This course is about making money from the Forex market. I have learnt that trading success and making money in Forex trading is all about stacking the odds in your favour. When I say STACK THE ODDS IN YOUR FAVOUR traders immediately think of a trading technique. You need to stack the odds in your favour the 3 major areas – Trading psychology, money management and trading techniques. Forex trading success is not about being the best online Forex Trader achieving 100% success with every trade all the time. It’s about giving yourself an edge and maintaining that edge over the market in all the major forex trading areas. This course is about giving you that edge.
You have probably bought this course to become a total winner. You want to trade the Forex market successfully and make lots of money. So you are now reading this course with lots of enthusiasm and positiveness. You are probably thinking about hundreds of positive deals using great new techniques.
That’s what makes my first job the most difficult one.
I need to teach you how to accept the fact that you are going to be a LOSER when trading the forex market.
A Forex trader’s ability to deal positively with losses is the biggest differentiating factor between making money and losing money in the Forex Market.
I budget and expect to lose between 30% and 60% of my trades in bad patches. But I also budget and expect to make money in spite of losing and that is what makes the difference. You need to accept and manage losing in a positive way. It is VERY important that you understand all the concepts of this section before moving onto the next section of the course.
No system has a 100% success rate. The ones that do have a 100% success rate don’t cash in their losses or they trade once in a blue moon.
I started my Forex Career by learning and then lecturing Forex trading methods.
This period was very constructive as I experienced Forex trading using different trading techniques and was exposed to many good traders over a short period of 2 years. During this period I realised that ANY trading technique has a very good chance of being successful if applied appropriately. Some very unsuccessful techniques are successful if simply reversed anyway. The main difference between successful and unsuccessful traders is their temperament, attitude, patience and mental outlook rather than the technique used.
I have also been looking for the Holy Grail ever since I was first introduced to Forex trading. Everybody dreams of a system that has 90% reliability and can be traded continuously through all phases of the markets – sideways and trending – year after year. The problem with this, is that this high expectation creates an extremely bad mindset for trading. I have been there. You feel as if the market is out to get you, that you are banging your head against a brick wall, the market always goes in exactly the opposite way you are trading, etc. It is a very DARK place to be in. If you have been there, you will know. You develop a love hate relationship with the market. You love forex trading but you hate the results.
These feeling are caused by unrealistic expectations, impatience, a desperate need to succeed, inability to deal with adversity, the urgent need for money etc. These feelings will kill your trading career before you have even started. Unfortunately I know some very bright people that have ended up in the “Forex Morgue for unsuccessful traders” because of these factors and no other. People lose all perspective and they think that because they watch Tiger Woods sink a 10 foot putt to win a Major Tournament they can do it too.
It is only once I accepted that the way to make money trading the Forex market was to be right more often than not and to make sure that I make more money on my winners than I lose on my losers. Coming to this simple realisation has taken me years and a few lost fortunes due to greed and the drive to be right all the time. I wanted to make a fortune right away and was too impatient to tolerate losers. Trading takes considerable patience and respect for the market.
The Forex Market makes it very difficult to get out of the Holy Grail mentality. New systems are constantly being advertised as having very low or no losing records creating unrealistic expectations for new and eager Forex traders.
I realised that one of the KEY SUCCESS factors to Forex trading was to change my trading mentality towards trading loses and develop a numbness towards losing trades. Both winning and losing trades used to excite me so much, that I would lose all objectivity for the next trades.
I was influenced by Dr Alexander Elders great trading classic “Trading for a living” in which he spent most of the introduction on Psychology and money management. I initially found this very irritating but now I can understand why he did that. He had an interesting approach to trading and compared trading to alcoholism and suggested that every trader started the day saying:
“Hallo, My name is Barry, I am a Forex trader and a loser. I have it in me to do serious and permanent financial damage to my trading account today.”
I am not suggesting that the Long Candle approach will only give you a low success rate. In fact it will go a long way getting your success rate high with high probability trades. But, as with any trading system there will be losses and you need to be able to manage the impact of these losses. I have seen traders stop trading highly successful techniques because of one or 2 losses. Don’t let this happen to you OK….Lets learn how to become successful LOSERS………..
The way that I have learnt how to make money trading the Forex market is:-
First: Learn to make money with a 50% success rate. This will develop a healthy trading attitude to losing and make you competent at money management by staying calm in the face of adversity. Making money with a low success rate is a trading skill without which, you will not succeed.
Second: Once you have mastered making money with a 50% success rate you can then fully concentrate of improving your success rate with more experience regarding various trading techniques. Competency at making money with a 50% success rate will create a mental safety net.
95% of traders bypass step one in their trading career. No wonder so many fail.
So let’s look at how a Forex Trader can make money from losing and do a few exercises which will help you make losing part of your Forex trading mental attitude. By the way, if you follow these suggestions it will also resolve most of the psychological trading problems traders face at the same time.
There are 3 areas you need to manage:
Your trading capital. Having the right amount of trading capital is more of a psychological requirement than a financial requirement.
Your trading SUCCESS RATE. Your trading success ratio is calculated by comparing how many successful deals you have had to the number of unsuccessful ones. Most traders concentrate so hard to try to get this high that they never achieve financial success. Many traders make money with success rates as low as 40% and lower.
How much you make with “winners” and how much you lose with your “losers” (Your $ Win / Loss ratio). The trick is to lose less on your losing trades than you make on your winning trades.
After seeing Forex success and failures early in my career I realised that Forex trading is about making the right but hard choices. Choices that give the freedom to sleep well in the evening, travel anywhere enjoy forex trading, have fun discussing Forex trading, enjoy a good life style, meeting interesting people.
Success breeds success. The minute you start pushing the boundaries of the 3 areas mentioned above you are bringing in desperation and tenseness that have a good chance of destroying your Forex career. So let’s spend some time understanding the boundaries set by the 3 areas above.
The ideal trading capital I have available for trading is always equal to 100 times the amount that I normally risk on 1 forex trade. If my stop loss (the amount I risk on I trade) is $1000 then you need $100 000 in your trading account. That also means that I can not risk more than 1% of my trading capital on any 1 trade. Those are my personal rules which I have reached after years of risky trading. I also never have more than 2 deals active at any one time.
What this gives me is the knowledge that a negative deal can not cause major financial harm to me. I can sleep well at night. As I said previously the amount of capital required is a psychological and mental requirement – not a financial one.
OK – That’s me what about you?
The quicker you can apply the 1% rule the better. Luckily these days mini ($1 per pip) and Micro (10c per pip) trading is being offered by brokers. This means that if you want to risk 100 pips ($10) in your next trade you only need an account of $1000 if you use a micro account.
It is more important in the long run to start trading profitably than trying to make big gains using a small account. I will show you ways of making higher returns even if you use the conservative recommendations explained above, later on in the course.
This rate compares the number of successful deals with the number of unsuccessful deals or the total number of deals during a period. If you have had 50 successful deals out of a total of 100 deals during a month you would have a 50% success rate.
A 50% success rate does not mean that you have broken even for the month. This depends on the amount you lost with your losers compared with the amount you made with your successful deals.
You can therefore make money with a 40% success rate and lose money with an 80% success rate (which is very common).
Your success rate is also related to the size of stop you use. The smaller the stops, the lower your success rate and the bigger the stops, the bigger your success rate. Again you can not relate this ratio to trading success without knowing the other ratio. This is a common mistake traders make.
The amount you make on winners compared to the amount you make on losers( Your $ win / loss ratio ):
To get the average you make on winners, you can add up the amounts gained and divide that by the number of successful transactions. Similarly take the total of the losses and divide that by the number of negative deals.
This is where Trading skill is required. You need to find deals where you can make much more than you risk.
Catching a long candle improves your odds dramatically.
Combining your success rate with the amounts you win and loss.
Table 2.1 below shows the success rate required to breakeven based on the your $ win / loss ratio
table
The table above (for instance) shows that if you make on average $1.25 for every $1.00 you will still breakeven even if you’re your success rate is 40%. All forex traders want to reduce risk by having a high success rate but there are other ways of making money in the forex market other than having a high success rate. An ideal balance would be to have a reasonably high success rate (say 70%) and a reasonable %win ratio (say $1.50).
Below are some real-life of 3 active Forex traders I know.
The first is a daily scalper who traders the Forex for a financial institution. He trades over 100 deals a day. He achieves a 56% success rate and his risk return ratio is 1:1. (He makes as much as he loses). For every $1 he trades he makes $1.03. He is happy with return as he trades big numbers. For every $1 million he trades in a day he earns $ 30 000 for his employer. Everybody is happy.
The other trader is a long term swing trader that goes for 150 to 250 pip targets trading his own account. His aim is to catch a trend at its start and stay with the deal until completed. He likes using small stops because of his large targets. Using small stops reduces his success rate tremendously. In fact he only has a 35% success rate but he actually achieves a 4:1 risk return ratio (135 pips for winners and 35 pips for losing trades). He makes 35% x $4 on winning trades = $1.40 and loses 75% x $1 = .75c on losing trades. He is happy with this return as in the long run he is almost doubling the money lost with winning trades. He does about 6 trades a week. If he risks $ 20000 in a month (20 trades risking $1000 a trade) he makes $ 15 000 a month and he is happy.
Then there is a daily trader who trades about 20 trades a week. She actually achieves success ratio of 63% and has a favourable risk return ratio (% success ratio) of $2.00: $1.50 (For every $1.50 risked she makes $2.00). Her wins therefore become 63% x $2:00 = $1.26 is therefore made on winning trades and $1.50 x 37% = $ 0.56 on losing trades. Almost the same as the long term swing trading trader. On her 80 trades a month risking only $200 a trade she makes over $11 000. Not bad for working from home.
The exercise below should result in you losing +/- 50% of the time. It will however show you how you can make money losing 50% of the time and having fun and enjoying the losing experience. This is very similar to the attitude I am trying to instil in you for your Forex Trading activities.
You need to develop a numbness towards loses. This numbness comes from the fact that you are not risking your house or future on the each trade but only 1% of your trading capital. After you have done the course you will also have a trading edge which will make sure that you have a reasonable success rate and an appropriate risk/return ratio. This will give you the mental, psychological and trading edge you need over the market.
EXERCISE 2.1: The coin flipping exercise
Imagine that you have $100 to trade with. You can therefore risk $1 per trade. Now find the biggest coin used by your local currency.
You need to spin this coin 100 times. Pay yourself $1.50 for every head you get and deduct $1.00c for every Tail you get. Start spinning and calculating your account balance. The first 10 to 20 spins you will notice that you are quite tense about the outcome of every spin and very interested in the outcome (emotional). After a while you realise that the odds are stacked so favourable in your favour that loses do no hurt at all. They become an opportunity for a fresh spin.
PLEASE DO THIS EXERCISE (It is more important than you will ever realise) – Trading is a practical activity like golf or swimming. You achieve nothing by understanding a concept. You only achieve something by using a concept in your trading and making it yours.
I still force myself to do the 100 spin exercise after I feel that the Holy Gail way of thinking is trying to affect me or if I start experiencing too much pain or emotion after seeing my stop loss being hit. I regard it as so important that I have never stopped doing it – and so should you.
You should make +/- $25 profit (25% Return on your money). (50% x -$100= -$50) + (50% x +$1.50 = $ 75 ) = $25
This exercise is not too dissimilar to Forex Trading and that is why it is so
important. I have run and marketed a few really good alert services. I have found that people can’t take the pain of losing. They can’t develop the numbness towards Forex trading loses require. They stop the alert service the minute there are 2 loses in a row. There is also a rush to join the service after it has had a good run. So you have this SAD human pain avoidance behaviour occurring. People join a service when it’s due for a few negative trades and leave the service when it is due to have a few positive trades. If they just stay with the service and ride the waves of success and failure (like the coin exercise) they would be better off.
One of the SADDEST experiences that I have as a trainer is to share a really good trading technique with students and get them going on it. 3 months later I would contact them (after I have traded the same technique and have made money) only to find that they dropped the technique as it had 3 losses in a row. YOU NEED TO DEVELOP THE ABILITY TO MENTALLY MANAGE LOSSES – Please do the Coin exercise again to see how you make money with many, many losses.
If you ever expect a Forex trading technique to give you 100% successes please do the 100 spin exercise immediately!
Most trading techniques can be traded profitably. Yes, MOST TRADING TECHNIQUES CAN BE TRADED PROFITABLY. I have seen too many successful traders using too many varied trading techniques to believe otherwise. Why these traders are successful is that they trade their technique consistently year after year through all the good and bad phases. They know that they have an edge over the market if they stick to their technique consistently and apply sound money and risk management. This course will teach you how to make most techniques more profitable by using filters to filter out unprofitable transactions.
After all of that talk of patience I am now going to show you a way of doubling your trading capital using reduced risk. We are going to redo the coin flipping exercise with a small change that will double our trading capital with reduced risk.
EXERCISE 2.2: Double your money safely
Imagine that you have $100 to trade with. You can therefore risk $1 per trade.
Now find the biggest coin used by your local currency.
You need to spin this coin. Pay yourself $1.50 for every head you get and deduct $1.00c for every Tail you get. Start spinning and calculating your account balance.
Once your account balance reaches $ 110 increase your bets. Pay yourself $3.00 for a head and deduct $ 2.00 for a loss). In other words double your lots.
If your account goes back to $100 return to the normal bets.
Once your account reaches $ 130 increase your bets. Pay yourself $4.50 for a head and deduct $3.00 for a loss (add another lot).
If you account goes back to $110 apply the bets as at that level
If your account goes back to $100 return to the normal bets.
Once your account reaches $ 160 increase your bets. Pay yourself $6.00 for a head and deduct $4.00 for a loss (add another lot).
If you account goes back to $130 apply the bets as at that level
If you account goes back to $110 apply the bets as at that level
If your account goes back to $100 return to the normal bets.
The likely outcome after 20 spins is (20 x -$1.00 = - $20.00) + ( 20 x $1.50 = $ 30.00) = $10.00
The likely outcome after the next 20 spins is (20 x -$2.00 = - $40.00) + ( 20 x $3.00 = $60.00) = $20.00
The likely outcome after the next 20 spins is (20 x -$3.00 = - $60.00) + ( 20 x $4.50 = $90.00) = $30.00
The likely outcome after the next 20 spins is (20 x -$4.00 = - $80.00) + ( 20 x $6.00 = $120.00) = $40.00
TOTAL = $ 100.00
You have doubled your money in +/- 80 spins.
PLEASE DO THIS EXERCISE
Your bottom end risk is +/- breakeven as you only become aggressive when you have built a buffer of retained gains. Risk can even be reduced more by increasing the levels where bet increase happen to say $120, $160, $240 etc. After doubling your capital you would revert back to the 1% rule (this time starting with $200 in trading capital) and start again increasing your bets when it is safe to do so.
I use this technique for the portion of my trading capital that I want to trade more aggressively but don’t want to incur much risk. I also only use this technique for the more reliable trading processes. So now you have a conservative method of trading – always 1% of capital – and a more aggressive method of trading – increasing lots – to choose from.
TRADING SUCCESS AND THE RISK RETURN RATIO
From doing the Coin flipping exercises it must have become very clear that the financial success of your Forex Trading is dependent of the major assumption we made when flipping the coin. You make $1.00 losses and you make $ 1.50 on gains. The rest of the course will be based on finding ways that will give you 2 edges:
A better than 50% success rate
A better than 1: 1.5 risk return ratio.
If we can achieve the above we are home and dry. So let’s do a trading exercise to get a feel of the possibility of achieving the above goals.
EXERCISE 2.3
Using your demo account please place simultaneous a buy and a sell market orders (immediate) in both the GBPUSD and the EURJPY (4 transactions) with a 30 pip stop loss and a 45 pip target for all transactions.
Do this for the next 5 days – 5 x 4 transactions. Try to do the transaction at the start of the UK (9:00 am GMT) or US (9:00am US) sessions if possible.
We are not guaranteed of a 50% success rate or a 1: 1.5 risk return ratio. Lets see how close you come.
This exercise will also teach you a lot about currency volatility, trading volumes and how annoying spreads can be sometimes.
AGAIN YOU CAN THEORISE ABOUT THIS OR DO THE EXERCISE – I SUGGEST YOU DO THE TRADES.
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