Insurance and Credit

Many forex traders start trading live too soon. They dont have any understanding and learning of good money management rules. As a forex trader, you need to develop a few good money management rules. Practice them on your demo account before starting live trading. By developing your own money management rules you are comfortable with means how much of your money you are willing to risk on one single trade. You also need to determine how many contracts per trade your risk tolerance allows?

The important question is how you can improve your investment results by making small changes to your trading strategies. Proper money management can be the difference between becoming a successful forex trader in the long run or an unsuccessful one who decimates his/her account in a few weeks.

Have you ever played poker? If you have, then rarely you will see good players put all their chips on a single bet. As a poker player, you know by risking only a small portion of your money on a single bet, you can win or lose but be still play the next hand. If you put everything on the table on a single bet, you have to be 100% sure of winning. An impossible thing, you can never be 100% right.

You must know that currency trading is far more complicated than playing poker. You will be dealing with hundreds and hundreds of unknown variables that affect the markets what to talk of only 52 cards. You must understand and implement good money management principles in order to succeed at forex trading.

There are many pitfalls that you will run across while trading. A trader is constantly under the pressure of two emotions; greed and fear. When you win a trade, you become greedy and want to risk more to win big. You want to strike it rich in a few trades. This drives you to take more and more risk.

In case you lose a trade, you will become fearful of risking your money on the next trade. Now, fear will take over and impair your decision making. Fear will make you lose confidence in your judgment and decision making. Lets see how fear and greed can impair your trading results.

Lets suppose you have a run of successful trades. You are feeling overconfident and you are not satisfied by risking only 2% of your account on a single trade. You want to risk more on the trade. The more you have in a trade, the more you will make if you are right. You increase your risk to 5%, you win. You increase it further to 10%, you once again win. You finally decide to put 25% of your equity at risk on a next trade, but misfortune strikes. Your successful run comes to an end. You lose.

Suppose you had a $100,000 trading account and you had foolishly risked 25% or $25,000 on one trade that you desperately wanted to win. Losing $25,000 means you have only $75,000 in your account now after your loss. How much you need to make to get back the original balance of $100,000; you need to make $25,000 again to go back to the original balance. It means you will have to make 25,000/75,000= 33%, so you risked 25% but now you will need to make 33% to get back your original amount.

Many investors once they lose a trade become desperate and try to risk more to recover their original loss. They end up losing more and more and very soon those investors destroy their accounts. Most of them are out of trading forever soon. There are other traders who try to reduce risk even more on making a losing trade; eventually they lose any opportunity for meaningful growth in their accounts.

Support and resistance levels are used by investors and speculators to determine how far they believe a currency pair will move between the two levels. This also tells them at what points the price action may turn around due to the buying or selling pressure and start moving in the opposite direction.

But sometimes, the markets change direction due to a fundamental factor. The market change of direction is strong enough to cause a currency pair to break through a previously established support and resistance level. When a previous support and resistance level is broken by the markets, new levels are established. However, the broken levels may still have some influence on the market in the future.

Sometimes there are attempted breakouts. This is also known as False Breakouts. It will become obvious to you that prices do not always stop at exactly the same points each time. So if you are going to set up stringent requirements for your support and resistance levels, those levels may not hold up. You would fake yourself out of a lot of valid price movements.

Even when you take all the precautions, you may fall victim to a false breakout. Now, you will ask how I can tell a false breakout from a true one and when the price has truly broken through support and resistance in a new direction.

There are primarily two methods that you can use to filter out a false breakout with a true breakout. These two methods are setting price-amplitude benchmarks and identifying role reversals.

Setting price amplitude benchmarks involves looking at a chart to determine if you can identify and know when the price action momentarily broke through the prevailing support and resistance level before pulling back and once again returning to the previous level.

The dips through the predetermined levels are usually short lived. You can draw a secondary support and resistance lines which you can then utilize as your price-amplitude benchmarks.

A price amplitude benchmark will tell you if the price has broken through the predetermined level but did not breakthrough the benchmark; you dont have to worry about a change in the trend direction. However, if the price had enough momentum behind it to breach the benchmark, it can continue in the new direction.

Identifying role reversals method involves watching the price action to see if support levels turn into resistance levels and resistance levels turn into support levels. Often, you will see the price action bounce off a level of resistance, then turn around and start heading lower and bounce off the previous resistance level.

When a resistance level is broken, that same level will turn into a support level. Conversely when a support level is broken, that same level will turn into a resistance level. You should use both the benchmark and the role reversal confirmations in your trading analysis to screen out false breakout from a true breakout.

Everybody dreads the Inland Revenue, no matter what your occupation. We have the idea that they are always asking for more money and if you are unlucky enough to pay late or not at all, you could well find yourself in financial difficulties. Small business operators have even more to worry about because they have to deal with the payroll taxes of their employees.

So, what’s the issue? When you employ people there are more taxes to pay and returns to be made. Have you heard the saying, “There are only two certainties in life: death and taxes.”? It’s all too true and as well as having to pay your taxes and file the returns, there are other things about which you may be unaware.

Those new to the responsibilities of running a small business must understand the workings of employee taxes. Immediately your doors are open you will have to pay payroll taxes and when you have employees you will also have other responsibilities including withholding taxes from cheques to send to the Inland Revenue, filing quarterly tax returns, etc etc.

Please don’t underestimate the lengths to which the Inland Revenue will go to get these taxes; even after your business ceases to operate! We all realise that late payment will result in hefty fines. As your business becomes larger and you employ more people, the tax bill will also increase.

Can you take the heat? You may think you can, but consider this sobering fact: if you become bankrupt and the business still owed taxes to the Inland Revenue, it could possibly be you that are considered responsible and have to pay the taxes. Bankruptcy court will not shield you from these obligations.

Consider this “hypothetical” case: A small business owner was having problems regarding paying bills as a result of cash flow issues. This became worse when he was no longer able to meet the payroll tax payments and he found it necessary to file for bankruptcy and shut down the business. The bankruptcy court took possession of his assets. He did not have enough funds in his bank account to meet the tax payments. These went unpaid and the Inland Revenue was then identified as the top creditors. This was despite the fact that, as a creditor, the Inland Revenue was obliged to have filed a claim but did not do so.

What was the conclusion for the business operator? Because he was the signatory of the tax returns, he was considered to be responsible for the payment of the tax returns. In our “hypothetical” case, it was around 28,000. This situation could have been avoided had the tax returns been paid on time (our business owner did not have the funds to do this).

There was a happier conclusion to this tale: because the business operator had filed for bankruptcy, he was not required to pay the taxes, because he had been able to prove to the Inland Revenue that he was not able to raise the capital himself. Other business owners may not be so fortunate as each situation is treated differently.

The moral of this story is that all business person must ensure that they are completely cognisant of their responsibilities regarding the payment of payroll taxes if they are to avoid falling into the same trap that our unlucky “hypothetical” business owner had done.