How do FOREX (Spot Currency) Traders make money??????
Well it ain't how most people think it is.
First I would like to blow up the misconception, and or lie that "hedge funds are too big to make the % returns a private trader can", we are going to discuss deep dark and even arcane trading of Big Bucks, Yards and Yards of liquidity, the kind of liquidity known on to the likes of _bob.
10 Billion dollars, 10 Yards, 10 Yuuuuuge, ones, (the last one I made up)
So you are a fund that manages 10 Billion dollars, due to the fact that you know proper money management, you are only going to put at risk 1% of your total fund at any one time, some funds risk even less, but you are a risk taking "cowboy" so you are at 1%.
100 million, wow such a dilemma, what to do with 100 million?
Well you could send it to me, or, lets theorize
Remember no leverage, 1:1
40 million Short EUR/USD hold till Jan 8th
A. Hedged with Option
20 million Long USD/CHF same timeframe
20 million Long Dollar Futures contracts same time frame
19 million Long EUR/JPY same time frame
I'm leaving out 1 million. because I am not going through the trouble of calculating the cost of the trades and the cost of the options, so 1 million in costs for the trade only.
So lets say we are in the right place at the right time, and by Jan, we are up 5%, now think about this, 1% risk, and 5% return, that is great yeeeeeeehaw.
Now look at the amounts, 40 million, 20 million, 20 million, 19 million, these numbers are easily tradable, and not going to move a market, they would be easily filled and covered. So maybe if you do this 4 times a year, you get 20%. So, the size of the fund does not limit the the percentage, it is the RISK modeling. This the one thing that new traders forget, RISK assessment, RISK modeling, RISK avoidance, but nobody wants to hear this, all they want hear is how a small trader can "beat" the big houses at the "game", and that using massive leverage is the route to financial freedom, fame, and fortune.
So lets look at this in a practical way.
Account size 100k usd
Risk % 2.5% Make It Cowboy Size
Trade Size Notional $ 2500.00 USD
Max Units 106471
PIP Value $10.65 at 1.1752
The calculations allow you to start at a baseline, so lets' assume you are going to risk the whole $2500 per trade.
$10.65 PIP value, give you a stop potential of 250 PIPs, which is generally enough to go through some long term retraces, if you are swing trading.
Remember though there is one caveat here, some say to put at risk only x amount of your capital total at one time in one trade, others say risk only x percent per trade put on, so you don't look at the total risk, just risk per trade.
If you go by the Total Risk % Model, one trade at 2.5% capital, you cannot take another position and still be practicing your Risk Model. But if you use the Total Risk Model and tweak it, you will spread this risk through different pairs, either by tightening stops or what I recommend, taking smaller positions. This allows you to take full advantage of the market. You can be in a swing trade waiting for the market to start moving out of a consolidation, while taking short term trades on a 1-3 minute timeframe.
Now the per trade, no stop philosophy has always made me wonder. If you have taken 5 different positions, and each one has a 2.5% risk, well that to me is a 12% risk, and if someone could explain to me how it is not, I am willing to listen.
Of course you have heard of traders 'Giving It All Back" in other words the gains they made have been given back to the broker, how does this happen? Simple, the market shifts, and the trader is to stubborn to adapt, its as simple as that. The worst part is when someone is giving a clear warning, and folks don't even pause, to think about the possibility, so sad, too bad.
So, lets look at Trader 100k, they risked $2500 usd.
Entry 5/12/17 long 1.0776
Cover 7/03/17 1.1776
On thousand PIPs baby, swingin for the fences.
Profit not counting the spread $10,640 usd
So in 90 days you pulled down 10%, in a very favorable market, using your full at risk capital in one trade, so between one thing and another, IF you can do this 3 times a year, which is a big IF, you make a hair over 30k usd. This is phenom money, not your average hedge fund profit. But even though you are at 30%, at 100k you really are not making enough to live on. And that is the rub, you need money to make money, not more leverage, but more money.
So you can plug it in anyway you'd like to, but reality is reality, you can fantasize all you want, listening to the people who tell you what you want to hear. So be wary and cautious like the 'Ol viper, if it sounds to good to be true...........
The Ever Cautious VIPER