Currency Trading for Beginners: Equity Building Strategy
Equity building with this strategy will allow you to make full use of all available capital by placing multiple smaller orders that follow a bull or bear trend. This has the effect of minimizing exposure to risk while maximizing potential for profits.Equity Building Strategy BenefitsThe benefit of this currency trading strategy is to potentially make full use of all of your available capital while only exposing a percentage of it to risk of loss at any one time. This strategy only works in a bull or bear market and is most effective with high leverage. 50:1 is adequate for success with a lesser degree of risk than higher leverage as the percentage of capital exposed to risk of loss increases with leverage.Equity Building ExampleThe following example does not account for broker spread or exchange rate of your currency pair. Exchange rate and broker spread of your currency pair will change the cost of purchasing your orders. If using a lower leverage like 50:1 as in the example and a currency pair that is close to par like USDCAD then the actual values will not be far off, but EURUSD at 500:1 will have significantly different values and need to include exchange rate and broker spread in any calculations. The parameters used for the example are as follows:
- $1000 starting equity
- 50:1 leverage
- 1 mini lot (10,000 units) orders @ $200 each plus a 20 PIP buffer at $1 each equaling $220 each for purposes of calculating lot order size
- $1 PIP value
- Order separation of 5 pips
First Order (0 pips/0 profit) $200 Cost $1000 - $200 = $800 remaining equitySecond Order (+5 pips/$5 profit) $200 Cost $5 equity gain from the first $800 - $200 + $5 = $605 remaining equityThird Order (+10 pips/$15 profit) $200 cost $5 equity gain from the first for a total of $10 $5 equity gain from the second $605 - $200 + $5 + $5 = $415 remaining equityFourth Order (+15 pips/$30 profit) $200 cost $5 equity gain from the first for a total of $15 $5 equity gain from the second for a total of $10 $5 equity gain from the third $415 - $200 + $5 + $5 + $5 = $230 remaining equityFifth Order (+20 pips/$50 profit) $200 cost $5 equity gain from the first for a total of $20 $5 equity gain from the second for a total of $15 $5 equity gain from the third for a total of $10 $5 equity gain from the fourth $230 - $200 + $5 + $5 + $5 + $5 = $50 remaining equityContinued Equity GainsIf the market should continue in a profitable direction enough to reach +40 pips from the purchase price of order five for a total of +60 pips adding another $200 equity to your account then you will be able to place a sixth order, but this is not a good idea as doing so would give you a total pip value of $6 with enough margin left for only 8.3 pips with the $50 equity remaining after purchasing order six. The benefit of this strategy is to maximize your entire capital while only risking a percentage of it at any time. This depends heavily on each new order not being placed so far from the one before it that losses from the most recent unprotected order do not negate profits from the previous stop loss protected orders. Placing order six would compromise this strategy as it would be 40 pips away from the previous order while all others are only 5 pips apart. It would be a better idea to place a trailing stop loss on all orders to guarantee some good profit as opposed to risking most, if not all, of it to make a small amount more.Greatest RiskObviously, the time of greatest risk is after a new order has been placed but before it clears market fluctuations and is protected with a stop loss. If at any time your market turns and triggers the stop loss orders you should also close your newest order if it was not yet protected with a stop loss. Any losses sustained on a new unprotected order will be subtracted from profits guaranteed by stop loss orders. This strategy requires a strong bull or bear market and a watchful eye while new orders clear market fluctuations. It is very unlikely that you will be able to get any kind of exact spacing between your orders. It is also very possible that the market will move to trigger your stop loss positions before five orders are placed. Given a spacing of exactly 5 pips per order, a market turn after purchasing, but before protecting the third order triggering the stop loss for the first two will result in a total loss/profit of $0 if the third is closed at the exact same time as the stop loss is triggered. Stop loss for order one will give a $5 profit, stop loss for the second will give a $0 profit, and closing the third will give a $5 loss resulting in a net $0 profit/loss. If the same events take place after purchasing, but before protecting the fourth order, the result will be a net $10 profit.Automated Equity ProtectionThe new order is the source of risk until it has cleared market fluctuations and stop loss for all have been changed to the purchase price of the new order. As previously stated, any losses sustained on a new unprotected order will be subtracted from profits guaranteed by stop loss orders. For an extra level of automated protection, a stop loss value could be entered into the new order while initially making it. Set the stop loss value on your new order to the same value as the previous order while being aware that the number of pips between the new and previous order represent loss and a stop loss value closer to the new order may be needed. In the event of a market turn triggering your stop loss, manually closing the new order would not be necessary.Equity Building vs Single OrderAt this point, your fifth order has cleared market fluctuations and you have set the stop loss on all five orders to the purchase price of the fifth. You are now guaranteed $50 profit and protected from any loss. You now have 5 mini lot orders open with a total pip value of $5 and are using your capital to full potential. Not only that, but if you look at making $50 profit in 20 pips and calculate the single order necessary for the same profit you will get an original order of $50 divided by 20 pips which equals $2.50 per pip or 2.5 mini lots. The cost to place an order for 2.5 mini lots in this case would have been $500 or 50% of your capital. Using the equity building strategy, you have only ever needed $200 or 20% of your capital at any one time. Also, any gains made past protecting your fifth order are at $5 per pip while gains from the 2.5 mini lot order are still only at $2.50 per pip. So with this strategy, you are minimizing the amount of capital at risk at any one time and maximizing gains after the fifth order is protected in exchange for smaller gains in the beginning. If used with 500:1 leverage, this strategy will actually increase equity by more than the cost of placing a new order after the fifth , making the duration of the bull or bear market run the only limitation to the amount of orders you can place! Increased leverage means increased risk. Never invest money that you cannot afford to lose!www.thesmartforex.comGet FREE access to the highly acclaimed Business Mastery Insider's Secrets Club and tap into the latest business growth strategies, profitability applications, assessment tools, training and more.
I am an active trader in the foreign exchange that has a strong desire to have my money work for me as opposed to working for it. Surely, many of you feel the same way but jumping into something like currency trading using leverage without knowing the risks and how to deal with them is a sure way to guarantee that you work for your money for a long time to come. It is my goal to help new traders to acquire the base of knowledge necessary to not only financially survive, but become well equipped to succeed. The ability to make money online and release yourself from needing an income that is based on your physical location is the beginning of true freedom.