Defensive FX Trading - The Rob Booker Way

Rob Booker mentioned in his book The Currency Trader's Handbook, that he aimed to achieve a 10 pip profits every day. He never try to make a ton of money on each trade, and never will he let himself lose a lot of money in any single trade. He talked about defensive fx trading. A method that made him very successful today.

Defensive FX Trading includes using break even stop after a predetermined take profit level is achieved. The action of shifted initial stop loss to entry price is called break even stop. This means which ever the direction the market decides to move, the risk after implementing a break even stop is zero loss.

While using a break even stop, a forex trader can also execute partial close when the first take profit level is achieved. This means that he can close 50% of his contract and can extract a small profit out of the market.

The advantage of using partial close together with break even stop is that you will extract a profit regardless of where the market will be headed for. It is a way to minimise risk and grab a small profit while at the same time allowing the trader to participate in longer term market actions.

Rob Booker's Forex Defensive Trading Plan

It is a powerful plan where a trader can turn from $10,000 into $130,000 in one year (trading 17 days a month) earning 10 pips a day. A trader will no longer need to be greedy because he need not require to capture 100 pip market movements. Advanced traders are conservative with their trading capital because they know that the market can take BIG swings against them when they're waiting for 100+ pips.

Out of 10 trades, would you accept 5 break even trades, 2 losers of 20 pips, and 2 winners of 50 each? I would. That's trading defensively, and it's what made him a successful forex trader.

For example, I find a great opportunity to go for 10 pips trade. I entered a market order, to buy the EUR/USD at 1.2900 and set a stop at 1.2880 (20 pips). I am now long the EUR/USD at 1.2900 which means i make money money when EUR/USD go up. When the market price reaches 1.2910, I made a 10 pips profit. I can either exit the trade with my profit, or stay in the trade longer.

Here is how I stay in the trade:

First, stop loss will be moved to the entry price. This step is called break even stop. If my initial stop was 20 pips (or, on this trade, at 1.2880), then I move my stop to 1.2900. That means that if the price falls back to 1.2900 my trade automatically closes and I have lost nothing. I have gained nothing. I have traded defensively.

But if the trade goes to 1.2920, and 1.2930, and beyond, I am prepared to get more money. I can lose nothing - I am in a 100% risk free trade. Now I can let my profit run and I don't have to worry about where the market will be headed for.

Defensive trading is about how a forex trader manages a trade. Most professional traders will use one or a combination of partial close, break even stop and trailing stops to manage and exit trades.

This is a strategy where risk can be reduced to minimal but with profits potential maintained. It allows the common saying 'higher profits with higher risk' does not applies anymore if you employ break even stops and trailing stops.

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Why Forex Trailing Stop is Important to Traders Survival

Whenever many novice forex traders come across the term forex money management, they either did not choose to employ it in their trading plan or they didn't even know about it. They take it as an afterthought and that the problem of money management will take care of itself if they are able to nail the perfect trade. This should raise an alarm as the existing leverage provided by brokers serves as a double edge sword.

This thing called leverage enables you to have a little amount of money to control a huge position size where you can profit the market tremendously but also can strike you down with heavy losses due to your losses multiplied many fold when you are in the red. Learning money management in trading is like learning to manage your little soldiers in battle with the market to win the trade for you or in the worse case to allow you survive another day of battle.

Once i attended a course on basic forex trading with a so called guru paying a few thousand dollars for it. I learnt the basics of forex together with some simple strategies to apply and was excited about the whole trading thing and what fortune it could bring to me. After a few trades i was on a hot streak or so i thought when i hit a few losses along the way.

The losses was starting to be more heavy and its compounding the whole time while i maintain hope that i can win all that i have lost. Alas it wasn't working and i blew the account. I thought just by setting my stop loss fifty pips away will be fine and that is all i can lose.

But i didn't know that there is calculation on position sizing and amount risk from my equity to be done. I thought that there was only one kind of position size and that is one standard lot. The amount risk is will total to about $500 each trade and that's damaging to my account.

From that point onwards, I've explored and learnt about the importance of knowing money management. Knowing set up your stop loss level isn't enough, you need to know how much you want to risk per trade and how much you can afford to lose in a single month before you go bonkers.

The norm in forex trading is that many will choose to only risk 1-2% of their equity per trade and up to 6% of their equity per month before they stop trading to reassess their strategy. Anything more than what you think is safe will result in recovering your losses more arduous.

Having a basic money management plan in place will keep you out from blowing your account and ensure you receive a loss that you can tolerate and expect. With additional money management rules such as having more advanced trailing stop strategy methods allows you to minimize your losses and in fact allows you to lock in those profits you've earned along the way if you know how to.

So one may have the best trading set-up out there that is highly profitable but without a forex money management in place, no matter how profitable one is, one will soon be in the red. Trust me it will be hard to make that come back unless you are that top 1% of the traders out there.

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Forex MT4 Demo and Backtesting

Back testing and demo-ing are a key component for evaluating effective trading system. The theory is any strategy that work well in the past is likely to work well in the future. Conversely, any strategy that performed poorly is most unlikely to perform good results in the future.

Advantages for Performing Demo and Back-testing Evaluation

1. History repeats itself. Repeated patterns can be identified from the back-test.

2. Investors can be educated with key ratios like max draw-down so that they know what to expect when using the systems.

3. Increases investors' confidence to rely on the systems during the draw-down period. Thus, investors know when to stick to the trading rules and when to discard the trading system.

4. Provides an estimate of the probability and magnitude of the potential trade profits and losses because the performance statistics can be reproduced by back-testing.

Limitations of Demo Testing and Back-testing

1. Spreads

Liquidity conditions during certain news hour may narrow the spreads. GMT day spread and night spread may differ due to liquidity conditions. All of this widening and narrowing of spreads may not be accurately accounted for in the bid and ask price.

Strategy that requires certain max spread conditions would not have perform as well in live trading compared to a back-test.

2. GMT OffSet

The server time may change at certain time of the year in UK and US due to summer and winter daylight saving hour. The price and history feeds may not correspond to the specified chart timing. This will mean that certain strategies that only trade at certain hours may get prices mismatch figures.

3. Brokers' Manipulation

Certain brokers' will offer close to ideal trading conditions in the back-test and demo test. This ideal conditions certainly do not happen when trading live. The idea doing this is to attract as many potential traders to use their services. You can find out more information on some of the popular forex forums online.

4. Trade Entry Method

Systems that use market order for entries may face difficulty in getting in at the right price you want in the live conditions. The fact is during live conditions, the market price will be very volatile and getting in at the right price manually will be a problem. There will be a difference in the entry prices between back-test or demo with live conditions.

Summary

Having to recognize the limitations of backtests and demo test, it will help us in understanding more about how the trading systems work and how to evaluate and analyse a system better. It does not mean that backtest results do not work, the fact is, it still works.

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