In defining your Money Management rules, do not forget to consider the Risk/Reward ratio for your given trading method or strategy. Write it down, read it often, and stick to it!

Risk/Reward is defined as a ratio of potential loss vs potential profit, and you will see quotes such as 1:1, 1:2, 1:3 etc.(or vice versa cos its easier to say!). So, for a 1:1, you would risk $100 to make $100, and for 1:2, you would risk $100 to make $200, and it goes on.

So why is Risk/Reward important? Well, there is one absolute fact, and that is, you will have losing trades! You will have heard the statement “losing trades are part of the game”, and there’s a very good reason for that! Even those considered to be the best Traders in the financial markets will have losing trades, and that’s an undeniable fact.

So, if you don’t get your Risk/Reward right, coupled with your employed strategies, you will lose money.

There are a couple of ways you need to look at Risk/Reward. Firstly, if you are using a trading method with fixed Stop Loss and Take Profit level (not price action based), you need to understand the average success rate of your method in order to establish if the fixed definition for Stop Loss and Take Profit will prove profitable over a period. For example, if you have a method with a ratio of 1:1, you will want to see an average success rate of greater than 70% to make it viable. If it is less, you need to test the strategy with a better Risk/Reward ratio to see if that turns it profitable.

This is called optimisation, and can be quite time consuming, but worth the effort. If you are not aware of the success rate, then you are essentially trading gambling! You will undoubtedly have joyous moments when your method give you 30 pips in each successive winning trade, but when the losing trades occur, and each successive losing trade is taking 30 pips from you, how long will you keep your discipline if you are blissfully unaware of the average success rate of the method used? My guess is you won’t, and you will either lose faith in the method immediately, and go searching for the next ‘Guaranteed 600 pips a month’ method, or you will continue nervously, likely leading to you not taking the next trade, which will probably always be a winning one so you’ll beat yourself up, or exit early in either a winning or losing situation (you’ll not want to take another 30 pip hit), and essentially break the rules of the method anyway.

So you see why I cannot stress enough that, whatever the method you employ, be sure to back-test and forward-test to ensure the success rate makes trading of it profitable.

Secondly, if your trading method is based on price action (chart stops), although you still need to understand the success rate of your strategy to determine the minimum Risk/Reward criteria, you also, prior to the trade, need to have identified potential levels that might hold either way of the price you are looking to enter. After that you need to quickly ascertain if the trade has sufficient Risk/Reward to meet your strategy criteria. Now this sounds difficult, but when you have your ‘eye in’, you rarely need to ‘count pips’. If the profit target is insufficient distance in pips away to meet your Risk/Reward ratio, then do not take the trade. Look for the next opportunity.

Remember always…….. trades will go against you, and if you take small profits, and large losses, you will never be profitable in Forex.

To your wealth and success

Martin

Whenever you want to improve any area of your life, keeping records is essential.  If you want to lose weight, and be successful at it, you need to keep regular records of your weight each week, recording the weight loss regularly, so you can track progress.  You may also record what you eat, at what times, etc., etc.  Without it, how do you know if you are making progress?    In the sporting world, runners keep records of their running times, and adjust their training regimes to combat areas they need to improve, as do racing drivers…………  I could go on and write a long list of examples, but I’m sure you see the picture. 

My point is, whatever it is you are doing, either personally or professionally, keeping records is essential to achieving the progress and performance you desire. 

It was in one of Alexander Elders books that I read “keeping good records sets you apart from the crowd, and puts you on the road to success…….” 

So, always, always keep good records of your trades, and make the time to review them.  If you review them properly, and take action on your findings, you will improve as a trader.  I personally have a spreadsheet, that I have modified several times over, but now find acts as an excellent tool to review my trading.  I have adapted the tool to be able to monitor the trading methods I use, which allows me to focus in on specific areas that may be letting my trading down.  Being able to do that is priceless!

To your wealth and success

Martin

I would say this is particularly prevalent to the Forex market, and I say this for the following reason……  I once attended a seminar on trading the stock market, and whilst I was there, I got talking with some of the presenters, as well as a number of attendees.  As you can imagine at one of these types of events, the first thing people do after introducing themselves, is ask if you are trading at the moment, and if so, how are you doing… 

Well, the reaction I got from nearly everybody when I proudly said “Yes, I do trade right now, but not stocks, I trade Forex”, was not quite what I had expected!  People would look at me like I was totally insane, some with a look of, what I can only term as, horror!  “Oh, and you’re doing well?”, as if they knew the answer would be ‘no’ before I had even spoken it!   And you know, the disheartening thing was, at that point in my trading, they were absolutely right!   I really wasn’t doing that well…. And at that point in time, it actually added to my ‘can I really be a successful Forex Trader’ mindset I found myself in…… 

Anyway, as you might imagine, the response from those presenting at the seminar was not as extreme, although I heard more than once from the different professional personnel there, “well you’ve jumped in at the deep end then”! 

My point in telling you about that seminar was, it is recognised by Market professionals (the event staff were seasoned Stock Market Traders), that Forex trading is tough.  It is after all, the most volatile and liquid market on the planet!  And for that, make no mistake, you have to be Mentally Tough!   

It seems there is also a reputation with a lot of novice/would-be traders that you have to be totally insane to consider trading the Forex Markets!  And I have to say, at times I would have to agree with that sentiment!  But let’s not confuse being Mentally Tough with being Mental! 

So, how do I prepare myself mentally to trade in the Forex Markets?   The first thing I do is accept that the Market is ALWAYS right!  And that’s because it always is!  No matter what you expect it to do, or even want it to do, the Market will just do what it does – and that’s that.  No amount of wishing or praying is ever going to change that.  And think about this…..  with the hundreds of thousands of Forex Traders out there, to be able to know exactly what the market will do next, would be to know what each and every trader out there is going to do next – and that is an impossibility.  So, just expect that the Market will do what it does.  It cannot then fail to meet your expectation. 

Next, I have developed faith in the methods I use.  This is my edge in the Market, until it proves me otherwise.  So just what do I mean by edge?  Well, think of an edge as nothing more than an indication of a higher probability of one thing happening over another.  That’s it…. not guaranteed, not definitely, not anything, but that of a higher probability.  So just think in probabilities when trading…..  Also, if you’ve done your proper method testing, you’ll know probable success rates etc., so you know you have an edge….

Let me leave you with this……. There is a random distribution between wins and losses for any set of variables that defines and edge.  Now this is a very important thing to remember, particularly if you are new to Forex Trading.  If your method gives you an edge in the market, the distribution of wins or losses will be random, and therefore if you have several losses in a row, it does not necessarily mean that the method is no longer effective.  Nor should it mean that you immediately try to modify it or search out a new one.  If you have properly tested your method, be confident and trade it with discipline. 

To your wealth and success

Martin

Well, it wasn’t long before our conversation turned to Trading Plans.  We were discussing how difficult it had been to develop discipline in our trading, and that even today, we had to make a conscious effort to maintain the levels of discipline required.  I spoke about a learning model I apply that I had used in many business and self improvement situations, and it got me thinking that I needed to share this with you. 

This learning model is known as the Four Stages Of Competence and is a psychological process of moving from incompetence to competence.  Now the word incompetence, does not suggest ‘useless’!  I know in my youth, there was that association, and maybe for some of you too!  However, the actual definition is:- lacking qualification or ability.  

So lets take a look at the four stages of Competence:- 

1. Unconscious Incompetence

This is the stage where a person does not have the skill or ability to do something, but also does not have awareness they have a lack in that particular area.  To move from this stage, the person must become conscious of their incompetence before they can develop. 

2. Conscious Incompetence

This is the stage where a person does not have the skill or ability to do something, but is now aware of the fact.  Steps have not yet been taken to address the deficit, but the person now makes a commitment to learn and move to the conscious competence stage. 

3. Conscious Competence

At this stage, the person knows how to do something, but has to concentrate hard on the skill or ability to demonstrate it.  The person needs to continually practice the skill, and be very conscious of applying the necessary practices. 

4. Unconscious Competence

At this stage the Person has had so much practise in the skill that it is now second nature.  They carry out that skill with little thought or effort…… it has now become a HABIT! 

You have to be totally committed to consciously put into practise the skills required to be a successful Forex Trader, and discipline for me was the hardest, and I doubt I am alone among the majority of Retail Forex Traders.

If you are just starting out in Forex, you are very likely at stage 2 of this learning model.  You have, through whatever means, been introduced to Forex Trading, and have decided it is for you, but you have yet to acquire the skills required to successfully trade.  You have however made a commitment to learn, and have started the journey to successfully trading the Forex markets. 

If you have been trading for a while, you are likely at stage 3.  You are developing the skills, but it is not second nature to you yet, and mistakes creep in letting you down at critical moments!   What you have to do is judge those critical moments, and see what let you down!  Was it an emotion?  Were you hesitant through fear of losing? Were you scared of missing out on the trade?  These are emotions you will feel when trading, you just have to exercise the discipline to overcome those emotions.  Importantly, be honest with yourself, and then adopt conscious practises to deal with the shortfall you have identified…………. and, always trade to your plan!

 To your wealth and success

Martin

In case you have yet to define your own Money Management rules, I thought I would post some things for you to think about here on the Blog.  I hope you are able to take something from these to improve your trading. 

You need 4 key things for your money management rules, these being:- 

1.  A Defined Stop Loss

Before you enter the trade, it is crucial for you to know where you are going to place your stop loss.  This is the price where, if the market goes against you, you no longer want to be in the trade.     

Typically, there are two main types of stop used by retail traders. 

a)  Equity Stop

This is the simplest of all stops to calculate.  Basically, either through the rules of your Trading Strategy, or indeed your trading style, you have a predetermined number of pips you want to place the stop at.  There is some criticism to this type of stop in that it is arbitrary and bears no relationship to the price action of the Market.  That said, if it is Trading Strategy related, and that strategy is netting you good pips each month, then the success rate of the Strategy itself is justification enough to use it.  

b)  Chart Stop

This stop is based on technical analysis, so essentially driven by price action.  As a Trader you will have various important levels and trend lines on your chart.  These may be Pivot Points, Fibonacci Levels, or defined Trend lines with 3 or 4 ‘touch points’, but whatever they are, you are essentially making a projection that, should your trade go against you, there is a good probability that the technical level identified will hold the market and reverse it back in your favour.  The downside in this type of stop of course, is that your technical analysis will probably identify lots of potential stop levels! You must however be disciplined, and identify just the one, and stick to it!   Now, you don’t want to be putting your stop loss directly on that point, so you could place it maybe between 5 or 10 pips past the actual level (some call that ‘wiggle’ room!). 

2.  A Per Trade Risk On Your Capital

This is the amount of money you will risk on any one trade, defined as a percentage of your capital.  There are various guidelines to this, and most would be dependant on your experience and success as a trader, but they range from 1% to 5%.  Personally, when starting out, I risked no more than 2% of my capital, but mostly use 3% these days. 

3.  A Maximum Daily Loss

You need to set yourself a maximum amount of your Capital, defined in percentage terms, you are willing to risk in any one day.  I personally found this very, very useful, but also very, very hard to adhere to.  Again, various opinions are written on this subject, but 6% to 8% is typical, so you are essentially limiting yourself to 2 or 3 consecutive losses if you had no winning trades that day. 

4.  A Discipline to Take Profits!

For me, this is as important as managing the losses on your Capital.  Always define a Take Profit target before you enter a trade.  Like Stop Losses, Retail traders generally use two types of Profit take targets, and they are exactly the same as Stop Loss.   

a) Capital Take Profit

 As with the Stop definition, you have a predetermined number of pips Take Profit target, either through the rules of your trading strategy, your trading style, or your risk/reward ratio – another topic! 

b) Chart Take Profit 

Again, as with the Stop definition, your Take Profit target is based on technical analysis, and therefore Fibonacci, Pivot, Trend lines, or maybe Daily/Weekly Highs/Lows will determine that.  As with the Stop definition, don’t expect the market to stop directly on the line, so possibly place your target 5 or so pips before the price (not after as in your stop). Also, be disciplined enough to identify the most probable Take Profit Level, and don’t change it based on other levels that might come into play! For example, you may reach your Take Profit target very quickly, so you decide to let the trade remain, expecting it to reach another level you have on the chart… You may be totally right, and the trade will go further in your favour, but… what if it doesn’t?  You may have thrown away already earned profits, particularly if it retraces back as quickly as it got to your first Take Profit point!   There are other options you can use to take advantage of any further potential moves that may go in your favour… 

I’ll put a couple of examples below that reflect these rules… 

I’ll base it on Capital of £2000,  but the formula is the same whatever your starting or current capital is… 

Example 1

I am using a strategy that uses Capital Stops, and Capital Take Profit.  My Trade Plan states that I will risk 2% of my Capital on any one Trade.   The strategy states a 20 pip Stop, and a 30 pip Take Profit, therefore… 

£2000 x 2% = £40 – this is the total I will risk on the trade 

£40 / 20 = £2  - this is the amount *per pip I will place on the trade

30 x £2 = £60 - the profit I am looking for on this trade 

* I use the term ‘per pip’ as I Spreadbet in the UK.   If you are using a broker that deals in lots, this equates to about 4 mini lots (please check with your broker) 

Example 2

I am using a strategy that uses a Chart Stop and a Chart Take Profit.  My Trade Plan states I will risk 3% of my Capital on any one trade.  I have analysed my chart, and calculated that my stop needs to be 20 pips away.  I have also calculated that my Take Profit level is 45 pips, therefore… 

£2000 x 3% = £60 – this is the total I will risk on the trade 

£60 / 20 = £3 – this is the amount per pip I will place on the trade 

45 x £3 = £135 – the profit I am looking for on this trade 

For me, employing Money Management rules, and being disciplined in their use, made a big difference to my trading.  If you are not yet trading with any Money Management rules,  you should start defining and employing them as soon as possible – possibly before your next trade!  If however you have yet to start trading, make sure to take time to define your Money Management rules before you put on your first trade…..  You’ll be glad you did! 

To your wealth and success

 Martin

Forex is a leveraged product, and if you over-leverage yourself, the truth is you could be staring at a ‘blown account’ in no time at all…. 

Therefore, it should go without saying that disciplined Money Management is an important key to not just succeeding, but surviving in Forex trading.   Sadly, the temptation of riches can wreak havoc with even the most disciplined people out there!   In fact, the determination to succeed and be wealthy may just be the one thing that causes a person to relax their own Money Management rules……………  ‘Speed up the path to the intended destination’ will be the justification in their mind! 

I know it, because I personally fell foul of just that!   So certain that the trade I was going to put on could go in only one direction, I calculated that if I increased my trade size for this particular trade, I could then go on and move up legitimately to a larger trade size for all future trades (by legitimately, I mean according to my Money Management rules)…….  Brilliant!  I’m sure this is the type of risk these successful guys take every now and again… After all, you have to take bigger risks sometimes if you want to ‘make it’!  Well, I’m pretty sure I don’t have to tell you what happened next……….!!   

So,… here I was, now in a position where I now had to decrease the size of my future trades, to account for the huge hit I had just taken on that one trade.  And not only that, to make matters worse, I exited the trade early because I did not want to take the ‘full hit’ of it reaching my pre-determined Stop Loss!    

Yep!  You’ve probably got the next bit too!  The trade didn’t make it to my intended Stop Loss, and actually would have been a successful trade if I had followed the rules of my strategy! I had just gone down the ladder several rungs in a ‘calculated’ attempt to move myself up a few rungs. It would now take several weeks of SUCCESSFUL trading to get back to the trade size I had been taking that day……  

So, the first thing I did that day to cause such a hole in my account was throw away my Money Management rules.  However, that wasn’t all that followed!  Through just that one act, I lost all sense of discipline, and also didn’t follow my trade strategy. By exiting early, I hadn’t given the trade a chance to succeed according to my entry and exit rules for that trade.  Now, had I adhered to my money management rules,  and applied my normal trade size, I would not have been concerned by the trade potentially hitting my Stop Loss, and therefore would have remained in the trade, and been in a position to record a successful outcome, and not a rather large losing one! 

I tell this story not for entertainment value, but to share a lesson on how disciplined you have to be at all times in Forex Trading.  My discipline here had succumbed to the emotions of greed and fear, and I paid dearly for it. What I’m telling you here is,… if you allow just one area of your trading to ‘relax’ against your predetermined Trading Rules, no matter how valid you think your reasons are, there is a very high probability you will pay the price.  You will likely ‘need’ to break other rules too.   

I would ask you to think about this……..Your Trading Plan will have been created while in an environment of calm and rational thinking, based on information, knowledge and facts.  When you are trading Forex, the environment is neither calm nor rational, and the only thing that can keep you trading calmly and rationally, is to be disciplined enough to follow the rules of your Trading Plan – and in that, Money Management will be clearly defined.   

Your adherence to your Money Management rules, and the power of compounding will help move the odds of reaching your trading goals in your favour ….  

Remember that….. 

To your wealth and success

Martin

First and foremost you absolutely have to remember, Forex is a business just like any other business, and from Day 1, you have to treat it as such.  My first mistake was thinking I just had to log onto the internet in the morning, look at a few charts, open my Broker platform, log onto my recently subscribed ‘Service’, make a few trades, and by lunchtime I’d have money in the bank, and the rest of the day to do as I pleased!  And the next day I’d go and do exactly the same - easy!  After all, I had been sold ‘promises’ and dreams, and I was chasing the dream of riches………………….. not the dream of becoming a successful trader.   There lies a problem!

Nearly all successful businessman, in whatever business they choose, started with dreams of owning and running a successful business or,  if you look at the sporting world, dreams of becoming the best in their chosen sport - World Champion even!  Sure, most of these people will have become very wealthy in the process, but that is a by-product of being very successful in their chosen field!  So, what you have to do is look at the ingredients to their success in their chosen field?  Well I can tell you that fundamentally, it is passion,  committment, hunger and desire.   If you are in Forex just to chase the incredible potential rewards available, and that is your sole focus, there is a high probability, you will not walk the path of success.

 What happened to me in my early months of trading forex (as well as losing money of course!), was that I developed a passion for the Forex Markets.  I cannot see myself ever not trading now - I absolutely love it!  And because of that, my focus shifted from searching out the next Forex Service promising me 100’s of pips every month, to developing my skills and achieving my ’new’ goal of being the best trader possible.  And that will be an ever evolving process until the day I hang up my keyboard…..  World Champions and Successful Business owners are always looking to improve their performance - its what makes them who they are!

So, first and foremost - have a passion for Forex.  If you don’t, learning to be a successful Forex trader will be disheartening.  Can you imagine reading lots of material on a subject you have no desire in?  Reading for 10 mins will seem like 10 hours, and then its no fun - and if its no fun, you won’t serious about it for very long!   Also, have a business plan!  Its a business, and no successful business was built without a plan.   When you have a business plan, create a Trading Plan.  This will be your rule book.  Kind of like Company Policy!  And as we know, there are consequences for not following Company Policy - and in Forex, that consequence is usually an unecessary loss on your trading account.

You can download the template of the Trading Plan I personally use.  Just sign up for my Free Newsletter, and you’ll get a mail with the download link.