street, the Dow Jones average jumped 1.35% to a record high, outperforming 1.0% gains in tech-heavy Nasdaq, as investors rotated into cyclical shares out of flying-tech firms.
In a possible sign of a fresh frenzy into old economy shares, GameStop rose 83.3% in extended trade, building on a gain of 103.9% on Wednesday.
U.S. bond prices stayed under pressure, boosting their yields to the highest level in a year.
The 10-year U.S. Treasuries yield rose to 1.412%, having hit a high of 1.435% on Wednesday.
“I wouldn’t say there is a panic in the bond market. But we have a coronavirus package worthy of $1.5, $1.7 or $1.9 trillion. And in addition, there will be infrastructure spending as well. Investors see few reasons to buy bonds aggressively now,” said Takafumi Yamawaki, head of Japan rates research at J.P.Morgan.
A closely watched part of the U.S. yield curve measuring the gap between yields on two- and 10-year Treasury notes rose to 127.4 basis points, near its 2016 peak of 135.7 hit after Donald Trump’s surprise election victory.
In the currency market, the safe-haven U.S. dollar languished near three-year lows versus riskier currencies as continued dovish signals from the Fed stoked reflation bets.
The Australian dollar hit a three-year high of $0.7978, while the safe-have yen eased 0.2% to 106.04 per dollar. The euro stood little changed at $1.2159.
Elsewhere, copper price jumped 3% to its highest level in almost a decade.
Crude oil climbed to fresh 13-month highs after U.S. government data showed a drop in crude output as a deep freeze disrupted production last week.
U.S. crude rose 0.25% to $63.40 per barrel and Brent was at $67.33, up 0.43% on the day.
(Reporting by Echo Wang in Miami; Editing by Sam Holmes)
Dollar languishes near three-year lows as Fed’s Powell stokes reflation bets
By Kevin Buckland
TOKYO (Reuters) – The safe-haven U.S. dollar languished near three-year lows versus riskier currencies on Thursday as continued dovish signals from the Federal Reserve stoked reflation bets.
The greenback sank to a fresh low against the Australian dollar, and held near lows set overnight against its British, Canadian and New Zealand peers.
Fed Chair Powell reiterated on Wednesday that the central bank wouldn’t adjust policy until the economy is clearly improving, and will look through any near-term spike in inflation. The remarks to the House of Representatives Committee on Financial Services mirrored his testimony before the Senate the day before.
“Powell made it very clear that the improvement in the economic outlook thus far will not instigate the Fed to tighten monetary policy,” National Australia Bank foreign exchange strategist Rodrigo Cattrill wrote in a client note.
“The punch bowl ain’t going anywhere anytime soon and the policy backdrop should remain supportive for risk assets for some time.”
Easy financial conditions, the promise of fiscal stimulus and an accelerating COVID-19 vaccine rollout have driven money into what’s come to be known as the reflation trade, refering to bets on an upswing in economic activity and prices.
Commodity-linked currencies are placed to benefit from a pick-up in global trade, while investors have also cheered Britain’s progress in recovering from the coronavirus pandemic.
Australia’s dollar rose 0.1% to $0.79717 on Thursday in Asia after earlier touching a fresh three-year high of $0.7975.
The New Zealand and Canadian dollars traded just off Wednesday’s multi-year highs.
Sterling was little changed at $1.4143 after pushing to the cusp of $1.43 overnight for the first time since April 2018.
The euro traded near the top of its recent range at $1.2168, near the almost one-month high of $1.2180 touched earlier this week.
The dollar strengthened though against other traditional safe haven currencies, rising 0.1% to 105.94 yen for a third day of gains. It held near the three-month high of 90.945 Swiss francs reached overnight.
(Reporting by Kevin Buckland; Editing by Lincoln Feast.)
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