Page 63 - Ultimate Guide to Currency Trading

If you have several trades building up on one currency pair, the possibility of a margin call will
force you to close out the oldest one of the grouping first. In the United States, closing multiple trades
in the same currency pair must be done in a first-in, first-out basis. This means that you will have to
close out the first trade that you used to buy into the currency pair first, even if it is at a loss, and later
trades are gains. This rule is one of the reasons that it is best to pyramid your trades in a multistep
method of purchasing. If you go all into a position in one swoop, you are running the risk that you will
have to dismantle the whole trade at a loss sometime in the future.

After selling off your winners, take notice of the amount of margin avail-able you have posted
on your trading screen. You will undoubtedly have noticed that the amount has gone up considerably,
and most likely you are out of the danger zone. The next best thing to do now is to wait. Wait for the
trades to turn in your favor, if even by just a bit. Every cent matters in currency trading. A cent on a
trade can mean a lot when you are trading at high margin—ratio levels.

With this idea in mind, you can see where building up a position in smaller sections can really
help out when it comes time to close out those same positions. If you have used the pyramid method
of one-third, one-third, one-third, or better yet, one-fifth, one-fifth, one-fifth, one-fifth, one-fifth of
your margin goal building up a position, then you will have greater flexibility when it comes time to
dismantle the same position at the time of a 'margin call.

The method of pyramiding a position can also be very helpful when it comes time to close out
and dismantle a position that is profitable. You can switch to the part of your trading software that
gives the status of your positions. It will tell you the net number of units per pair (grouped together)
and it will also tell you your net profit for the group of trades that are all in the same currency pair. If
you are in a profit point that is good for you, then you can start to dismantle the position one trade at
a time. It might be that you want to reduce your exposure to a currency pair by a third or a half. When
you have built up the position in smaller bites, you can reduce your position in the same smaller bites,
and get it down to the size you would like and feel more comfortable with.

The 2 Percent Rule and Risk Management

One of the ways that you can set up your account to prevent any chance of a margin call is called the 2
percent rule. The 2 percent rule is a method of set-ting your stop losses to be no more than 2 percent
of your total margin balance. Setting stop losses is when you program the software to close out of a
trade at a predetermined point automatically. Once you set up a stop loss it will fire automatically
when that price level is breeched. The use of stop losses is one of the best methods of preventing an
all-out disaster in your account. Setting stop losses can be one of the best methods to keeping your
Forex account intact during harsh market conditions.

When you are going to set up your stop losses you can use the 2 percent rule. By nature, if you
are trading with a smaller amount, you would be able to place your stop losses at a further price
difference away from the original purchase price. If you have a large position on the books, then the
placement of the stop loss would be that much closer to the purchase price. To explain this further, if