Yup, let’s revisit this fun topic about “Equity Management”. There are a few
important points to make here for “Forex Sailing” in contrast to what I’ve
already mentioned in “Forex Surfing”.
This concept is the key to being an overall successful trader, and is what
ultimately separates unsuccessful traders from the successful ones. If you
know proper equity management principles, and, more importantly,
IMPLIMENT (!) those principles, then you too can be one of the “elite”
traders that are ***consistently*** profitable, making some excellent ‘chaching’.
I’ll have some comments along these lines in the next pack I produce
titled “10% to 30% Monthly ROI”, but here I’ll stick to what is necessary to
know for the techniques presented here in this eBook, “Forex Sailing”.
The strategies presented in this eBook are drastically different than what was
presented in “Forex Surfing” (though there are many similarities in
techniques). The difference is primarily in the scope or size of the trades
sought after. In “Forex Surfing” most of the strategies required tiny stops of
say 20 pips, however in “Forex Sailing” most of the strategies require
significantly larger stops of 100 pips or more.
Don’t let the fact that the “Sailing” techniques require larger stops scare you
off because the target gains are proportionally larger as well for excellent risk
to reward ratios. It is important to realize two things here: (1) Following
proper equity management principles (which will be elaborated upon shortly)
you should only trade the primary techniques taught in “Forex Sailing” if you
have a minimum of $5,000 in your trading margin account (preferably
$10,000 or more). (2) For those of you who have less than the required
minimum then you can use a modified technique by combining the strategies
learned in “Forex Surfing” to use as an entry technique into trades more
appropriate for “Sailing”. More about this will be discussed later in this
eBook.
Here is a thought for you: Trading one regular lot for 20 pips is the same
thing as trading 1 mini lot for 200 pips, 2 mini lots for 100 pips, 4 mini lots for
50 pips, etc. Bottom line is to just think of these types of larger trade risks as
being the same thing just scaled differently.
Back to our discussion about proper equity management applicable to the
techniques in this eBook.
The most common mistake made by rookie traders (of Forex, Stocks,
Commodities, or whatever) is that they fail to understand the purpose of
setting “Stops”. Many seem to think that a stop is placed to limit how bad a
trade can go based on what they can afford to loose. The mentality is that if
they can only afford to loose a specific amount of money then they place their
stops there. This is complete “bovine excrement” and is a surefire way to
loose your money as a trader. The market couldn’t care less about what you
can afford to loose, and it certainly won’t stay away from your stop price just
to be nice to you. Your stops must be set at prices not based on what you
can afford to loose, but rather based on strategic price levels, that
indicate to you that your original assumptions about the direction the
market will move in were wrong. One thing I always strive to make sure
you are aware of in all my materials is at what strategic price level to cut your
losses and the logic behind the reasons for those price levels.
The other most common mistake made by rookies (I’m not really sure which
is more common than the other, but they both happen) is that they DON’T use
stops. YIKES!!! Just the thought of this makes scenes of horror movies and
the theme song of the movie “Jaws” flash through my mind. I’ve heard
people say stupid things like “don’t worry, I’m watching what’s going on and
can manually exit a trade if things go sour”. Folks, trading without a stop is
one of the dumbest things you can possibly do (other than deliberately trying
to loose money by trading). What could happen if you loose your Internet or
electrical power while in the middle of the trade and can’t sit there to baby-sit
your computer watching to see what happens? Even worse, what if the market
dives sharply & quickly due to some unforeseen news? Bottom line is a “stop
loss” is there to protect yourself from unnecessary losses. Just do yourself a
favor and ingrain the following thought into your mind. NEVER EVER
EVER TRADE WITHOUT A STOP.
Now having a stop loss set is of course a very good idea, but you need to be
aware that since September 2004 most Forex brokers now have a new policy
that they’ll guarantee stops under all market conditions except in
circumstances of extreme market volatility (the reason why is explained as a
supplementary information at the end of this section). What this means is that
the only time that your Forex broker might (and the key word here is “might”
because they still often do) not honor your stop loss is if a Fundamental
Announcement blows the current market price (a gap) way far beyond your
set stop loss level. Knowing this you need to be aware of when FAs are being
released so you can make the appropriate decision whether to engage/remain
in the trade or not.
Now that you know that you should always trade with a stop in place you also
have to know how much you are willing to loose on any one trade. Again, as
stated above, where (at what price) you set your stop is not arbitrary but at a
strategic price level that would prove that your original assumption of which
direction the market will move in was wrong. What I am meaning here how
much of your margin account balance may be risked for any single trade.
2% is the ideal risk level for most traders. Less than 2% (i.e. 1% or 0.5%) is
even safer, and it is usually what professional traders stick to, but significantly
less than 2% will usually yield to small gains for the tastes of most solo
speculators.
What does 2% mean? Simply put, for ever $100 you have in your trading
account you should not risk more than $2 on any trade. If you have $1,000
then $20 is your maximum risk, if you have $10,000 then $200, if you have
$100,000 then $2,000, and so on. You can do the math to figure out what
your maximum risk amount should be based on how much money you have in
your trading account by simply dividing by 50.
Usually traders that have small trading account balances bend this rule to have
their accounts grow larger faster, and also simply because they simply
wouldn’t be able to engage in some trades. Thus they take bigger risks, which
is fine, but if you are one of them then realized that your account balance will
swing wildly rather than experience a nice steady climb.
Only half of the equation of being a profitable trader is having cultivated the
skill of consistently picking trades that out perform the inevitable losses. The
other half is consistent application of equity management strategy.
Why limit yourself to 2%? Simply because this is an important part of being a
successful trader. If you were to “bet the farm” (bet all or a huge percentage
of your equity) on one trade then you could possibly walk away triumphantly,
but chances are you would loose terribly and will abort your career as a Forex
trader. Maximizing your losses at 2% means that you can weather out a series
of potential losses (also known as “draw down”) to allow you to stay in the
game long enough to catch some winners. Remember that the deeper you “go
into the hole” (loose equity) the harder it’ll be for you to just recover to the
breakeven point. For example, if you were to loose 50% of your account then
you’d have to shoot for a 100% gain just to recover. You’ve heard the cliché,
“a dollar saved is a dollar earned”, well a part of the overall success of a trader
is to protect your equity and not to squander it. Protect your balance from
significant losses – not loosing much is part of the overall strategy of building
your trading balance.
“Well what about what you teach in your eBook Forex Freedom?” Obviously
if you are following that plan you would be breaking the above stated 2%
rule. That is true, but in some circumstances rules are meant to be
broken. When your account is tiny, as it would be if you started with a
meager mini account, you would simply have to break the 2% rule otherwise
you couldn’t even trade. Think about it… 20 pips (stop & limit) is just about
the smallest trade you could possibly engage in (don’t argue with me that
you’d scalp trade for just 10 pips), so the above rule could only be followed if
you had a minimum of $1,000 in your trading account! (Explanation = 1 mini
lot x 20 pips = ~$20 which is 2% of $1,000). “Forex Freedom” was designed
to quickly accelerate account growth by taking greater risk in compensation of
quickly turning an insignificant amount of money into something
significant. Face it, if you were to loose $300 due to highly leveraged trading
then “so what”. I apologize to you if that was insulting to you because $300
could be a seemingly significant amount of money to you… but come on, it
really is chump change. What is important to notice about what was taught in
that eBook is that once you reach $10,000 you are then scaled close to an
appropriate 2% risk limit, and after $30,000 you should DEFINETELY stick
to the 2% rule. It is also important to remember that in that eBook I refer to
making trades with a 20 pip stop loss, so if you start trading engaging in trades
with larger required stops then you MUST adjust how many lots (mini or
regular) you may trade.
I should also state here that how you trade a mini account (in light of what I
just said above) is also contingent of what your purpose is for trading it. If
you are just trying to build up your account quickly then the above statements
is fine for you. Some people, however, trade a mini account not because it is
all they can afford to trade with, but rather because it is a training tool to
practice proper trading techniques (including equity management). If this
describes you then please do limit yourself to the proper rule of 2% (assuming
you have enough in your account to be able to trade at 2%) while you develop
your trading skills and disciplines.
Later in “10% to 30% Monthly ROI” (bundled with this Rapid Forex package)
I further discuss the upside of sticking to the 2% rule, because by following it
(along with the trading strategies you’ve learned from me so far) you can
easily make 10%, 30% or even more rather easily! Please listen to it as soon
as you finish reading this chapter. Think about it… if you can manage to
catch a 20% net profit per month (YES! IT IS REALISTIC) and let’s say you
have a meager $30,000 in your account then you’ve made over $6,000. The
fun really begins once you’ve built up to over $100,000.
Ok, so we’ve touched on one of the reasons when it is “ok” to break the 2%
rule – when you have too little money in your account to be able to trade at
2%, or if you have less than $10,000 and are trying to build your account
somewhat faster (following the “Forex Freedom” strategy). There are two
other times when it’ll be somewhat ok for you to break the 2% rule.
(1) Many of the techniques contained within this eBook, Forex Sailing,
are designed to have significantly larger stops. Some of the largest
stops condoned in this eBook would be up to 200 pips. Following the
2% rule this would mean that to trade just ONE mini lot you would
need a minimum balance of $10,000. Here is your “permission” to
bend the rules and let yourself go up to 5%… BUT PLEASE USE
THIS WITH UTMOST CAUTION!!! Only trade at 5% when you
think that the opportunity you are looking at is superb. Try to limit
yourself to “allowing” yourself this luxury to just once a week
MAXIMUM!!! Really “cherry pick” your trades.
(2) Some of the techniques contained in this eBook are to enter into trades
that should last for long periods of time. Different traders would
define “a long time” differently. I define anything lasting over a week
to be a long-term trade – some traders (position traders) would laugh at
me considering a week to be “short term”. Well, some of the trades
you’ll do will last for several weeks, possibly even months (obviously
this would only happen if it is running profitably), and simple logic
would dictate that the “set up” for such opportunities doesn’t happen
every day, every week, and not even every month. Because such
trades happen rather infrequently many traders increase their
percentage to better capitalize on those rarer opportunities. Some
traders go as much as 10% (there are even other eBooks on the market
that teach going for higher – just stupid), but generally speaking I like
to go higher leveraged into those trades to a limit of 5%. Yes, the risk
for the trade is higher, but generally speaking when engaged in such a
trade you are shooting to score multiple times your risk, so it is worth
it (risk to reward ratio of 1:2 or better). Remember, as stated above,
this is a rather rare event that doesn’t happen every week.
Let’s wrap up this discussion about “Equity Management” for “Forex Sailing”
by summing up the important points we’ve covered.
Your stops must be set at prices not based on what you can afford to
loose, but rather based on strategic levels, or price points, that indicate
to you that your assumptions about the direction the market will move
in were wrong.
THEN based on proper equity management principles you decide
how much you can stand to loose on that one trade.
Then based on the required stop size and based on how much you
can afford to loose (according to proper equity management principles)
you decide how many lots you may commit to the trade.
Never EVER trade without a stop loss!
Protect your account from losses as the deeper down you go the
harder it is to just come back to break even.
Even with a stop set still be cautious of significant Fundamental
Announcements (i.e. “Freaky First Fridays” of each month).
Limit yourself to only risk a maximum amount of 2% of your equity
on any single trade. Except for the following circumstances…
o If you are following the rules set in “Forex Freedom”.
o If your account is less than $10,000 you may ONCE A WEEK
(maximum, but preferably less often) risk up to 5% to go after
larger trades requiring larger stops.
o Once in a long while when there is a great set up for a potential
long-term trade you may trade up to 5%.
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