Understanding Leverage and Risk!

  The difference in performance due to use of excessive leverage happens in two ways:
  a) When we are trading using the Money Manager to calculate the size of our trades, we have the lots sizes assigned as a percentage of the Free Margin in the account. If the leverage is too high, the size of lots would go up too.
  When we figured out the best amounts to trade in our default settings, we used 100:1. We made sure that even if you have orders opened for all pairs, you would never get into an over-trading situation that could trigger a margin call.
  We have tested this percentages and found that they work fine, never a margin call.
  But if you push up the leverage, the lots will be increased with the extra available margin, and you could find yourself over-trading to dangerous levels.

  b) When we have losses, our capital is decreased. If you trade with small leverage, your losses will be small. But watch what happens with increased leverage:
  Let's say that you have an account of $1000, for example, and you are using the recommended 50:1 leverage (maximum legally allowed in the US, and for good reason).
  Let's also assume for this example that 1 pip= $1 in the size lots you are trading on the $1000 account (keep the figures simple).
  Imagine that on a bad week you lose 100 pips. Given your lot sizes you would have lost $50 using 50:1 leverage (5% drawdown is normal for us).
  But if you had been trading at 500:1, you would have lost $500 because your lots would have been that much larger. Now instead of a 5% drawdown, you now have a 50% drawdown on the account!
  To get back to your starting point you now have to make $500 profit instead of just $50.
  Now let's say that the next week is a really good week. BUT, your account is now only $500, which means that your trade sizes are going to be half the size of the trades you took in the losing week, (because the MM will always calculate on available margin).
  To get back to your starting point you now have to make twice the number of pips to make up the loss, because each pip at half-size lots will only pay you $0.50 (whereas your losing pips cost you $1.00).
  To recap, in one losing week you lost 100 pips and the next week you won 100 pips. If your leverage is 50:1, you are pretty much even because the size of your trades is more or less the same, since you only have a 5% drawdown. If you are trading 500:1, your lots will be half-size and with 100 pips you will only make up about $250, to keep figures simple, because the size of your wins were much smaller than the size of your losses. You lost 100 pips, then you recovered the 100 pips, but you still have a $250 loss to make up! You still have a 25% drawdown, even though you made up the pips!
  That is the difference.

  Basically, in Forex the main concern in not how fast you make your profits, but rather how much you can control your drawdown, so the size of your trades remains more or less the same, or hopefully grow at an even pace

Never completely trust a robot?

The other day I came across an article with the above title. After reading it I thought that, beside the catchy title, what was really the appeal of the question?

I think it harks back to the deep set fear we have, that automation may be our ultimate doom - a la I-Robot or the Terminator.
I think it needs to be said loud and clear - "You are your Forex account's biggest enemy."
Compared to what the average greedy Forex trader is capable of in just "one adrenaline - caffeine induced trading rush" - even the most grave programming error of an expert advisor is a walk in the park.
I give you a real example of just last week: We had a client who was happy with the overall trading performance of one of the robots we developed, but had a couple of loss entries that he didn't understand. He wanted some clarification and sent us his account history. I don't know if you can imagine our bewilderment when we realized that this fellow had been trading at all the wrong hours. The robot's schedule was 180ª reversed - since he had not synched his account settings with his trading charts. Yet he had been writing up some beautiful profitable weeks!  We set him straight and the problem was solved with two clicks of a mouse, but - talk about trading without supervision.

I have said it before and will say it again - human emotions and human error caused by fear and greed are the number 1 enemy of you account.
If you have robot-trusting issues - this is what I recommend:

1. Do your research: buy a great forex robot from people who care and offer training and support. Make sure it has automatic money management controls and is specifically designed for the currencies you wish to trade.
2. Install your robot - check in once a day or once every other day to make sure it works fine - and let them do what they do best!

If you want more involvement read about our no trade days - but don't try to outguess the market it is a sure kiss of death for your accounts!
Other than that - trust your robots - they are not emotionally compromised...

How to recognize the Best FOREX EA

First off I know there are many people out there who say that a "best forex robot" is like a contradiction in terms. Their opinion is that all Forex Robots are garbage. They are of course entitled to that opinon but I would question their wisdom, being a long term trader myself, if they truly believe there is safety in manual trading.
A Forex EA or Forex Robot - the terms are interchangeable - is nothing more than a software program based on a Forex trading strategy. Now, of course the program will only be as good as the strategy behind it, and there are a lot of questionable EAs out there.

How can you tell a great forex robot from a bad one? Here are a couple of pointers:

1. Is the software creator confident enough to offer you a money back guarantee? - a profit guarantee of course is even better.
   Whereas it is a general good business practice to offer a money back guarantee - in Forex trading this is particularly important.
   You want to make sure the company stands behind their robots and will not only offer you great customer service but also help you in set-up and can knowledgeably answer any questions you have. Of course if the company offers a profit guarantee - that really would be awesome.
2. The EA is customized to no more than two or three currencies.
   Each forex currency pair has its own distinct personalities. That has to be accounted for to create a good Forex strategy. I dare you to show me an EA that can trade the GBP/JPY and the EUR/CHF with the same presets! It is simply impossible! Doesn't exist. So, you can group some currencies as scalping currencies together and trade them in a similar fashion - but if the robot promises to work on ALL currencies in all market conditions run for the hills.
3. The software company offers different robots for different strategies - and they have created more than one robot.
   This goes hand in hand with the previous point. Each type of currency and each market - London, New York, Asia - requires careful tweaking in strategy. A do-all approach will lead only to losses. Your EA creator no doubt has to have different solutions for different markets. Also, be aware of EA creators who seem to offer too many robots. If they have found a strategy that works, why would they go on creating so many different robots? You are looking for a software company that created a handful of EAs and took years to develop them with real-time testing on live accounts and back testing over several years as well.
4. Your EA developer can answer questions - and offers customer support.
   In case you need assistance you need to be able to get in touch with your EA developer. Especially if you are a FOREX beginner - questions will come up and should be answered with real trading knowledge.  You want "real" traders with real experience behind the development of your product - not just some software geeks, who churned out a quasi system they have never traded on a live account.
5. Price is not a indication of quality.
   Unfortunately that is very true in the Forex world. Just because a Forex Robot is expensive is does NOT mean that it will trade better. I have seen some real hack-jobs in my time. Be very careful if the software company tells you outright that there are no returns. Like I said in my first point: a real company stands behind their product.  I for one believe it is important to offer a robot at a decent price and leave enough money in your pocket so that you can actually set up an account and trade well.
6. Be careful with exaggerated promises of "1000% returns", "Doubles your money in one month" "Never a losing trade"and other stupid quotes.
    A real Forex trader - who should be the person behind developing your Forex robot and therefore your Forex strategy - should know that the growth of your account is relatively slow and steady. I said "relatively" slow because compared to other forms of investment it is actually at breakneck speed - but it should not involve risking too much of your margin and put you at the constant danger of wiping out your entire account. Let's get real here - 1000% profit IS ridiculous and CANNOT be guaranteed - however 200% over a year is more than any other investment can offer you and sounds a lot more reasonable and therefore interesting. Look for robots that offer a believable return and do not promise things that seem too good to be true - because they usually ARE!

Happy Trading!

Stanley