Despite the hundreds of currencies in existence, only a handful is heavily traded on a daily basis. The currency pairs that see the most activity are considered the Majors. The Majors consist of GBP/USD, EU/RUSD, USD/CAD, USD/JPY, USD/CHF, and USD/AUD.
Do you see one common denominator amongst the majors? The United States Dollar is traded in every major currency pair. Currency pairs that do not include the USD are considered to by cross rates. And example of a cross rate would be GBP/JPY.
When the Dollar moves, a lot of times you were see correlation between the Majors. For instance, if GBP/USD is in an uptrend, it is common to see that USD/CAD might be in a downtrend. Keep in mind, not always will that be the case, but generally speaking the two move against each other.
Money management is one of the most important elements in a forex trading system. In any given trade, no matter how good it looks, you should never risk anymore than 2% of your bankroll. If you have $10,000 in your account, the maximum risk you should allow yourself is $200. So if your trade has a 100 pip stop loss, you would want to risk no more than $2 per pip. A common mistake traders make is to base their pip size in direct relation to their bankroll. For instance a trader might risk decide to risk $1 per $1000 in his bankroll. Trading in such a fashion has no regard for the amount of risk per trade. On a larger trade, such a method of trading could be financially devastating.
Knowing that you should never risk more than two percent per trade, you should be mindful of which currency pairs you are trading if you trade more than one. For instance, you might analyze your charts and decide that EUR/USD is presenting an excellent opportunity for you to short. Likewise, as you scan through the charts, you see the GBP/USD is also looking good to short.
You decide to go ahead and place both short orders and risk 2% each. Both pairs start to move in the same direction as the news for USD was released. The news was positive for the USD and both pairs drop. Your profit targets were hit on both pairs and you took an 8% gain that day, assuming your risk/reward was 1:2.
While you were profitable in this particular trade, it is my belief that you in fact were overtrading. The news was moving both pairs because of the strength behind the dollar. As a result you were actually risking 4% on that one move. While it might have worked this time, what if it didn’t? Your bankroll would have taken a 4% loss on the same move.
An easy remedy would be to only trade one or the other. Take whichever pair looks to give the highest probability of success. Since you are risking the same amount on either pair, the amount of pips won or lost is irrelevant.
Winner’s Edge Trading, as seen on: