Page 64 - Ultimate Guide to Currency Trading

you have a total of $10,000 available margin, 2 percent of this would be $200. You would keep this
number in your mind when you were going to the order entry screen. When you are buying into a
trade you would then set the amount of units (money) that you are to buy at that time. Before you
click the "Submit" button, go to the "Stop Loss" part of the order-entry screen and enter in a price
level at which you would like the trade automatically to close out. Take notice of the amount of
money that you will lose if the trade goes through at that level and closes out at that price point. Keep
adjusting the price of the stop-loss level until it reaches "loss amount = $200." Once you find this price
level, you are ready to go. Next, you need to confirm the amounts mentally, and then click "Place
Order."

You can get familiar with using the 2 percent rule when you are using your practice
demo account. Practice many of the ideas presented in this book by working out your
skills in a demo account that is the same type you intend to trade with. Learn the skills

Essential required for currency trading by practicing often!

You should do the same thing for any amount of currency that you buy. If you purchase a
smaller amount, then there will be more room built into the length that the pair can travel before
triggering the $200 loss. If your purchase is a large amount, the price will naturally have to move less
to trigger a $200 loss.

Using the 2 percent rule and keeping your losses to within 2 percent of your total account
value is doing two things. One, it is keeping you within a range of profit and loss that is easy to
visualize and gauge with each trade. Second, keeping your losses to 2 percent for each trade means
that you will lose a maximum of 2 percent of your margin with each trade; or in other words, you will
never lose more than 2 percent of your account if a trade goes bad or against you. Carrying this out
further, if you used the 2 percent rule for each and every trade, you would be able to lose 50 trades in
a row before your account was closed out with a balance of zero (100% x 2% = 50). The idea of losing
fifty trades in a row is almost inconceivable, and would rarely happen. It would be more likely that you
would win a number of those trades, and this would add to your available margin.

Either way, understanding how your margin works and using stop losses effectively will help
you keep your account in profitable territory. If you can work in a bit of risk management by using
position pyramiding and also the 2 percent rule, you will be going a long way toward keeping yourself
net positive over the weeks and months. You will also be giving yourself a proven method of risk
management that goes beyond what most Forex traders work into their trading systems.