Trading education » Money Management

Forex: Money Management Principles

admin — Sun, 02 May 2010 20:35:25 +0000

Trade With Sufficient Captial

One of the worst blunders that forex traders can make is attempting to trade without sufficient capital.

The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.

Exercise Discipline

Discipline is probably one of the most overused words in forex trading education. However, despite the cliché, discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan.

It’s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you’ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.

Employ Risk-to-Reward Ratios

The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.

Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)

40/20 (2 to 1) = 67%, 40/40 (1 to1) = 50%, 40/60 (1 to 1.5) = 40%,

40/80 (1 to 2) = 33.5%,

60/20 (3 to 1) = 75%,

60/60 (1 to 1) = 50%,

60 /90 (1 to 1.5) = 40%,

60/120 (1 to 2) = 33.5%

Important Note

Never risk more pips on a trade then you plan to make. It doesn’t make sense to risk 100 pips in order to make only 10. Why? See below example.

Profit taking level (pips): 10

Stop used or pips at risk: 100

You win 10 times which makes 100 winning pips.
You ONLY lose once and have to give back all profits!!!

This type of trading makes no sense and you will lose on the long term guaranteed!

By: Toby Smitz

FX Trading Strategy – To Win it Must Contain These 3 Vital Elements

admin — Tue, 13 Apr 2010 15:27:56 +0000

If you want to win with your FX trading strategy make sure it contains these key elements otherwise you will be doomed and join the 95% of losing traders.

1. It must be Your Strategy!

Don’t fall for the hype that some junk robot will give you success or a guru or mentor there are plenty sold online with huge profits in simulation but they don’t work – no one gives you something for nothing and forex trading is no different.

Even if you have got the forex education from someone else, you must understand it and have confidence in it so you can follow it with discipline – discipline is the key, you must be able to ride out losing periods and wait until you hit a home run.

If you don’t have confidence you will never be able to do this make sure you have it.

2. You Must Understand Your Edge

Your trading edge is the reason you will win when 95% of other traders lose and you must have confidence and understand what it is and it must be based on sound logic.

Many people think they have an FX strategy based on sound logic and do the following and lose.

- They try and predict market prices

- They follow bogus scientific theories

- They trade news stories

- They day trade and try and scalp

- They follow experts

All the above will see you lose if you don’t know why, continue your forex trading education until you do.

Your trading edge is something that is personal to you and can be based on a simple forex trading strategy you can execute with discipline – that’s enough, remember simple systems executed with rigorous discipline work!

3. Play Defence First

When you are trading on leverage you need to trade great defence first and always protect what you have this means rigorous money management rules and money management is much more than placing a stop!

If you don’t keep your losses small you will get wiped out – sounds obvious?

Well most traders don’t heed it and use leverage of 200 or 300:1 on a few hundred bucks, 10 or 20 is enough.

Forex trading can make you a lot of money but if you expect not to have to work your in for a rude awakening.

Do your homework, get confident and make sure you have the discipline to stick with your FX trading strategy and follow it through drawdown periods, to long term success and the rewards if you can do this are huge.

By: Kelly Price

Forex Trading Made Easy – A Lesson From a Group of Super Traders For Big Forex Profits!

admin — Thu, 01 Apr 2010 23:58:21 +0000

95% of all traders lose money and that’s a fact but Forex trading made easy is possible and to show you how you can win, I am going to tell you about a group of traders who learned to trade in two weeks and enjoyed stunning trading success…

Richard Dennis was a well known trader who wanted to prove anyone could win at Forex trading, so he set up a test and the test was simple. He set out to get a group of people who knew nothing about trading and taught them to trade in two weeks. He completed his test and his pupils went on to make several hundred million dollars in just 4 years – he had proved that anyone could win with the right guidance.

Before you say, these people must have been college educated or nerds, they were the exact opposite, just ordinary people a security guard, an actor, a boy just out of high school and an actor, to name just a few of the group.

So why did they do so well when most traders fail? Lets take a look in more detail and see how they achieved success.

The strategy itself was simple, it traded long term trends and did so, by entering trading signals via breakouts which all experienced traders know, is a timeless way to make money. The system had far more losing trades than winners and actually had losing periods that lasted months but long term, it did triple digit annual gains.

The key to the systems success was its simplicity which made it very robust and the fact it had strict money management rules which cut lossers quickly and ran profits. Dennis knew the system was easy to understand but the traders would all have problems following it with discipline and this is true for most traders. Most traders simply can’t take losses or stay on track, through losing periods and here Dennis focused on giving them the right mindset to succeed.

Having the right mindset is a choice – if you want to feel smart and clever and win all the time trading is not for you – but if you can accept losses cheerfully, keep them small and stay on course you can win, as the group showed.

Now you may not become as rich as this group of traders, life is simply not like that – but there is nothing to stop you winning as trading success can be specifically learned. Getting the right education is easy but getting the right mindset is harder however you can do it and you can make a lot of money as the experiment we have just looked at proved.

By: Kelly Price

Forex Trading – These Traders Had No Experience But in 14 Days Became Super Traders – How?

admin — Thu, 25 Mar 2010 11:34:17 +0000

Imagine having no experience of forex trading, being trained for 14 days and you then went on to make millions – sounds far fetched? Well, it happened in the 1980s in one of the most famous trading experiments of all time which is enclosed and should become part of your essential forex education.

In the nineteen eighties, trading legend Richard Dennis wanted to prove a point and the point was simple:

It doesn’t matter what you do, how intelligent you are, if your young, old male or female, you can become a successful trader, if you have the right mindset and a willingness to learn.

He set out to prove his point.

He gathered a group of people who met the above criteria and they included:

An actor, a security guard, a kid fresh from school and a female auditor – diverse they were but they were all about to get a trading education.

In 14 days, Dennis taught them to trade and set them up with live accounts and they went on to make hundreds of millions of dollars and go down in trading history.

This group was nicknamed “the turtles” and proved Dennis right – anyone could learn to trade with the right education and the right attitude.

That’s interesting you may say… but 95% of traders lose, so how come this group was so successful?

The answer lies in the way they learned.

They learned a simple long term trend following trading system (essentially a breakout system) and it was so simple anyone could understand it. It’s a fact also, that simple trading systems always work best, because they have fewer elements to break than complicated ones.

Now Dennis didn’t just say off you go and trade – he rammed home why it worked, gave strict money management rules and made sure they would be prepared to trade it with discipline, to achieve success.

The above is the important part.

Learning a trading system is not enough, you need to execute it with discipline and take loss after short term loss, without quitting and then profits follow. You need to take losses to win and stay on course.

To trade you need to follow your system with discipline and you need confidence to do this. He taught them to stand on their own two feet and appreciate – learning a trading system is easy – executing it with discipline is the hard bit.

You can learn from someone else – but you have to make the system work for you!

Most traders can’t do this, they like to ask experts, trade worthless robots with simulated track records, or believe drawdowns don’t last and trading is easy and they all lose.

Trading is all about having the mindset to succeed and to execute a plan. Most traders are to lazy or naïve to do this and most think forex trading is easy. Well, when big money is on the line and to be earned – it’s not easy. However, there is a big difference between something being easy and something being achievable.

Sure you might not become as successful as the above group life simply isn’t like that but the opportunity is there – they did it you could to.

Even if you don’t achieve such great success, you can find success which more than makes up for the effort you have to put into your forex trading.

Sure forex trading is not a walk in the park, it’s a challenge but accept it – work hard, have the mindset to succeed and you can find success – it’s up to you.

By: Monica Hendrix

Why 90% of Forex Traders Fail?

admin — Tue, 23 Mar 2010 04:26:09 +0000

Yes it’s true and it is only a conservative estimate. There have been many statistical studies to prove the point. A very small percentage of these traders even go bankrupt.

Why do traders fail ? Is it because they are stupid? No. Studies have shown that many of these traders are highly educated, have good incomes and are highly motivated. Then why do they fail?

Lack of Education

A doctor generally spends around five years in training before he is given a basic license to practice. Developing core skill sets is one of the fundamental principles of success in any human profession. In relation to trading, education does not mean learning about how to do, for example learning Fibonacci patterns or drawing charts or learning new trading systems from traders. It means thoroughly educating on all aspects of the chosen profession. Learn about Psychological tendencies of human mind, correct approach to money management and learning the correct exit and entry methods for the trading style that suits you, the list is practically endless.

Peter Bain in his Am Reviews says it clearly “You can never learn too much”.

Your income would be the by result of the skill you develop. Devote yourself to life long learning.

Approaching trading with the wrong Mindset

Here are common misconceptions which beginners often fall into.

* You can Trade with 80 % accuracy.

* Turn $ 1000 into six figures in short few months.

* Predict Turning points in their market within minutes.

* Buy a system that is 100% ACCURATE.

* Quit their day job and begin trading full time in a short period of time.

Why is this mindset prevalent? It’s nothing but a result of marketing hype which a trader’s mind is often subjected to – “Make 10 pips a day Guaranteed!”. The human subconscious mind often uses these signals to make it’s own reality.

However experienced traders would often tell you that successful trading takes time and persistence.

A successful trader is the by product of persistence, hard work and sound judgment. Good Judgment stems from experience and experience stems from many bad judgments. Take your time to learn trading and expect to make mistakes, there’s no stopping for you.

By: Mike Lombardy

Commodity Futures and Options Trading- Money Management, Risk and Trading Logic, PART 3

admin — Mon, 22 Mar 2010 19:35:14 +0000

Possibly the most important aspect to get right in trading is survival. This is number one. Without surviving the bad times we are gone, with no hope. Money management and risk may sound like boring subjects, but read on to see how exciting they can be once you learn the concrete reasons and logic for their use. You may never trade the same way again!

Commodity option buying can be rough for novices. Some see a TV pitch about striking it rich in gold or heating oil. They load up their entire account buying way out-of-the-money options, lose all of their trading capital through premium erosion and then curse the market. They don’t consider to survive they must prepare for the inevitable string of losses when trading at 10% accuracy. We need to survive long enough to be around when that 10% option winner hits big. The other 90% will be losers simply from the probability of the method used.

In this case, it means dividing our trading capital into at LEAST twenty parts to be able to survive the string of losses that probability will surely bring our way, over time. It’s about survival and knowing what type of commodity trading we are doing so that we can adjust the money risked on each trade. If we are trading at 10% accuracy, (option buying) and expecting to make money on the first 3-4 trades, it’s pure arrogance.

Then there are some commodity option traders who will overload themselves by buying large option positions and are willing to let them erode away, taking a full 100% loss of the total account. They have no plan to exit if the market does not act properly. Not a good idea. Though, some buy a commodity option and use its full loss as a stop loss in itself. That’s acceptable ONLY if you do it with small positions. But the sad thing is when these guys get a mere double in the option price, they call that a big profit and grab it. Pure lunacy!

How can one be willing to lose their total investment and at the same time take tiny gains while still trading at 10-20% accuracy? The results are predictable. They consistently lose. Their excuse is the analysis is bad, or the commodity markets are poor or they should have gotten into another trade instead. You can point the math out to them, but they do not get it. No matter what they do, the result will continue to be the same unless money management changes are made. By the way, one definition of insanity is doing the same thing over and over while expecting different results. (grin)

The bottom line is that if your commodity trading method generates an average of 20% (at best) accuracy by design, as option buying way out-of-the-money often does, you had better be seeing your average gains four times larger than your average losses. And, this is just to break even not counting commissions, bid-offer spreads and slippage! This means if you think a $2,000 loss is prudent, you had better be averaging $8,000 gains to break even. Just to break even!

You must sit on your hands and let the profits run when buying options. This is over the long-haul where things even out over time. In the short term you may trade better or worse, but over time, probability will put you where you spend the most time. With a $10,000 account, if you’re taking $2,000 profits and $2,000 losses when trading 20% accurate, you will probably be out of the commodity option business in less than ten trades. This may sound like fiction, but believe me, many new traders do exactly this, thinking they will win in the end.

Part Four of Five Parts – Next!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

By: Thomas Cathey

Free Forex Trading Strategies – 2 X Trading Systems the Pro’s Use That Have Made Millions in Profits

admin — Mon, 08 Mar 2010 22:24:56 +0000

It always amuses me, when traders buy Forex robots for a hundred dollars or so and thinking they will get rich with them – but none of them work as they have never been traded in real time and are simply back tested simulations. The 2 Free Forex trading strategies we will look here, have made hundreds of millions in real time profits, lets take a look at them in more detail.

The systems we will look at have worked for over 25 years and unlike the popular Forex Robots you see for sale online, these systems are from trading legends not just programmers, these systems work in real time, not just in back tested simulations.

The first free Forex trading strategy we we will look at is “The 4 Week Rule” which was devised by the grandfather of modern trend following Richard Donchian. We have written in detail on this strategy, in other articles but in summary, its a one rule, trend following system which is based on breakout trading. While incredibly simple it works and always remember, the best trading systems are simple, as they have fewer elements to break than complex ones.

If you apply the 4 Week rule correctly, you can make some great long term Forex profits with a system that has stood the test of time.

The next strategy we will look at which you can get for free, comes from Richard Dennis, who incidentally, was also a fan of the 4 Week Rule; His strategy was based on the same logic, trading long term trends via breakouts and it made huge profits. The rules he devised, were used by a group of novice traders to show that anyone, with the right education and system, could win at Forex. Dennis was proved right and in just two years, his group of novices made $200 million real time dollars with it!

The system rules are available free and if you look at the strategy it has all the elements a good strategy has and I personally think, any traders should look at it for the money management rules which are a great example of how to preserve equity. The system is less effective today than when it was first used, as markets have become more volatile but for showing you the basics a good strategy needs to succeed its a great system to look at.

Two simple systems, by true trading legends you can learn from and there both free! Look them up and make them part of your essential Forex trading education and if you learn from them, they will help you enjoy currency trading success.

By: Samuel Leslie Berkovits

Forex Education – A Free System That Made Hundreds of Millions of Dollars

admin — Sat, 20 Feb 2010 15:05:06 +0000

How would you like to get a free system, that proven and that’s made hundreds of millions of dollars for traders in real time? Well you can and that’s the subject of this article.

The system I am referring to is the original rules, Richard Dennis devised to give to a group of traders, a system to trade, who he taught to trade in a couple of weeks. These people were called “the turtles” and they have gone down as trading legends. In just a few years, they piled up hundreds of millions of dollars in profit and proved Dennis right in his aim which was to show anyone could make money at Forex, with the right education.

The system available free online and while the system is well over 20 years old it still works, although markets have changed in terms of volatility making it less effective than it was – but what I like about the system, are the three cores upon which it’s based which are timeless, in terms of making money in any trending market.

Firstly, the system was based on long term trend following and it always amazes me why people try and scalp a few pips when the big trends are the ones which make the really big profits.

Secondly, it’s based on breakout trading which is the simplest and best way to get in on any trend. Most traders like to predict but that’s hoping or guessing trading breakouts, trades the reality and is far more profitable.

Finally, the system had great money management and trade weighting rules and as we all know money management is the key to any systems success, the rules may be simple but they work.

The system lost far more trades than it won and this is true of most systems ( don’t believe what the vendors of cheap software programs say about making money with no drawdown – its simply not true) but if you cut your losses and run your profits, you can make a great long term income.

If you want to know more about the system you will find it free online and also check out the excellent books “Way of the turtle” by Curtis Faith, the most successful turtle and the interviews, with Richard Dennis and his disciples in Market Wizards and the new Market Wizards.

I always found the turtle experiment inspiring, in terms of my education and if you look at the original rules and read about how a group of novices learned to trade in a few weeks, it might inspire you to become a successful trader too, as it showed anyone with the right education and mindset could win.

By: Samuel Leslie Berkovits

Forex Education – The Proof That Anyone Can Win and How You Can Achieve Success

admin — Wed, 10 Feb 2010 22:01:45 +0000

Enclosed you will find a story about a group of traders who made millions of dollars after just two weeks trading and what is interesting about this story is how they achieved success. If you study it, you will see how you can win too – let’s take a look at this Forex education in more detail.

Legendary trader Richard Dennis set out to prove that anyone could win at Forex trading with the right education and he gathered a group of ordinary people together and taught them to trade in just 14 days; these were just regular people – a security guard, a lady auditor and a kid just out of high school, to name just three of them. After 14 days training however, they achieved spectacular success and made over $100 million in a 4 year period.

So how did they do it? Let’s find out

These traders were taught a simple method which was a long term trend following system which had strict money management parameters and was based on breakout methodology, so nothing complex; it was nice and simple and the speed with which the traders learned it proves this.

Of course 95% of traders lose and it’s important to state they don’t lose because they can’t learn to win, they simply get the wrong Forex education or more importantly, most traders can’t trade their system to its rules, as they lack the discipline to follow the system rules as there laid down; if you deviate from the system and don’t trade it with discipline you don’t have a system.

Discipline is harder to achieve but it can be done, you simply have to accept you will face losing periods and when they occur you MUST keep your losses small and most traders can’t do this. Instead, they run losses and hope they turn around, trade more frequently to get back money they have lost or they simply change systems.

Dennis knew this and instilled in his pupils, that while the system he was teaching them would lose far more trades than it won, it would make huge gains over time if they kept their losses small.

They did this and while many of them commented it was hard mentally to stay disciplined (and it is when the market makes you look a fool) they adhered to the system and were rewarded. Anyone can learn a simple system needed to win and if you acquire confidence in what your doing and follow your system with discipline, you can win.

Many traders think its the market that beats the trader but its really the trader who ends up beating himself. If you want to win at Forex trading you can and I hope this article, inspires you to get the right education and mindset and enjoy currency trading success.

By: Kelly Price

Learn Forex Trading – These Traders Made Millions After 2 Weeks Training

admin — Sun, 07 Feb 2010 01:22:52 +0000

If you want to learn forex trading then you should know the story of the turtles who were a group of traders with no experience went on to make $100 million dollars in just 4 years. How did they do it? Read this article and you will find out and it will inspire your forex education.

The Experiment

Legendary trader Richard Dennis set out to prove that anyone could learn forex trading with the right education and mindset – he believed that traders were made not born and set out to prove his point.

He gathered a group of people together who only had one thing in common – they had never traded before. They included a security card, some professional card players, an actor a female auditor and a kid fresh from school just to name a few.

The Results

After 14 days of trading education he set them off to trade and the result was:

They made $100 million for him in just 4 years and went on to make a lot more and become some of the most famous traders of all time.

The Education

So what did Dennis teach them? He taught them a very simple forex trading method which was basically a long term breakout strategy combined with rigorous money management rules to preserve equity.

Dennis knew however that a trading system is not enough to succeed its having the discipline to follow it through long periods that is. He made sure the traders he taught knew how and why the system worked and even when it lost he taught them to stick with it and not deviate from the rules. Rules are rules and must be followed with discipline – if you don’t have the discipline

This took him just 14 days and the rest is history.

What You CAN Learn

There are several lessons that you can learn and the salient ones are outlines below.

1. Everything about forex trading can be learned

If you have the willingness to apply yourself. OK you may not become as successful as this group – but there is a big difference between something being impossible and something being achievable.

2. Simple systems work best!

Today many people think that the more complicated a system is the more likely it is to be successful – but this is simply not true. Simple systems have always worked best and always will, because they are more robust with fewer elements to break. He also taught rigid money management and made the first priority the protection of capital. If you lose what you have you can’t trade anymore.

It’s a bit like the old obvious gambling saying – to win you need to bet – but you can’t bet, if you don’t have any chips! Obvious but true, so you play great defence first and the profits will come, when the right opportunities present themselves.

3. Discipline is the key

You will here it time and time again how discipline is the key to forex trading success and it is – if you don’t have the discipline to follow your method you have no method.

Discipline comes from confidence in what you are doing, this is why he taught the turtles how and why the system worked and didn’t tell them to follow it blindly. Trading success comes from within and this means acquiring confidence and discipline. So if you want to learn forex trading correctly, learn from the turtles:

The potential is huge, you only need a simple system, good money management and most importantly – the confidence and the discipline to apply what you have learned. The reason most traders never succeed is they never learn the importance of the latter and want to follow others – but you don’t get these traits following others, they come from within.

By: Kelly Price