Good to know that you have been wacked and come back to thrive. Welcome to the club. Can you share what you learned, and what you are doing now that you consider "conservative"? As an equities-only trader who has been casually looking at forex for some diversification, I'm finding it hard to get over the impression that a LOT of leverage is involved in generating any profits that make the effort worthwhile.
Odd trader, You have to understand that FX, unlike other financial assets such as stocks or bonds, is a necessary consumable good. Certain actors need to buy and sell a given currency, for different reasons, every hour of the week. If the entire world can very well dump all the MSFT stock in their portfolio overnight, the same thing is not tru for FX. Central banks, commercial banks, businesses and other investors need to but and sell currencies for the needs of their businesses. The real need for currency eliminates the possibility of everybody dumping the same currency at the same time. That said, yes liquiduty can decrease, and yes the buyers / sellers can get all out of wack severely for a short time, but a major currency can not be sold out of everybody's portfolio overnight like a stock. Yes, liquidity is comparatively thin during Asian trade, but there are always enough buy/sell orders throuout the market to provide liquidity (assuming you are not trying to deal in several billions)
One thing that has kept me alive is not abusing leverage. I work based on a model, which is "risk management" intensive. I would certainly have to type for hours to explain the whole thing in detail (the model integrates about 30 some calculations just in the risk management side), but to give you a slight idea of how "conservative" I am, I start my "series" (my trades are organised in "series") with a risk on equity of about 0.2% of my capital .. on a given trade at the begining of a series, I risk about 0.2% of my capital. ... no, I don't use a "martingale" thing (many jump to that conclusion)
For various reasons, I think FX would be possibly the best trading instrument relative to others, imo.
The Governor of the Bank of England is to announce in a lecture in Kirkcaldy, Scotland, tonight that Adam Smith, one of the fathers of economics, is to appear on the Bank of England's new £20 note. http://www.bankofengland.co.uk/publications/news/2006/097.htm Adam Smith is one of my favorite economic writters. If any of you are interested in reading any of the great classics in economics, here is a great source to free copies : http://www.econlib.org/library/classics.html I strongly suggest Smith, Keynes, & Riccardo to start with .. the pillars of economic theory
Oddtrader, Agree 100%. Personaly, I trade FX, energies, and some equities/equity derivatives from time to time, but in my very holly oppinion, FX is by far the Rolls Royce of financial markets.
Lindq, Another thing that I attribute to my success & survival in FX is the fact that I do not "day trade". I look at the bigger picture and do not restrict my trades to a predetermined time. ... some of my trades only last a few hours, but in general, my trades last anywhere from a few days to several weeks. ... right now I have a short cad/jpy that has been a pain in the ass .. short cad/jpy from 105.92 oppened on Sept. 1st ... a real bag drag, but will only close this trade once either my stop at 106.45, or my target at 102.32 is hit.
Perhaps when trading such a fairly conservative leverage you've already accounting/ absorbing the "huge" gaps factor into your trading system.
Actualy, when you concentrate on "real risk" (ie; what you can actualy lose on a given trade) like I do, the leverage can vary greatly. Some of my trades are unleveraged, and some are leveraged 3 or 5 x capital. ... it just depends on the distance of the stop that needs to be placed to respect risk perameters. Example; higher volatility dictates further out stops and smaller trade size ... vice versa in lower volatility conditions & pairs. That said, if the JPY crashed 90% right now, I would be wiped out. .. I am presently short usd/jpy from 119.24, short cad/jpy from 105.92, and short nzd/jpy from 78.99, and short gbp/jpy from 223.65 (also long eur/gbp & short eur/nok) ... alot of long jpy positions in my books at present, but partial profits taken, and partial profits on the remaining size locked in with stops. ... if jpy crashed with a huge gap 1000 pip, I would be finished... I'm realy not worried at all about such an unlikely scenario.
I'm always reminded of the saying in politics that a liberal is just a conservative who hasn't been mugged yet. My respect for a trader increases proportionally to how often he has been mugged, and what he's learned from it.