Stop losses (SL) and take profits (TP) are essential tools for managing risk and maximizing profit.

But setting these orders on MT5 can be a little confusing, depending on which version you're using.

So in this tutorial, I'll show you how to set SL and TP orders in all versions of MetaTrader 5:

• iOS mobile
• Android mobile
• Desktop
• Web

MetaTrader 5 Desktop

Once you open the desktop version of MetaTrader 5, click on the New Order button.

The order entry screen will pop up.

Click on the crosshair button in the toolbar at the top of the MetaTrader screen. Then move the crosshair around and look at the price to the right side of the screen to determine your stop loss and take profit prices. 

Enter your stop loss and take profit prices in the order entry screen.

You could try to use the small screen on the left side of the order entry screen, but in most cases, it's too small to be useful.

So using the crosshair on the main chart is the best way to go.

Then set your order Type, double check the Symbol and set your lot size (Volume).

When everything looks good, click the Buy or Sell button.

MetaTrader 5 Mobile iOS

Entering orders on the mobile apps isn't as smooth as it could be. The process is actually different on the Android and iOS versions.

The iOS version is a little easier to use.

First go to the Charts tab at the bottom of the screen.

Then tap on the red and blue clock-looking icon in the top right corner of the screen.

A toolbar will appear at the bottom of the screen. It has buttons for SL, TP, Continue and “X,” or close toolbar.

Tap on SL to set a stop loss. A red line will appear on the chart. Tap and drag the line to the price you want to set the stop loss at.

If you need more space, tap and drag the prices bar on the right side of the screen up and down to compress the chart vertically.

Do the same to set the take profit. Tap on the TP button and drag the line.

If you're going to set a limit order, tap and drag the Limit line.

When you're done, tap Continue.

After you tap on the Continue button, you'll see the order entry screen.

Here's where things get tricky…

If you're trading a limit order as entered on the chart screen, then you're good to go. Check the lot size (center number) and click on the Place button. The order will be entered.

However, if you want to use any other order entry type, your Stop Loss and Take Profit prices will disappear when you change the order type.

Therefore, if you're going to change the order type, be sure to write down your prices before you change the order type. Then enter them manually, after changing the order type.

After that, select lot size (middle number) and entry price (if using a pending order).

Then click the Buy, Sell or Place button at the bottom, depending on which type of order you're using.

MetaTrader 5 Mobile Android

Entering orders on the Android version is the least intuitive of all the platforms.

But if that's what you prefer to use, here's how to do it.

First tap on the Charts tab at the bottom of the screen.

Then select the crosshair tool from the toolbar at the top. Tap and drag the crosshair around to get the prices for your stop loss, entry pending order and take profit. Write these down so you can use them on the next screen.

You cannot compress the chart vertically, like you can on the iOS version. So you'll either have to pinch the screen to make it smaller, or change the chart to a higher timeframe.

Then tap the square with the “+” symbol in the upper right corner.

This will open the order entry screen.

Choose your order type and lot size (middle number) at the top of the screen. If you're using a pending order, click on the box for the entry price and manually type in your entry price.

Next, tap on the Stop Loss and Take Profit boxes and enter the prices you wrote down in the crosshair step.

Finally, click on the Buy or Sell button at the bottom of the screen, depending on which type of order you're entering.

MetaTrader 5 Web

The web version is the easiest to use when it comes to adding a stop loss and take profit.

However, there are downsides to the WebTerminal. You cannot get all of the features that are available on the desktop version, like adding custom indicators and EAs.

But it's very simple and allows you to place trades when you're on someone else's computer.

Start by going to the WebTerminal here.

Login with your existing MT5 account or setup a new demo account.

Once you've connected to your account, click the New Order button in the toolbar.

This will bring up the order entry screen on the left side of the chart.

Start by selecting the order type at the top of the order entry screen. In the screenshot above, it defaults to Buy Limit.

Then set the Volume (lot size) and the entry price, if you're using a limit or stop order. You can also click and drag the limit on the chart to set the entry price.

Next, click on the “+” or “-” symbol next to the Stop Loss box. This will bring up a red line on the chart. Move the line to the price that you want to set your stop loss at.

After you've set your stop loss, click on the”+” or “-” symbol next to the Take Profit box, if you're going to use a take profit. A green line will appear and you can drag it to the price that you want your take profit at.

From there, set your expiration time, if you're doing a pending order, then click on the Place Order button to enter your trade. Most trades will be Good-Til-Cancelled (GTC).

How to Set a Trailing Stop Loss in MT5

A trailing stop loss can help you lock in profits, as the market moves in the direction of your trade. This is simple to set up.

To set a trailing stop loss in MetaTrader 5, right-click on an open order. Then select Trailing Stop from the menu. Select one of the default point values, or click on Custom to set your own. 

This feature is only available on the desktop version of MetaTrader 5. 

Once you set your trailing stop, your stop loss will lock in profits on every tick.

It's a good idea to give your trailing stop some space because if your trailing stop is too tight, you'll get stopped out too soon.

Backtesting is the best way to figure out where to set your trailing stop loss.

Why Stop Losses are Important

Stop losses are the easiest way to limit your risk on a trade.

Successful trading is about managing risk, not trying to hit home runs on every trade.

So using stop losses are vital for new traders. The easiest way to blow out your account is to not use stop losses.

At least in the beginning.

Once you're more experienced, you might consider trading without stops.

Using a stop loss also allows you to set a percent risk per trade. Knowing your exact risk per trade allows you to do advanced calculations on your trading results and optimize your trading strategies.

Where to Place a Stop Loss

Now that you know how to place a stop loss, the next question is to figure out WHERE to place your stop loss.

The best way to figure out a good place to put your stops is to backtest. Find a trading strategy that resonates with you and test it.

Then play with where you place the stop loss, to see if you can improve the results.

Your stop loss should be in a place where the normal market gyrations won't get to it easily. It should also be a place where you would be totally wrong about your hypothesis of where price is going to go.

To learn how to figure out how much to risk per trade read this tutorial.

Why Take Profits are Important

Take profits are not used by all traders, but they can be a great way to lock in your profits.

Many times, the market will move in your favor, only to snap back and either hit your entry price or your stop loss.

For example, if you didn't set the take profit (green line) at the previous support level, you would have missed out on quite a bit of profit as price bounced up off the level.

So consider testing a take profit on all or part of your position. A take profit on part of your position would allow you lock in some profits, while keeping your trade open to potentially catch a big run.

Where to Place a Take Profit

Figuring out where to set your take profit is trickier than figuring out where to put your stop loss.

It can be easy to change your take profit level during a trade, only to find that your original TP was at an ideal price.

So again, you have to backtest to find out the best place to take profits on your trades.

Putting in the time to figure out your ideal take profit will usually yield better results than trying to optimize your entry.

But not all traders use a take profit, so figure out what works best with your trading personality.

Final Thoughts

Having the discipline to set your stop loss will keep you out of trouble when a trade goes the wrong way.

A proven take profit level will allow you to take advantage of big moves, before they snap back.

Create a trading plan, then backtest your SL and TP to see which settings generate the most profit.

Be sure to track your results in a spreadsheet. That makes it easier to keep track of what you tested and play with the inputs to optimize your strategy.

The post How to Set a Stop Loss and Take Profit on MetaTrader 5 (iOS, Android, Desktop, Mobile and Web) appeared first on Trading Heroes.

Maximum drawdown is an important trading statistic to track in your backtesting and live trading. In backtesting, it shows you the downside risk of a strategy. Tracking max drawdown in live trading helps you understand when your strategy might not be working as expected or you might be in a less than optimal mental state.

Maximum drawdown is calculated in percent, and is the most that an account has lost between all-time highs. The calculation is performed on the running account balance column. This is the Excel formula. 

=MIN((A1-MAX($A$1:A1))/MAX($A$1:A1),0)

The rest of this post will explain how the formula works, how to setup your spreadsheet and answer frequently asked questions.

Here's a video to show you maximum drawdown in action.

If you prefer the expanded text version, it's provided below the video.

Step-By-Step Guide to Calculating Maximum Trading Drawdown in Excel

To get started, you'll need 2 things:

• A list of trades with a running account balance or profit/loss per trade
• Your favorite spreadsheet program

You can use the formula above in spreadsheet programs like:

• Microsoft Excel
• macOS Numbers
• Google Sheets
• OpenOffice

First, you'll need to have a set of trades to analyze.

These trades can come from any source. Just be sure that they are in CSV or another text file that your spreadsheet program can import.

I'll be using an export from Forex Tester to analyze my backtesting results. You can learn more about Forex Tester here.

I exported my trade history file from Forex Tester as a CSV file.

Once you have your file saved, then in Excel, go to:

Data > Get External Data > From Text

Then find your file and click the Import button at the bottom.

From there, you'll enter the import wizard. The settings you choose in the wizard will depend on the format of your file. For this example, I'll use the settings for importing a Forex Tester file.

In step 1, do the following:

• Select Delimited as the original data type
• Set Start import at row to 2 to remove the header row. Start at row 1 to keep the header row.

Click on the Next button to go to the next step.

Then select Tab and Comma and click on the Finish button.

Excel will ask you where you want to import the data. Put it into cell A1.

In this example, the last column contains the initial deposit, as well as the profit/loss from each trade. So I'm going to create a new column to keep a running total of the account balance.

I start at the second line and add the initial deposit to the current line.

In the next cell in the same column, add the cell above to the current profit or loss.

Then double click the handle (the little square) in the bottom right corner of the cell with your formula in it. This will copy the formula all the way down the column.

Now you have a column with the running account balance.

In the next column to the right, copy and paste this formula:

=MIN((A1-MAX($A$1:A1))/MAX($A$1:A1),0)

Change the cell references to match your spreadsheet.

For this example, my formula is:

=MIN((R2-MAX($R$2:R2))/MAX($R$2:R2),0)

Double click the handle in the lower right corner of the cell to copy the formula all the way down the column.

You can now see the percent drawdowns in your trades. The formula only shows drawdowns, not account growth.

Now there's just one more step…

Find the largest drawdown in the column to get your max drawdown.

Do this by using the minimum (MIN) function to show the lowest value in the column, or the biggest drawdown.

In this example, the formula is:

=MIN(S2:S15) 

Here's what the 3 columns will look like after you're done.

The maximum drawdown in this backtest was 1.03%.

That's all there is to it!

How do You Find the Max Drawdown of a Portfolio?

The process of calculating the max drawdown of a portfolio is the same. Simply add all of the trades in the portfolio to the spreadsheet.

After that, sort all of the trades by exit date. Then follow the steps shown above.

Finally, use the MIN function in Excel to find the biggest drawdown in the running total.

What Does Maximum Drawdown Tell You?

There are 3 different scenarios when you should look at maximum drawdown:

• Backtesting
• Beta Testing
• Live Trading

The max drawdown in each situation gives you different information.

Backtesting

You should find out what your max drawdown is for a particular system in backtesting, so you know what to expect in live trading. 

Your backtesting results may have produced solid returns, but if you couldn't realistically endure the biggest drawdown, then the system won't work for you. It's good to know that before you start trading with real money.

The great thing about backtesting is that you can test many different ideas, to see how a little tweak in the strategy changes the results. Once you have a strategy that you like, you can move on to the next step.

Beta Testing

When you are beta testing (also known as forward testing), this is the first opportunity to see if your backtesting results will translate into live market conditions.

Sometimes they don't, for reasons that I talk about here.

If your beta testing max drawdown is much bigger than your backtesting drawdown, then you might be doing something differently in beta testing. Compare your backtesting trades to your beta trades to see why you are having a bigger drawdown. 

This intermediate step acts as the final check on your trading strategy, before you go live.

Keep in mind that the strategy might be working fine, but you simply hit a run of bad luck.

Live Trading

Finally, your max drawdown in live trading will show you how well you are doing, compared to your testing. If your live trading max drawdown is higher than your backtesting or beta testing, then you should like at your live trading more closely.

Here are some things to consider:

• Are you taking too many impulsive trades?
• Have market conditions changed?
• Are you not following the rules of your strategy?
• Have you been revenge trading?

Tracking your max drawdown is a warning system that will show you when one or more of these things could be out of line. Without this information, you might not know that you are trading poorly…until it's too late. 

If that happens, it might be really hard to make up for the losses. 

In addition, when you have backtesting and beta trading data, you can compare your testing trades to your live trades to see if there are any noticeable differences.

If you don't have testing trades to reference, you'll have to build up your “library” of trades with live trades only, and that can take some time.

Expected Maximum Drawdown

Testing isn't the only way to figure out your expected maximum drawdown.

You can also use a Monte Carlo simulation to find out how much your strategy could potentially lose. 

Backtesting and forward testing are good approximations of how your strategy will perform, but it's also good to plug your stats into a simulator to see what your worst possible result could be.

A Monte Carlo simulation simply uses the parameters of your strategy like win rate and win/loss per trade. Then it simulates thousands of trades with those properties, to see what your worst drawdown might possibly turn out to be.

For example, you might have a maximum of 4 losing trades in a row in testing. However, a Monte Carlo simulation might show you that you can potentially have up to 8 losing trades in a row. 

This is important information because if you trade this live and you hit 6 losing trades in a row, you might think that your strategy has stopped working.

In reality, this is within the normal parameters of how your system works and you shouldn't freak out about it.

However, if you hit 12 losing trades in a row, then it might be time to stop trading and review your results because this is outside the maximum loss that you saw in the Monte Carlo simulation.

You should plugin backtesting, beta testing and live trading results into a Monte Carlo simulator to see what your expected max drawdown might be.

The more data you have the better.

What is a Good Maximum Drawdown?

There's no such a thing as a “good” maximum drawdown. Acceptable maximum drawdown will vary by trader. 

Many new independent traders strive to have a low maximum drawdown.

But with low risk also comes low rewards.

If you are OK with that, then low drawdowns should be one of your goals.

However, if you want to see higher returns, then you will usually have to endure higher drawdowns.

That's just how trading works, there are no free lunches. 

Another thing to consider when looking at max drawdown is the psychological effect that the drawdown might have on you. 

Some traders are able to withstand a 60% drawdown, in exchange for also having higher returns.

But for a lot of traders, a 60% drawdown would freak them out!

So you should find your “freak out” point and tailor your trading strategy accordingly.

Read this post on finding your Risk Tolerance Personality to learn more about how to figure out your risk tolerance.

A good max drawdown for you might be more like 20%. If that's the case, you will probably have to risk less per trade.

What's a High Watermark?

A term that you might hear related to max drawdown is “high watermark.”

That's simply the current all-time high of the account balance. The maximum drawdown is the highest percentage drawdown that has occurred between high watermarks.

So if your account started at $10,000, then went to $12,000 after 5 winning trades, then $12,000 is your high watermark. Whatever drawdown takes place between now and when your account balance is higher than $12,000 will be your current maximum drawdown.

Conclusion

Every trader should know their max drawdown in live trading.

It also helps to know your drawdown in backtesting and forward testing because that data will give you reference points to help improve your trading.

Take a few minutes to do this simple calculation right now, and find out how you're doing.

Then also run your data through a Monte Carlo simulator to see how big your drawdown could possibly get. If you aren't comfortable with that expected max drawdown, then dial back your risk per trade until you can tolerate the maximum risk.

The post How to Calculate Maximum Drawdown in Excel appeared first on Trading Heroes.

Getting stopped out is a normal part of trading. You win some, you lose some. But could your stop loss placement be better? This post will teach you how to make a data-driven decision on the best place to put your stop losses.

The ideal place to set your stop losses is determined by these 2 factors:  

1. The stop loss should be at a level that proves that the entry idea was totally wrong 
2. The stop loss should have an acceptable historical win rate (relative to your overall trading strategy)

Now let's get into more detail on how this works in real-world trading…

Step 1: Create a Written Trading Plan

If you don't have a written trading plan, then it's absolutely necessary that you create one before you move on.

Download the free Trading Plan Worksheet PDF from this blog post.

In order for you to optimize your stop loss placement, you first need to have a consistent method of setting your stops. 

Once you have concrete rules on where to place your stop loss, you can track the performance and see if there are ways to improve it.

Step 2: Backtest Your Trading Plan

Backtesting allows you get data on your stop loss plan, based on historical data. If you have never done backtesting, Forex is a great market to do it in because the software and data are relatively inexpensive and easy to use.

You can backtest with any of the Forex software programs out there:

• MetaTrader
• TradingView 
• Forex Tester

To get started, read this guide on backtesting.

Review the results to see what works best. Remember to test on the timeframes and currency pairs that you will actually be trading.

Step 3: Adjust and Retest Your Trading Plan

If your backtesting wasn't profitable, it's time to experiment with your trading plan.

Even if your backtest went well, also consider testing other ideas. 

Don't be afraid to get really creative. 

Sometimes the weirdest ideas end up being the most profitable!

Once you have a strategy that tests well, it's time to move on to step 4.

Step 4: Track Your Results

Now it's time to track your results in Beta Testing. Trade your strategy in a demo account and track the results.

You can use a trading journal like RazorJournal, Evernote or a simple Excel spreadsheet.

Backtesting does have limitations, so this is where you can flush out the bugs in your trading strategy.

If your Beta Testing doesn't match your backtesting, then review your journal and adjust accordingly.

Common Stop Loss Placement Mistakes

Setting a Greedy Stop Loss

Many beginning traders like to set really tight stop losses, then dream about the Ferrari that they will buy with the 20X profit on their trades.

Then they get stopped out repeatedly…and quit.

Don't be greedy. 

Setting really tight stops can work for some day traders, like this trader.

But in most cases, setting a wider stop loss usually leads to higher profits, especially if you are a swing trader. This is because you give the trade room to work itself out.

Otherwise, you are at the mercy of normal market volatility.

Trading Incorrect Lot Sizes

If you have a very small account (under $10,000), then you should consider trading nano lots. This will allow you to set the ideal stop loss level on every trade.

Many traders get stopped out because they use lot sizes that are too big for their account size. So they set a tighter stop loss because they simply cannot afford to take a 200 pip loss, even with micro lots.

Using nano lots will give your trades the room they need to breathe, while still taking a reasonable amount of risk. 

Not Having a Tested Stop Loss Plan

I mentioned this before, but it's worth mentioning again. You need to have a black and white trading plan on how you will set your stop losses.

If you place your stop losses on “gut feel,” you have no way of figuring out how to improve your results because there's no consistency in your method.

But simply having a plan is not enough.

Your trading plan should be tested thoroughly to find out if it really works.

5 Ideas for Stop Loss Placement

If you want some new ideas on where to place your stop loss, here are five ideas that you can experiment with. Results will vary by trading strategy, but these are great starting points.

1. Beyond the Current Swing Low/High

The last price swing can be a good place to set your stop loss. It's usually a pretty obvious level.

If you are setting your stop loss on the other side of a candle, and you are getting stopped out often, then consider using a swing point instead.

Here's an example short trade. If you went short at the arrow, you could place your stop above the current swing high.

A big benefit of setting your stop loss beyond the last swing is that you can usually get in with a fairly small stop loss.

Of course, the downside is that you can get stopped out fairly easily because it's close to price action.

2. Beyond the Previous Swing High/Low

If the last swing point is too close for you, then consider using the previous swing level. Some traders may not like this idea because the stop loss can be considerably further away.

But if you do some testing, you might find that a bigger stop loss can actually lead to a higher winning percentage.

Don't take my word for it, test it for yourself. 

This tip may not apply to your strategy. However, if you are setting your stop losses way too tight, this one simple tweak can greatly improve the profitability of your trading strategy.

Here's an example of the previous swing high on the short trade shown in the previous example.

3. Beyond a Moving Average

Setting your stop loss beyond a moving average can be a good strategy for trend following trading strategies. It provides a dynamic level of support or resistance that moves with the market.

You will probably have to test several different lookback periods to see what works best for you.

The best way to get started is to test some of the common settings out there.

For example, the 20, 50, 100 and 200 moving averages are popular, so start there. You don't have to test every single setting. It's all about what works pretty well, most of the time.

Some countertrend strategies can also use moving average stop losses, but this type of stop loss strategy is usually better for trending strategies.

However, you never know. Give it a test and see if it works for you.

4. Support and Resistance

Another great place to set your stop losses is beyond a key support or resistance level. Remember that these aren't precise lines…they are more like support and resistance zones.

So be sure to give price a little room to move and don't think that price will stop on a dime, just because you drew a line on your chart.

If you aren't sure on the best place to draw support and resistance levels, then read this post.

As a rule of thumb, the best places to draw your levels are places where price reacted strongly, from both the bottom and top. If price violates one of these levels, it's usually a good signal that your initial analysis of the chart was wrong. 

Also remember to check for 50s and round numbers because they are often support or resistance levels.  

5. Parabolic SAR (PSAR)

Finally, PSAR can be another great way to set your stop loss. The goal of this indicator is to show you when momentum has shifted.

Like any other indicator, it's not perfect. But it does a good job of following trends and creating more space when price is moving quickly.

It can be used for both trending and countertrend strategies.

Test it out and see how it works for you. 

Here's what it looks like on a chart:

Conclusion

A final word of caution on stop loss placement…

It can be easy to get into over-optimize your stop loss placement.

That never works.

There is no perfect stop loss placement, trading is all about playing the percentages. But once you have data on what happens when you use a certain stop loss placement strategy, the best place to set your stop losses usually becomes obvious.

If you still don't know where to start, trade one position, then set a 1R profit target…and go from there.

Keep it simple.

Get started with testing some ideas right now. 

If you have any questions on about this post, feel free to leave your comments below…

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The post How to Find the Best Place to Set Your Stop Loss appeared first on Trading Heroes.

When working on growing a small trading account, it can be tempting to take excessive risk. In fact, that's what a lot of trading sites will tell you to do.

But taking too much risk will ultimately end in a blown account.

So what's the solution?

Is growing a tiny account even possible?

Sure, but it takes some patience and creative thinking.

In this post, I'll give you 9 sustainable tips for growing a small trading account.

Remember that this also assumes that you already have a trading strategy that has an edge. If you don't have that yet, work on that first!

1. Use Proper Risk for Your Account Size

For starters, be sure that you are taking the right amount of risk per trade. For most traders this is less than 2% of their total account, per trade.

If you are just starting out, then consider taking 1% or less, and move up from there.

Yes, risking a small amount like this, seems like it won't grow your account very quickly.

But here's the thing…

Growing a small trading account is all about consistently. Consistent wins compound to big numbers, over time. 

…and if you lose all your money, you'll have no account to trade with.

So the key is to take a small amount of risk, but figure out ways to win a lot more than you lose. 

This can be done with either a high win rate, or a high multiple-of-risk return per trade. 

You might consider taking more risk on a case-by-case basis, like when you are super-sure about a trade.

It may seem like a step backwards, but it's the best way to establish a solid foundation. Once you are consistent, then you can consider risking more.

2. Don't Withdraw Money, Let It Compound

Once you start making money in trading, it can be tempting to take some out to pay your bills or buy some toys.

But if you want to grow your account as quickly as possible, you should resist the temptation to make a withdrawal.

Let the magic of compounding work for you. 

Find other ways to pay your bills, while you build your account.

3. Stop Comparing Yourself to Others

It can be easy to compare yourself to others. That's what most of us are wired to do from a young age.

But comparing yourself to others usually brings about feelings of impatience, frustration and inadequacy.

You are only really competing against yourself in trading.

So be happy for successful traders…but don't measure their success against where you think you “should” be.

There's no “should.”

Only the reality of where you are now and the work required to get where you want to be. 

So stop following #lifeofatrader and #bitcoinbillionaire on Instagram, and get to work.

4. Look For Ways to Amplify Your Trading Strategies

Alright, now let's talk about trading strategies.

Many struggling traders jump from system to system, in search of gigantic returns.

But in reality, you may be able to take a your consistently profitable strategy, and simply “turn up the volume.”

Here are some ideas to get you started:

• Can you add to your position, once it's in profit? This is one way to do it.
• Can you simply risk more per trade? This guy will risk up to 10% on trades that he's really sure of.
• Can you leverage your wins (or “house money”) on your next trade to double your return? If this interests you, test this concept.
• Can you set a closer profit target to improve your win rate? Consider testing a 1R profit target.
• Can you set a tighter stop loss? Tracking your MAE can help with that.
• Can you set a profit target that's further away, to improve your average return per winning trade?
• Can you trade 2 positions…one at a close profit target and one at a further profit target?

Give those methods a try and see if you can improve your returns with an existing trading strategy. 

Remember to test these ideas extensively before risking real money.

5. Focus on Your Trading Process

Your process and mindset are much more important than your actual trading strategy.

Implement Backtesting and Beta Testing before you trade in your live account. 

This process is important because it gives you important data about a trading strategy and how it works for you.

In addition, it allows you to focus on specific elements of your trading to see if they work individually. When you break them out like this, it's easier to see where your issues are.

If you jump into live trading right away, it's really hard to tell if your issues are in your risk management, strategy or psychology. 

To get a complete explanation of the process, read this post.

Backtesting

Backtesting is a fast way to find out if a strategy has an advantage. You can test hundreds of trades in a few days, whereas it could take weeks, months or even years to get the same data in Beta Testing alone.

It also removes the emotional element of trading, so you can evaluate the strategy itself, not your trading psychology.

Beta Testing

Beta Testing (or forward testing) brings your emotions and lifestyle into the picture. Now you can see if the strategy will be a good fit for the way you see the markets and your schedule.

If your Beta Testing does not line up with your Backtesting, then your Backtesting data can help you understand why. Without Backtesting, you are flying blind and are likely to give up on a strategy.

…and that usually leads to a ride on the Trading Silodrome.

Live Trading

Live Trading is the final step and now it's time to bring your money psychology into the picture. Is your psychology strong enough to handle the rigors of trading your full-sized account?

If your Backtesting hit your goals, and your Beta Testing was similar…but your Live Trading sucks, then it's time to consider lowering your risk per trade, or improving your psychology.

Also, don't put unnecessary pressure on yourself by setting daily or weekly goals.

Take what the market gives you, journal your trades, review if you are missing trades, and keep getting incrementally better every day.

6. Add More Trading Strategies

Some traders get so focused on maxing out their current strategy, that they forget that they can also add more strategies to increase their returns.

If you have something that's working and you don't want to mess with it, then don't.

Just look for a new strategy. Be sure that the new strategy doesn't take similar trades to your first strategy. 

So if you have a trend trading strategy, then consider testing countertrend strategies.

How were the pyramids in Egypt built?

One block at a time.

Take the same approach to your trading skills.

Add one strategy at a time and you can build an impressive trading account. 

7. Review Your Discretionary Spending

This is an area that you might not have thought to look when building a trading account, but it can be an easy win.

To get started, track your expenses for 30 days.

Use an app, spreadsheet, or a notebook…whatever works for you.

Be sure to record every single thing that you buy.

At the end of the month, take a look at what you spent money on.

Is there any way that you can reduce your expenses?

Maybe you can, maybe you can't.

I'm not saying that you should live like a monk and not buy a coffee in the morning.

But maybe you don't need to go the tanning salon every week…

…just sayin'.

If there are a few things that you could cut out and wouldn't miss, then put the money you would have spent on those things into a separate bank account.

At the end of the month, move that money to your trading account.

Growing a small trading account isn't just about how much money you make. It's also about how much money you can add to the account. 

8. Sort Out Your Job Situation

Did you quit your job to trade for a living?

I've never heard of that working, unless someone was already making enough money in trading to cover their expenses several times over.

If you did quit your job and trading isn't paying your bills, then go find another job.

Seriously.

You'll need that stable income to maintain the correct mindset for trading.

Maslow's Hierarchy of Needs comes to mind here.

If you don't take care of your psychological and safety needs (will I go hungry?) first, it's almost impossible achieve the higher levels of esteem and self-actualization…which are required for successful trading.

So take care of your basic needs first.

Then go after those big trading goals…

Already have a job? Great!

Keep that job until you can cover your monthly expenses by several multiples with trading.

Trading usually won't provide the same consistent pay every month, like your job. So take that into account.

Hate your job?

That's the biggest reason a lot of traders quit their jobs prematurely.

Find another one. 

It can be easy get stuck in a rut at your current job. There are options out there, explore them. 

But for your next job, prioritize:

• Lower stress
• More interesting work
• Less commute time
• Better hours
• Co-workers you actually like

Sure, you may have to take a slight pay cut. But you can also work on lowering your expenses.

…or maybe not. You might actually find a job that pays more!

You will never know until you try.

Be willing the explore all of the possibilities. It might be a job in an industry that you've never worked in before.

Having a job that you like can free up a lot more energy and mental capacity for trading.

9.  Look For New Cashflow Sources

Finally, find ways to add new sources of low-maintenance cashflow to your life.

In most places in the world, there is an abundance of money lying around.

Well, not money per se, but opportunities to make money.

The skill is to be able to identify these resources and turn them into steady streams of income.

Here are a few ideas to get you started…

• You may be surprised how much some of your “old stuff” is worth. Those items can be sold locally or online.
• If you have skills that are in demand, you can setup an online store to sell your products, or offer consulting services.

To get more ideas, read this blog post.

Put all of the profits from your new endeavor into your growing trading account.

Just one additional income source can help you grow your trading account balance significantly.

So always be open to new ideas to make money. 

Final Thoughts on Growing a Small Trading Account

Building a small trading account to a point where you can start trading for a living isn't only about having a high win percentage, or taking high-risk trades.

It's about taking inventory of all the skills and opportunties that you have in your life and growing your account in a sustainable way. 

Be willing to consider all of the possibilities, from both inside and outside trading.

Is there something that wasn't mentioned above that has helped you build your small trading account? Let us know in the comments below…

The post 9 Strategies for Growing a Small Trading Account appeared first on Trading Heroes.

Why would you want to hide your stop loss from your broker?

In this post, I'll show you why some traders do this, how to do it, and the situations where it makes sense.

If you prefer the text version, it's provided below the video.

Why Hide Your Stop Losses From Your Broker?

Not all traders will benefit from hiding their pending orders.

There are 3 reasons why you might want to hide your stop losses.

1. Conceal Your Trading Strategy

If you have a trading strategy that works really well and you don't want other traders (or your broker) to reverse engineer it, then you might benefit from concealing your orders.

This is especially true if you publish your track record on MyFxBook or a similar copy trading or reporting platform.

Your broker will be able to see your initial entry and final exit level, but they won't know if you closed the trade manually or if it was a pre-set order.

2. Prevent Intentional Slippage

I'm not saying that all brokers do this but…

…a few do.

So if you are consistently profitable and you are not making as much money as before, then your broker could be slipping you intentionally.

There may not be a way around this and you may have to switch brokers.

However, one way to potentially prevent this is to hide your entry and exit orders.

If you think that your broker is doing this to you, try hiding your orders and compare your results.

3. You Have Very Large Trade Sizes

Traders who have very large trade sizes will benefit from hiding their pending orders. If their trades are on the broker's books, other large traders can temporarily move the market to hit their orders or ride the order flow.

Large traders typically break up their entry orders, enter them in small chunks, and spread them out across multiple brokers.

Some dodgy, unregulated brokers can also trade against large trades or hunt stops to their benefit. Regulated brokers won't do this.

How to Hide Your Stops and Other Pending Orders

There are 2 ways to hide your orders.

The method you use will depend on your budget, needs and available resources.

If you don't know how to code, then you can get started here. If you just want to hire someone to do it, our list of Forex trading programmers is a good place to start.

Create a Custom Order Execution Platform

You can create a custom platform that talks to your broker's servers via an Application Program Interface (API). This is the more complex and expensive way to go, but it is also much more customizable and scalable.

Almost all brokers and trading platforms have an API that you can use to build your own trading platforms.

You can use whatever development platform and programming language fits your situation and host it on one of your servers or use a hosting service like AWS.

Here are a few examples of trading APIs:

• Oanda
• MetaTrader 4
• Scandinavian Capital Markets
• Tradestation

Create a Custom MetaTrader Expert Advisor (EA)

Another way that you can do this is to create an Expert Advisor for MetaTrader. This is generally easier and cheaper.

You simply upload your EA to a Virtual Private Server (VPS) and have it running 24/7. Just be sure to pick a reliable VPS and setup alerts so you know when your server is offline.

To see which VPS we recommend, visit our resources page.

Conclusion

In reality, not all traders will benefit from hiding their stop losses and pending orders.

However, if you fall into one of the categories above, this post will get you started on the right track.

There is a common misconception that you should hide your stops so your broker doesn't stop hunt them. This is a myth and any reputable and regulated broker won't do this.

They want to have you as a customer for as long as possible because they make money on your commissions. So it's in their best interest to not stop you out all the time.

If you have any questions about hiding your pending orders, leave a comment below…

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we wholeheartedly believe in. TradingHeroes.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

The post How to Hide Stop Losses From Your Broker appeared first on Trading Heroes.

I personally believe that having a great entry is best way to improve your trading results.

Others argue that the exit is the only thing that really matters and a monkey could throw darts at a board to pick stocks, and with the right exit, that strategy could still be profitable.

That might be mathematically true.

But I've found that most traders need to enter at a point where they can place a stop loss that makes sense and have a good shot at making a reasonable profit.

In reality, the are both important, but a good entry makes your job much easier.

But how do you know where to set your stop loss?

Is Your Stop Loss Too Tight? The Arguments for Both

On one hand, it's exciting to set a very tight stop and potentially get a 9R+ trade.

After all, the smaller your risk, the higher your chances of having a payout that is multiple times what you have at stake. But that also means that you will probably get stopped out more often.

On the other hand, the idea of giving your trade room to breathe is enticing too.

The markets ebb and flow like the ocean and sometimes there is a large ebb, before the next flow.

However, if you give your trade too much room, your returns can suffer because your winners won't pay for your losers.

So which one is better?

The Right Way to Choose the Best Stop Loss For You

The bottom line is that your stop loss should be set at a level where your assumptions about the trade will be proven wrong. 

Some traders will tell you that a tight stop loss of 8 to 12 pips is best.

Others will tell you that a wide stop of 200 pips or more, is best. Many will tell you to use an indicator like the ATR.

Who should you believe? 

Well, they are probably all right…in their own way.

As long as they are actually trading what they teach, and not just talking out of their asses, then their method is the best for them.

However, therein lies the secret to your failure. 

If their method does not match with your trading personality, then there's a very high probability that you will not be able to trade that method successfully.

It's like dating someone who snores like a horse…and you are a light sleeper.

Eventually something has to give, if you want to get a good night's sleep.

So just like dating is a way to try out a relationship before you make any long term commitments, testing a trading system is away to try out a system before you risk any real money.

Here's how to do it…

First, start with the system, as it is taught.

It doesn't matter where you get the trading system from.

The trading method might work as-is, without any tweaks.

To learn some trading systems go here.

Do a complete round of backtesting on the currency pair and timeframe of your choice.

It's important to do a complete test so you get an idea of what you can expect.

I recommend using NakedMarkets but there is other software out there.

Then change the stop loss and do a complete round of testing again.

Compare your results.

This will tell you which stop loss should work better.

But don't stop there. Test as many different stop loss levels as you need to. 

Feel free to experiment at this point. It's only testing.

Once you have one that works in backtesting it's time to move to forward testing.

This is the step before going live, so use a demo account or a very small real money account.

Forward testing will allow you to iron out any quirks that are going on between your backtesting and forward testing.

When you have something that works in both rounds of testing, then you are ready to go live.

Going through this process will help you understand the best place to put your stops.

How to Fix Artificially Tight Stops

Before I end this post, there is one more issue that I must address. Some traders purposely set very tight stops because the correct stop loss is “too far away” and they will lose too much money.

If this is you, then you are simply trading with the wrong broker. 

Trading mini lots (1,000 units) with a $1,000 account is a recipe for disaster.

No wonder you want to keep your stops uber tight.

However, trading that same account with nano lots will allow you to take the correct amount of risk, usually 1% or less.

When you are able to take exactly the same amount of risk on each trade, you will make a lot more money.

Conclusion

I hope that this guide has helped you understand what it takes to figure out if your stops are too tight, or not.

There's no fancy indicator or formula.

Many people will be too lazy to do the testing to figure this out.

But not you, right?!

If you follow this process, you will know once and for all, if your stops are too tight, or if they are just right.

The post Is Your Stop Loss Too Tight? Here’s How to Find Out appeared first on Trading Heroes.

If you are wondering how much to risk per trade, then this post will show you exactly how to figure it out.

…and it probably isn’t what you think.

First, let’s get some conventional wisdom out of the way.

I’m sure that you have read all of the articles and books (like Market Wizards) that say that you shouldn't risk more than 2% per trade.

Some call it the 2% Rule.

As a general rule of thumb, it’s actually great advice. It will keep most traders out of serious trouble and help them hang around long enough to learn how to trade profitably.

But is the 2% rule optimized?

Not by a long shot.

If you don’t risk enough per trade, you aren’t maximizing the earning potential of your trading system. Risk too much and you can hit a drawdown that will have irreparable negative long-term effects on your trading psychology.

As traders, we want to avoid both of these scenarios. This is why you need to optimize your risk per trade.

Let’s start by taking a look at why 2% risk is far from optimized.

Why the 2% Risk Rule is Not Optimal

Again, the 2% Rule it is a good guideline that will keep most traders out of serious trouble. But it’s probably not ideal for you and your trading strategy.

These statistics need to be taken into account when figuring out how much to risk on each trade.

• Your win rate
• The percentage drawdown that you want to avoid (AKA your Freakout Point)
• Your average win/loss ratio

Without these stats, you are shooting in the dark.

The most important one to have is the drawdown that you want to avoid. Most new traders dream of the millions of dollars that they can make in trading.

But as most professional traders will tell you, focusing on the amount that you can lose is much more important.

If you hit a drawdown that screws with your head, you will go on tilt and possibly lose your entire account. At the very least, you will not trade well until you get over the loss.

So your long-term success absolutely depends on knowing your “breaking point” and that comes from knowing your vital statistics.

How to Figure Out Your Vital Statistics

Luckily, it is easy to figure out these numbers. Here is how to get each of your vital statistics.

Maximum Tolerable Drawdown

The best place to start is the maximum amount of your account that you want to avoid losing.

How do you do that?

It’s pretty simple…

First, imagine a trading account that would represent “a lot of money” to you. This will be different for everyone, so use a number that works for you.

For example, let’s say that $10K is a lot of money to you. Since that is a fairly big account balance for most people, we will use that number in the following exercises.

Now ask yourself how much of that account you would be willing to lose before you start freaking out.

In a $10K account, you might want to stop trading when you lose $2K, or 20%.

That is your maximum drawdown number.

I would actually suggest shaving little off that number, so you have a cushion. This is in case you are hit with some slippage or you fat-finger a trade.

So in this example, you might want to use 18% as the maximum drawdown that you want to avoid.

Once you have this number, it’s time to figure out the other two stats that you need.

Win Rate

Next, you need to know the win rate for your trading strategy. If you have been trading in a live or demo account for awhile, then you can use your current win rate. You should have at least 20 trades or so, to have a valid win rate.

But what if you are not consistently profitable yet?

No problem, simply put your trading system into Forex Tester and backtest it. That will give you a very good idea of how your strategy will perform.

Of course, your live trading performance will not be exactly the same as your backtesting. But having a number that is pretty close is much better than guessing.

For this example, let’s say that your system has a 62% win rate.

Your Average Win/Loss Ratio

Finally, take your average winning trade and divide it by your average losing trade.

To make things simple, let’s say that your average winner is $56 and your average loser is $28. That would give you a ratio of 2.

Again, if you don’t have live trading results, backtest in Forex Tester to get these numbers.

Now that you have the three vital statistics, you can plug them into the drawdown calculator to figure out how much to risk per trade.

How to Use the Drawdown Calculator to Figure Out How Much to Risk Per Trade

Here’s the moment of truth…

Head on over to the drawdown calculator, located on this page. If you want to use the example stats mentioned above, here is what the calculator would look like.

In this example, you would have a 8.4% chance of hitting a 18% drawdown over 1,000 trades, when risking the recommended 2% per trade. That’s not terrible.

…but it is still very possible.

Keep in mind that your exact result will probably be a little different from my answer because the calculator runs a new simulation each time you click the Calculate button. If you click the button a few times, you can see the range of probabilities to expect.

But let's see if we can get that 8.4% to absolutely zero.

Start playing with your risk per trade until you find a point where your chance of hitting your drawdown is absolutely zero. Click the Calculate button a few times, just to be sure. I would suggest using up to two decimal places for your risk per trade.

With the numbers mentioned above, you would need to risk 1.22% per trade to have a zero percent chance of hitting an 18% drawdown. Now you have the exact amount that you need to risk per trade, to avoid your most feared drawdown, while maximizing the return of the trading system.

But only 1.22% per trade?

Is that really enough?

What if the Risk Per Trade is Too Small?

Chances are pretty good that you will come up with a risk per trade number that you think is too small to grow your trading account significantly.

This is a common mistake that traders make.

They either throw out a perfectly excellent trading system because they think the risk is too small, or they disregard what the calculator says and risk way too much per trade.

Both of these actions usually lead to frustration and a ticket to ride on the Trading Silodrome.

So what can you do to build your trading account faster?

Remember that our friend compounding can help us increase our gains much faster than we might realize.

To see a perfect example, read this post.

When you are able to find a system that is consistently profitable, then you can simply trade it on more currency pairs. Of course, this is provided that your testing shows that it will work on the other pairs too.

You can also test other trading systems and if the results of your testing are good, you can start trading those systems too.

Lather, rinse and repeat until you reach your trading goals.

By layering trading systems and currency pairs, you multiply your trading edge. This can make a seemingly insignificant advantage pay out very well.

Conclusion

If you are just starting out, then risking no more than 2% per trade is a good place to start. In fact, keeping your risk down to 1% is even better.

However, if you have a technical trading strategy that can be backtested or you have a good amount of live or demo trading results, then using the Drawdown Calculator to optimize your position sizing will be a huge help in keeping you out of a heart-crushing drawdown.

Success in trading is all about sticking around long enough to take advantage of excellent trading opportunities. You cannot do that if you lose your account…or your mind.

Figure out your ideal risk per trade beforehand and your trading will be much less stressful.

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we wholeheartedly believe in. TradingHeroes.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

The post How Figure Out Exactly Much to Risk Per Trade appeared first on Trading Heroes.

If you are struggling to become a consistently profitable trader, then pause for a second, take a step back, and ask yourself if your trading strategy matches your personality.

How do you figure that out?

One of the steps in this process is figuring out your Trading Risk Tolerance Personality (TRTP).  In this post, I'll explain what that is, why figuring it out is vital to your success in trading and how to figure it out.

What is Your Trading Risk Tolerance Personality?

The bottom line is that everyone has a certain level of risk that they are comfortable with. However, most traders don't take the time to figure out what that level of risk really is.

So your task is to figure out how much you are comfortable risking on each trade. This may seem like a simple thing, but it is immensely important to your success.

You may think that you should risk 10% or maybe even 20%, because you think that you can make 50%, or even 100% in profit. But the reality is that you shouldn't be risking more than 2% per trade.

Yes, you can still be consistently profitable, even when risking less than 1%. In fact, a lot of professional traders recommend it.

Risk Tolerance Can Make or Break a Trading System

You may think that a trading system is the only thing that will determine your success.

But there are so many more factors than that. 

One example is the amount of risk that you take on one trade. The amount of risk that you take on each trade, can determine a few important things that you may not have thought about.

The Likelihood That You Will Take a Trade

If you take more risk than you are comfortable with, then you will be less likely to take a good trading opportunity.

It's like if you tried to start a campfire as a little kid and accidently burned your finger. You would probably be much less enthusiastic about helping build the campfire on the next camping trip.

Or if you invested in a rental property and lost a lot of money in the process. You would probably be turned off to the idea of real estate investing.

…essentially, you become gun shy and miss great opportunities.

You need to figure out a risk tolerance level that works for you. Otherwise, you will give up after a few losses.

How Much You Beat Yourself Up

When you lose more than you are comfortable losing on a trade, you will start to create a negative feedback loop that goes something like this:

• I lost and I don't feel comfortable with it
• I lost again and I feel even more uncomfortable
• I lost, how could I have been so stupid
• I lost, now I'm in trouble
• I lost, how could I have been so stupid
• I lost, that was a bad trade (even if it wasn't)
• …and so on…

Once that happens, you will begin to doubt every trade you make. So while there's no guarantee that using the right amount of risk per trade will solve this downward spiral (because other factors can contribute to it too), it can reduce the probability if it happening.

Sticking with a Trading System That Could Work

You may find a trading strategy that fits your personality perfectly. But if you risk too much per trade, then you lower the chances that it might work for you.

Even if the trader you learn it from says to risk X%, you can always risk whatever you feel comfortable with. That can help you stick with a system that you might have otherwise given up on.

How to Figure Our Your Risk Tolerance Personality

So how do you figure this out?

There are two ways that you can do this. First, you can open a demo account that is the same size as the real account that you are currently trading or you plan to open.

Then start taking trades with the following risk levels. Test each risk level for about 25 trades in a demo account and see how you feel.

• 0.25%
• 0.50%
• 1%
• 1.5%
• 2%

You don't even have to have a trading system. In fact, it's probably better that you lose more trades than you win.

Just take random trades and focus on what it would feel like to lose that amount of real money per trade.

It can be tough to properly simulate how it feels to lose real money, but do your best. This is the preferred way to figure out your risk tolerance. 

Another way that you can do this is to put a very small amount of money in an account that allows you to trade nano lots. With nano lots, you can deposit as little as $100 and still take the risks listed above, on each trade.

Since you are trading real money, you should use a trading system and do your best to make money. But again, that should not be your primary goal.

You are trying to figure out which risk level is the best for you. For some traders, having real money on the line, no matter how small, is the only way to experience the true effect of a loss.

Only you can make the decision as to which method is best for you. 

But What About Multiple Entries/Exits?

The great thing is that even when you are risking such a small amount of money, nano lots will allow you to split up your entries or exits. So you can still execute almost any trading strategy and simulate live trading conditions.

It can be hard to take the exact amount of risk when you are trading micro or mini lots. But nano lots make it possible.

…and mathematically speaking, you will make more money when you take the exact amount of risk on every trade.

Conclusion

Your risk tolerance might change over time, and that's OK. But in order to get off the Trading Silodrome and get closer to consistently profitable trading, you need to figure out what works best for you right now.

Focusing on nailing down a specific risk level that you are comfortable with is one of the three parts of the Trading Foundation. It is the groundwork of successful trading.

To learn the other two parts of the Foundation, read this.

The post How to Figure Out Your Trading Risk Tolerance Personality (and why it matters) appeared first on Trading Heroes.

Entering a trade can be a nerve-wracking experience.

But it doesn't have to be.

Part of making it less stressful is using the optimal Forex position sizing. If you know exactly how many lots you should trade, that is one less thing that you have to worry about.

Optimal Forex lot size and consistent use of the same risk per trade will also allow you to make way more money in the long-run.

Even if you have been trading for awhile, how do you know that your entry strategy is optimal. Could you improve it, simply by adjusting the position sizing?

That is what I'm going to show you in this blog post. Here are the three simple steps to figure out what position size will work best for you.

1. How Much Should I Risk Per Trade?

Before you get too deep into different entry strategies and position sizing, it is first important to understand how much you should be risking on each trade. There are two components to this.

Games Help You Learn Faster

First, you need to understand the optimal risk per trade. A great way to understand this is by using the Van Tharp position sizing game.

Walter turned me on to this and I agree with him in that this should be required training for any new trader. It took me a couple of tries to get the hang of it, but I was eventually able to run up the account to over $14,000,000,000!

Yes, with a “B!”

Here's a screenshot…

So how did I do it?

I won't spoil the fun, you will just have to figure it out for yourself.

But I can show you why the game is such a great teaching tool. For starters, games are a great way to learn basic concepts, in a fun and low pressure environment.

When you are relaxed, you get lost in trying to win the game and sometimes forget that you are learning something. One of my favorite games is Cashflow by Robert Kiyosaki.

I didn't think that it could teach me anything. But it was surprisingly good at teaching some complex concepts in a way that was easy to understand.

Position Sizing Game Overview

Anyway, back to the Van Tharp position sizing game…

A warning beforehand…this program is old school. Not Ed-Sykota-punch-cards old school.

But late 1990's, dot-com crash, old school.

So it only runs on Windows.

…and it still uses “puffy” fonts. It reminds me of the first website I built.

After you get past the splash screen, the main account window pops up. It took me some time to get used to using it.

But if you read the directions, it starts to make sense. Not the greatest interface.

From there, you have a starting account balance of $10,o00 and you have to pass 10 levels to win the game.

In order to pass a level, you have to make a certain amount of money within 75 trades.

Sounds simple enough. But as you progress, the levels get harder and harder.

The interesting thing is that different levels introduce different variables into the mix.

Here are the main ones:

• The option to go long and short
• A price chart
• Name and price of the stock
• Amount you have to make per level
• The ability to move your stop loss

It can be easy to get tripped up with these things changing between levels, but that is the beauty of the game. You will learn that a lot of these things actually don't matter.

Yes, it sounds weird, but the game teaches you what really matters in trading (besides psychology).

It is a little pricey at $199, but I think it is totally worth it. It is especially valuable if you are just getting started in trading or have blown out a live account recently.

You can try the first three levels for free though. So I highly recommend that you at least try that.

A fun element of the game is when the voice of Van Tharp actually comes on at certain points in the game.

Look out for it!

Here's a great video that shows you the value of using the right position sizing strategies.

2. Gut Check Your Risk Level

Once you understand how much of your trading account you “should be” risking per trade, now you need to see if your stomach can actually handle risking that much per trade. The best way to do this is to open a small account that allows you to trade nano lots.

Wait…

Before you do that, you do have a trading strategy, that you have tested…right? If not review this guide and this guide to learn to test a trading strategy and make sure that it has a very good chance of succeeding.

OK, if you have that taken care of, then you can proceed…

When doing your gut check, you will be surprised at the effect that even losing a small amount of money can have on your psychology. At this point, you are not trying to make money.

Your goal is to figure out how much you are comfortable losing on each trade. If you have any doubts, I suggest trying different risk amounts from 0.5% to 2%, in 0.5% increments.

Once you do about 100 trades or so, you should understand your risk tolerance level. That number of trades usually does the trick. But if not, then keep going until you feel comfortable with a certain amount, or at least a small range.

Now, there are some traders out there that will think that they are comfortable with risking more than 2% or even more than 5%.

These are the cowboys.

…and we all know what happens to cowboys, in trading. They get bucked.

If that is you, then go back to step 1 and play the game again (and again), until you pass all 10 levels. It is critical that you understand how much risk is optimal for any type of trading method.

Your risk management will keep you in the game longer than almost anything else. 

After you figure out your risk tolerance, you can use a position sizing calculator to calculate your lot size on every trade. You can also use this technique to calculate your lot size. But that depends on your broker.

The bottom line is that the amount that you are comfortable risking per trade will probably be less than the optimal amount.

That's OK.

There are ways to make up for trading with less risk.

3. Test Different Forex Position Sizing Options

Now that you understand how much to risk on a trade, you can review and test your trade entry options. Most traders start off with trading one position and one profit target.

But there are many other variations that you can experiment with.

Be sure to test things like:

• 2R profit target: Instead of targeting just 1R, see if it makes sense to go for a little more.
• 50/50 Version 1: Maybe you can target 1R with half of your trade and 2R with the other half.
• 50/50 Version 2: You could also target 2R for the first profit target, then trail the second position in 1R increments.
• 80/20: Take 80% of your position on your first profit target, then put the other 20% on another profit target or a trailing stop loss.

There are obviously many other variations of trade entries, but these position entry ideas will get you started. Remember to download the Trading Strategy Development Worksheet and follow these instructions to keep track of the different variations.

Conclusion

So that is the best process that I have seen to figure out your ideal position sizing. Many beginners think that it should be the same for all traders and that simply isn't true.

You have to match it to your personality if you want to succeed. When you know your risk numbers, it makes entering trades much easier and allows you to trade any strategy from within your trading comfort zone.

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The post 3 Steps to Optimize Your Forex Position Sizing appeared first on Trading Heroes.

I don't know how many times I've had someone tell me that they lost their entire account of $10,000 or more, in a couple of months. Equally amazing is when someone tells me that they are going to quit their job and trade their $100,000 of retirement money…with no education.

Those things used to shock me, but now I understand that it is just how the world works. Survival of the fittest, if you will…

“A foole and his money be soone at debate: which after with sorow repents him too late.”

– Thomas Tusser

For people like you and me, who don't speak Shakespeare, it simply means that a fool and his money are quickly parted. So if you don't want to be a victim of stupidity…err, sorry…natural…selection, then it is vital that you start with a small account.

Still skeptical?

I don't blame you. It's like when you were a kid and your parents told you:

“…because I said so.”

Therefore, here are seven concrete reasons why you must start with a small account, if you want to become a successful trader.

1. Experience the Right Amount of Real-Money Psychology

The beauty of Forex is that you really can trade a very small account and still use proper risk management. This can be accomplished with nano lots.

In other markets like futures or options, you need a pretty big account, to have any shot at success. At least $25,000 to do it right. Even in stocks, if you are only paying $7 a turn for commission, that is still 14% of a $100 account.

But in FX, you really can trade a $100 account and get many of the same benefits of trading a larger account.

However, the key is that you are also not getting the negatives of trading such a small account…like you would in other markets.

Here's what I mean…

I strongly believe in the process of backtesting > forward testing (demo) > evaluating > live trading (small account) > live trading (full account).

Backtesting and forward testing are great, but they lack one vital element…

The visceral feeling that can only come with having some money at risk.

If you remember in Rafael's interview, he mentioned that he knows a woman who can double her (relatively small) account every 2-3 months. But when they raised money for her and gave her significantly more, she almost blew out the account.

Money makes us weird, man. 

So when you have at least a little bit of money on the line, you get to experience that feeling. If you don't believe me, give it a try. Risk $100 in a demo account. Then risk $5 of real money in a live account.

The difference in anxiety level is huge.

Some traders like Colin Jessup actually recommend skipping the demo account and starting with a tiny live account, of about $100, from the beginning. This will allow you to experience the emotions that come with real trading, without risking a ton of money.

2. Lose Less Money

I hate to break it to you, but realistically, you will probably blow out your first account.

…and your second account.

…possibly your third. Hopefully, you learn better, by then.

That is just how human nature works. I'm making this statement after talking to hundreds of traders over the years, both pros and amateurs.

So if you start with a small account, you will lose less. It's just a good business decision.

3. Learn Faster

What happens when you have $10,000 of total risk capital and you only open a $500 trading account?

Well, you now have $9,500 to spend on education!

…and that is huge.

There are excellent trading courses out there, that cost between $300 and $1,500. Take advantage of this and get educated.

If you went to college, think about how much more money you paid for tuition, books and housing. If you didn't go to college, consider yourself lucky that you didn't overpay for an education that you probably wouldn't have used anyway (I'm speaking from experience).

You will pay for your education one way or another. At least if you get a real education, you stand a better chance of success.

The school of hard knocks can end up costing just as much as college.

Maybe even more

4. Get the Proper Tools

When you don't blow your entire account on bad trading, you can invest in the tools that will help you progress as a trader. Obviously, there are a lot of different tools out there and it can be easy to get carried away.

But the one tool that I believe every Forex trader should have is Forex Tester. If you are more excited about funding your trading account than getting Forex Tester, that is perfectly normal.

However, spending a little money for the right tools now, will pay off huge later. When you learn to properly test a trading method, that allows you to see what you can expect from the system and will give you the confidence to trade it later.

Isn't that better than having an empty trading account 3 months from now…and nothing to show for it?

If you have some backtesting under your belt, you will at least have a point of reference that can help you understand where you went wrong and how to correct it. 

Again, if you trade nano lots, Forex allows you to trade accounts as small as $100 and still use proper risk management. That is impossible in almost every other trading market.

5. You Have to be Selective

Even though Forex gives you a lot of leverage, with a small account, you still have to selective with the trades that you take. So starting small helps you focus and only take the best trades.

If you are using proper risk management, you won't take more than a few positions. If you have a larger account, it can be easy to start taking too many trades in different currency pairs.

Speaking of which…

6. You Have to Understand Position Sizing and Risk Management

There are two ways that this could go…

The first way is that you listened to #3 above, and you got some education. From this education, you learned how to size your positions correctly and you don't blow out your tiny account.

The second outcome would be that you didn't get educated and you blow out your entire account. Then you will hopefully learn the value of using the correct risk management.

Either way, you will get an education. Luckily, even if you make a mistake,  you will still learn something.

…and not lose a lot of money because you have a small account.

7. Make Money “Faster”

I hope that you already understand that you are going to suck when you first start trading. I'm mentioning it again, because it can be a tough pill to swallow. Heck, you are probably going to suck for awhile.

…that's just how trading works.

Actually, that's how learning anything works. Think about what you would have to go through to be a professional jazz musician or a pro surfer.

But what happens when you blow your load on your first account and then have to get educated and open another account with whatever money you can scrape together? Well, when you do learn how to trade well, you are going to have much less leverage to compound your account.

For example, let's stay that you have saved $25,000 to fund your “dream” trading account. However, you only risk $1,000 to start, and take it from there.

You will probably blow up your first three accounts and you will pay for some education. Still…after all that, you will probably “only” spend about $6,000.

When you get good at trading, you now have a $19,000 account to trade. When you are consistently profitable, that can compound very quickly into a monthly income that can have a serious positive impact on your lifestyle.

Now contrast that to blowing $25,000 on your first account, then having to save $1,000 to open your second account. Let's say that it takes you 3 months to save up that money.

It will now take you at least 18 months to get that same $6,000 that you would have spent in the first place. However, with all the starts and stops along the way, you will probably take a lot longer to become consistently profitable.

The “faster” route usually seems slower at the beginning.

Conclusion

So those are all of the reasons why you should start trading with a small account.

I know, I know…

It can be tempting to put all that money in play and dream about how much you can make from it. But the sooner that you realize that you need to start small, the better off you will be later on.

This is not gambling, your are developing a skill. Now get out there are and go to work!

The post 7 Huge Advantages to Trading a Tiny Forex Account appeared first on Trading Heroes.

Here is something that has worked very well for me over the years and I can't believe that I have written about this before. I learned it pretty early on and I have stuck with it because it works for me.

It's called the 2 Strikes Rule.

You can probably guess what it is, but in this post, I'll dig into why I created it, why it works for me and how you can establish a similar rule. Remember, you are going to need to figure out what works best for you.

But if you are prone to revenge trading or if you find yourself giving back a lot of money on what seem to be perfect trade setups, I would highly recommend that you start with the 2 Strikes Rule and see how it works for you.  

The Two Strikes Rule Explained

To put it simply, the 2 Strikes Rule says that if I have two losing trades in a row on the same trading idea, I will not trade that idea again. 

It is very simple, but also very powerful.

Once I am stopped out twice on an idea, I let the idea go and look for other opportunities. I release any emotional attachment to the trade…good or bad.

From there, I put the trades in my trading journal and I don't think about the trades again. Creating this rule has helped me keep my losses to a minimum.

When I first started trading, I would chase the same idea several times, then wonder why I have a huge dent in my trading account. Implementing the 2 Strikes Rule put an end to that.

Why the 2 Strikes Rule Works

Even if you have backtested and forward tested your system and know what to expect, there may still be times where a trade can look a lot better than it is.

…multiple times.

For example, let's take a look at this chart. Let's say that you think that this former consolidation zone (gray box) will serve as resistance and price will turn around in this area. So you decide to take a short every time it looks like price will drop.

However, if you look at the chart, there are at least 3 different places where you could have got in and would have been stopped out.

On top of that, when price actually started to move down, there is no way that you could have made up your losses on that one trade alone. Of course, this is assuming that you are using a fixed risk percentage (which you should be).

So by only taking two trades per trading idea, you would have only lost 2R or two times your risk. This can be made back pretty easily on one or two trades.

However, once you start getting into 3R or more, it becomes a little more difficult to make that money back quickly. In addition, if you don't set any risk limits, trying to prove that you are right can be a slippery slope.

To me, it is best to just take two shots at an idea and if it doesn't work out, then release the emotional energy associated with it and look for other opportunities. 

…and there are always other opportunities! 

When the 2 Strikes Rule Does Not Work

It is just as important to understand when this rule might not be for you. There are some trading methods that can make the money back (plus much more) on the fifth or even sixth try.

These methods can have win rates in the 30% range, but sill make money. 

For example, trend following is a trading method that can involve many losses in a row, but when you catch a big trend, that can make your year. The bottom line is that you need to understand the mechanics of your trading method.

This means that you should backtest and forward test your system and really get to know it, before trading it live. If it is one of these trading methods that takes several tries to get right, then you can disregard the 2 Strikes Rule.

The 2-Strikes Rule Extended

But it doesn't stop there. When you lose two trades in a row, be sure to journal your trades to be sure that you took good trades.

Doing a check like this will allow you to take a step back and make sure that you are on track. This will prevent you from going on tilt.

Conclusion

The 2 Strikes Rule is something that has helped me a lot over the years and it can help you too. However, like anything else in trading, it might not work well for your trading method.

So take some time to experiment with this rule or some sort of similar rule that will keep you from going down the rabbit hole of revenge trading.

The post The Two Strikes Rule: A Risk Management Must in Trading appeared first on Trading Heroes.

Some traders say that you should never move your stop loss to breakeven and others say that you should do it on every trade.

So who is right?

Well they both are.

I know of professional traders who move to breakeven and I know others that don't.

Every trader needs to figure out if moving to breakeven will fit their trading strategy, the markets they trade and their unique psychology.

In this tutorial, you'll learn when you should move your stop and when to leave it alone.

The best solution will be different for everyone, so you need to figure out what works best for you.

I'll also show you a couple of ways of moving to breakeven and beyond, that can make your trades more profitable.

Let's do this…

What Does it Mean to Move the Stop Loss to Breakeven?

If you're new to trading, I'll quickly define moving a stop loss to breakeven and give you an example.

In trading, moving a stop loss to breakeven refers to the practice of adjusting the stop loss level to the trader's entry price, plus a little profit to cover costs like slippage, the spread and commission. This is done after the market has moved in a profitable direction and ensures that the trader will not lose money on the trade, even if the market reverses. 

The idea behind this tactic is to create a situation where a trade is risk-free.

Example

Here's an example of a trade setup.

This is a long trade, entering at the current candle.

The red bar at the bottom of the box is the stop loss and the green bar at the top is the take profit.

Once price moves in my favor, I can set the stop loss to breakeven by moving the stop to the entry point.

I usually move Forex trades to the opening price, +3 pips profit to account for any slippage and fees.

This is now a risk-free trade. 

So if the trade reverses, like shown below, I would not lose any money on the trade because my stop loss would be at the breakeven point.

Now that you understand how to move your stop loss to breakeven, here are the benefits and downsides of doing this.

Benefits of Moving Your Stop Loss to Breakeven

When you move your stop-loss to breakeven, you do more than ensure that you won't take a loss on the trade.

You also free up your mental capital to find another opportunity.

Mental capital is the “space” that a trade takes up in your brain because you're worrying about managing the trade and if you will take a loss.

Moving the stop to breakeven takes the pressure off your trading because the trade is now risk free and you don't have to think about it anymore. 

This allows you to focus your attention on finding and managing new trades.

Let's say that you have 5 open trades that will either lose 1% per trade, or make 2% per trade.

You then decide to move the stop loss on all of them to breakeven.

Once you do that, the worst case scenario for these 5 trades is that they will all get stopped out at zero profit…and also zero loss.

The best case scenario is that you will make 10%.

So you can see why some traders find this technique so attractive.

But of course, there is a trade off to this benefit.

The Downsides of Moving Your Stop Loss to Breakeven

The downside of moving your stop loss is that it's more likely that your stop loss will get hit often and you'll lose out on profits. 

Just like the ocean, markets have a natural ebb and flow.

So it's best not to move your stop too soon because your stop is much easier to hit and you won't give your trades enough room to “breathe.”

As the saying goes: scared money don't make money.

Here's a common scenario, especially for beginners.

You enter a trade and the trade is profitable right away.

Since you lost your last three trades, you decide to make sure that you don't lose this trade too.

So you think you are doing the right thing and move your stop to breakeven.

Party time!

As soon as you open a drink…you get stopped out.

Then the trade goes 500 points in the profitable direction.

Doh!

This leads to second guessing yourself even more, which will affect your confidence and profit on future trades.

No bueno. 

Move your stop loss too soon and you'll break even a lot.

What this can mean is that your winners won't make up for all of your losers because many of your winners are breaking even.

If that's the case, then your strategy will not have an edge and will lose money.

Of course, it also could be possible that you're dodging some losing trades too, which brings me to my next point.

How to Tell if You Should Move Your Stop Loss on Profitable Trades

Not all trading strategies will work well when the stop loss is moved to breakeven, so it's time to figure out if this is for you or not.

Remember that there are 2 potential benefits to moving your stop loss:

1. Greater peace of mind because your trades are now risk free.
2. An increase in profitability of the strategy because the strategy has fewer losing trades.

In addition, if you are going to move your stop loss to breakeven, you must:

• Do the same thing on every trade: You cannot move to breakeven on some trades and not on others. Not following a well defined plan will lead to inconsistent and unpredictable results.
• Decide on the minimum amount of profit that you should have before moving your stop loss: This could be 1 times risk (1R), or a certain percentage profit on your account. Whatever it is, it must be applied consistently.
• Backtest your trading plan: This will show you exactly how much moving your stop loss will affect your profits.

Trading strategies that will generally benefit from moving to breakeven are:

• Longer term trading strategies (4 hour chart and higher) because it's less likely that the breakeven stop loss will get hit by normal market movements.
• Trading strategies that have a trailing stop loss because they can make up for lost profits caused by moving to breakeven, by extending the profit on winners.

These are not set-in-stone rules, but just general guidelines, based on what I've seen in my own backtesting and the results of others.

Another thing to consider is that you might want to reduce the overall profitability of a strategy, in exchange for the psychological benefits of that come with moving to breakeven on profitable trades. 

Not all decisions in trading have to be profit driven. 

Sometimes you can give up a little profit for greater mental clarity.

When your mind is clearer, you'll usually make better decisions.

Now if you decide that moving to breakeven is a strategy that you want to explore, then it's time to do some backtesting.

How to Backtest Moving Your Stop Loss to Breakeven

The primary question that you want to answer with backtesting is:

Will my trading strategy generate enough profit if I move all trades to breakeven, after they hit a certain amount of gain?

So first, create a trading plan without moving your stop loss. 

Then backtest that trading plan and find out what your baseline performance is.

My favorite backtesting tools are listed here.

Look at stats like:

• Win %
• Maximum drawdown
• Average profit per month/year
• Average winning trade in $
• Average losing trade in $
• Maximum number of losing trades in a row

Example stats by NakedMarkets.

Then create a new trading plan where you move the stop loss to breakeven after X amount of profit. 

The profit could be measured in:

• Pips, points or dollars, depending on what market you're trading.
• A multiple of risk, so 1R would be 1 times risk. In this case, if your stop loss was 100 pips, then your move-to-breakeven target would be 100 pips.
• Percentage of your account. For example, once you hit 1% profit, move the stop to breakeven.

Of the options above, I've seen the multiple of risk method work best and it's the easiest to calculate.

It's also the easiest to automate, if you want to do that later.

A professional trader I know of uses this tool to move his stop to breakeven and automate a trailing stop.

So I'll use risk multiple from now on.

If you don't know where to start, move your stop loss to breakeven once price hits 1R.

Then backtest your strategy by applying this rule to all of your trades.

Once you're done, compare the stats listed above, before and after your change.

Experiment With Your Settings

If your strategy is acceptable after the change, then you're good to go.

Move on to the next step of forward testing your new strategy.

However, if your strategy was not profitable enough, then it's time to do some experimentation.

Here are some things you can try:

• Move your stop loss to breakeven at a smaller profit. For example you could move your stop when price hits 0.5R.
• Move your stop after you have a bigger profit, 2R for example.
• Only move your stop after a certain number of pips or points.
• Use an indicator to determine when to move your stop. You could use something like a moving average. Experiment with only moving your stop loss if price closes above a certain moving average.

Again, I cannot give you a blanket solution that will work for every trading strategy and every market because there is so much variation.

Therefore, you need to put in the work to figure out what works best for your situation.

Forward Test Your New Strategy

Even if your new strategy looks good in backtesting, it's a very good idea to trade it in a demo account for at least a couple of months.

This will show you how deal psychologically with the ups and downs.

A trading strategy can look good on paper, but may not fit your risk tolerance.

So further testing in live market conditions will help you understand how the change will impact your mindset.

Going Beyond Moving to Breakeven: Trailing Your Stop Loss

Trailing your stop loss means that you move your stop loss to lock in profits as price moves in a profitable direction.

Here's what that looks like on a chart.

In effect, moving your stop loss to breakeven is a type of trailing stop.

However, you can take this one step further and see if you can move your stop loss periodically while the trade is open.

Using the 1R example, you could move your stop loss forward 1R every time price moves another 1R in your favor.

There are also many other techniques and indicators that can be used for this purpose.

Obviously, you should test this method extensively before using it in a real money account.

The only thing to avoid when trailing your stop loss is the default trailing stop loss that many brokers provide.

In my testing and research I have not found a viable use of this type of trailing stop.

Final Thoughts

The bottom line is that you need to test to see if moving your stop loss to breakeven will help or hurt your trading strategy.

Your strategy, market and mindset must be a good fit for this trading strategy.

You may discover that moving the breakeven is not a good fit for you.

But if you stay aware, keep an open mind and work hard, you can figure this out.

Anyone can.

Now go test some ideas! 

The post Move Your Stop Loss to Breakeven: Why, When and How to Do It appeared first on Trading Heroes.