Why is money management important in trading?

Money management helps control losses and maintain discipline, which is crucial for long-term trading success.

Is system accuracy necessary for profitable trading?

No, a trader can still be profitable with relatively low accuracy if they manage losses effectively.

What risk percentage should a trader consider?

It depends on personal comfort; generally, 1% or less is recommended for demo accounts.

How can traders prepare for losing trades?

By adjusting leverage after a series of wins to protect against potential drawdowns.

What emotional challenges do traders face?

Traders may struggle with fear and greed, which can impact their decision-making.

How do professional gamblers manage risk?

They know when to push their bets and when to hold back, similar principles can apply to trading.

What is the importance of avoiding maximum leverage after winning trades?

Excessive leverage can lead to significant losses during a losing streak.

Should traders always push their edge?

No, overextending can lead to avoidable losses.

Why do traders often blow out their accounts?

Inability to handle a series of losses can lead to emotional trading and mistakes.

How can one achieve a flatlined equity drawdown?

By systematically managing risk and scaling down leverage after wins.

ICT Forex - Money Management That Works

00:42:53

https://www.youtube.com/watch?v=RtMRykCZtC4

Zusammenfassung

TLDRIn this lesson, the speaker discusses the tremendous importance of sound money management in trading, often perceived as dull by developing traders. He argues that while system accuracy is commonly emphasized, it is more crucial to manage losses effectively since many traders fail after experiencing a series of them. The lesson highlights the significance of determining personal risk tolerance rather than adhering to a fixed 2% rule. Risk management strategies are shared, including adjusting leverage after five consecutive wins to anticipate future losses, thereby protecting a trader's equity. The session addresses the psychological aspects of trading, emphasizing that emotions can lead to detrimental decisions if not managed properly. Overall, this lesson aims to equip traders with the tools and mindset needed for robust money management to navigate the ups and downs of trading successfully.

Mitbringsel

📊 Money management is crucial for trading success.
❌ High accuracy in trading systems isn't a guarantee for profitability.
👤 Risk percentage should be based on personal comfort levels.
🎢 Expect drawdowns and prepare plans for them.
🔄 Adjust leverage after series of wins to safeguard equity.
🤯 Manage your emotions to avoid poor trading decisions.
🏦 Professional gambling strategies can inform trading practices.
📉 Avoid maximum leverage after winning trades to prevent significant losses.
🌀 Many traders fail due to inability to handle losses effectively.
💡 A flatlined equity drawdown is achievable with sound money management practices.

Zeitleiste

00:00:00 - 00:05:00
The lesson emphasizes the significance of sound money management in trading, often deemed boring but essential for success. New traders mistakenly focus on system accuracy instead of understanding that losses lead to account drawdowns, emphasizing discipline and effective protocols for handling losing trades.
00:05:00 - 00:10:00
Traders should not constantly push their edge or rely solely on system accuracy, as every trader will face losses. Having a plan to throttle back trading activity after experiencing a series of losses is crucial to avoid account depletion and maintain a disciplined trading approach.
00:10:00 - 00:15:00
A common cause for traders blowing out their accounts is their inability to handle consecutive losing trades. Acceptance of losses is part of the trading process, and traders must develop mental resilience to manage emotions and avoid over-leveraging to chase losses.
00:15:00 - 00:20:00
The speaker introduces concepts from gaming theory and shares insights from professional gamblers regarding money management. Effective planning helps traders control drawdown by implementing strategies that manage risk exposure in response to performance fluctuations.
00:20:00 - 00:25:00
Traders are encouraged to practice money management techniques in demo accounts, understanding that encountering losses is inevitable. Establishing processes to slow down losses and mitigating risks is essential for maintaining equity levels in both demo and live accounts.
00:25:00 - 00:30:00
Practical examples illustrate how managing trades with a structure reduces equity drawdown and enhances potential profitability. The speaker shares a hypothetical example of a trader risking 2% initially and adjusting leverage based on consecutive wins to preserve equity during drawdowns.
00:30:00 - 00:35:00
The speaker contrasts two trading models: one that lacks sound money management leading to significant drawdown and another utilizing protective measures to ensure steady growth. The latter showcases a disciplined approach that results in less volatility in the equity curve, highlighting the importance of preserving gains.
00:35:00 - 00:42:53
The presentation concludes by demonstrating how a structured money management approach can lead to a successful trading career, advocating for tailored strategies based on individual risk appetites and trading styles. Traders should focus on disciplined execution and should track performance through simulation before transitioning to live trading.

Mind Map

Video-Fragen und Antworten

Why is money management important in trading?
Money management helps control losses and maintain discipline, which is crucial for long-term trading success.
Is system accuracy necessary for profitable trading?
No, a trader can still be profitable with relatively low accuracy if they manage losses effectively.
What risk percentage should a trader consider?
It depends on personal comfort; generally, 1% or less is recommended for demo accounts.
How can traders prepare for losing trades?
By adjusting leverage after a series of wins to protect against potential drawdowns.
What emotional challenges do traders face?
Traders may struggle with fear and greed, which can impact their decision-making.
How do professional gamblers manage risk?
They know when to push their bets and when to hold back, similar principles can apply to trading.
What is the importance of avoiding maximum leverage after winning trades?
Excessive leverage can lead to significant losses during a losing streak.
Should traders always push their edge?
No, overextending can lead to avoidable losses.
Why do traders often blow out their accounts?
Inability to handle a series of losses can lead to emotional trading and mistakes.
How can one achieve a flatlined equity drawdown?
By systematically managing risk and scaling down leverage after wins.

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Untertitel

Automatisches Blättern:

00:00:07
you
00:00:11
okay folks this lesson right here this
00:00:15
lesson out of every lesson I've ever
00:00:19
taught this is the most important one
00:00:21
unfortunately many times it's viewed by
00:00:23
developing traders as the most boring
00:00:26
topic but you need to understand sound
00:00:31
money management and I'm going to give
00:00:33
you a perspective on money management
00:00:35
techniques that I view is one of the
00:00:38
best
00:00:44
okay ready tackling money management and
00:00:46
the topics vary in covering in this
00:00:49
module
00:00:50
is system accuracy important
00:00:54
I don't believe system accuracy is all
00:00:56
that important I believe that a
00:00:59
relatively low accuracy rate could still
00:01:03
be profitable and I'll give you an
00:01:05
example that in this specific module but
00:01:09
I want you to understand that a lot of
00:01:12
new traders developing traders and
00:01:14
traders that have been unprofitable for
00:01:17
a while
00:01:17
tend to believe that it's their system
00:01:20
and the lack of high accuracy that is
00:01:23
what prevents them from seeing a
00:01:25
positive outcome and that's not it but
00:01:29
it really isn't it it's the losses that
00:01:32
erode by the means of drawdown every
00:01:36
losing trader every busted account
00:01:38
starts with a single loss and it
00:01:42
compounds and what generally happens is
00:01:45
traders will lose their mind because
00:01:47
they are not disciplined they don't have
00:01:49
a procedure or protocol in place to deal
00:01:52
with a losing trade or a series of
00:01:54
losing trades so I think that system
00:01:57
accuracy is kind of like a misnomer
00:01:58
certainly there's nothing wrong with an
00:02:00
accuracy that's high but it also goes
00:02:04
along with just because it's been
00:02:06
accurate a certain number of times in
00:02:07
the past is in no way shape or form a
00:02:10
promise or guarantee that that system is
00:02:12
going to deliver the same going forward
00:02:15
it could fall apart it could have you
00:02:17
know Lord knows how many losing trades
00:02:20
I've had systems and developed all kinds
00:02:23
of methods over my last twenty five
00:02:25
years and some of them look great on
00:02:27
paper but soon as you try to plug them
00:02:30
in to live markets and walk forward with
00:02:32
them they didn't hold up and they were
00:02:34
all based on TradeStation systems and I
00:02:37
was trying to cut you back in the 90s
00:02:40
with the bond in the S&P market but if
00:02:44
you are on the fence about having the
00:02:47
dependency on system accuracy and we're
00:02:49
finding it terribly important I don't
00:02:51
think it's something that you should
00:02:53
lose sleep over
00:02:54
all right so how much equity should be
00:02:57
risked well I don't believe there's a
00:03:00
cookie cutter approach to this everyone
00:03:04
and I have done this in the past uses a
00:03:07
standard 2% as a maximum and truth be
00:03:11
told when you know what I'm trading I've
00:03:12
risked as much as three and a half
00:03:14
percent and sometimes when I was really
00:03:16
being a cowboy I was risking as much as
00:03:19
five and seven percent they were more or
00:03:21
less just working towards accelerated
00:03:25
growth and also testing what I was able
00:03:27
to do as a trader but generally my risk
00:03:32
appetite is about one percent one half
00:03:35
if I really want to push it everything
00:03:37
they're really good
00:03:38
I'll go as high as 3% generally it's
00:03:40
about as high as I'll go so I think the
00:03:43
question really is a matter of personal
00:03:45
choice and preference what I'm willing
00:03:48
to assume as risk percent may not be as
00:03:51
welcome as a percentage for risk for
00:03:54
some view for some of you 1% may be
00:03:57
extremely too high for others it may not
00:04:00
be high enough so everyone's gonna have
00:04:03
their version or comfort zone for risk
00:04:08
and I don't want to be the type of
00:04:11
mentor that tells you this is how much
00:04:13
you should risk because I teach in a
00:04:16
demo account so I think that it's
00:04:18
reasonable to assume 1% or less as a
00:04:23
risk parameter for your demo account but
00:04:27
I would never tell you what you should
00:04:29
do with your live account because it's
00:04:31
gonna be all dependent on what you're
00:04:33
willing to assume is risk what you can
00:04:36
tolerate you know some of you if you put
00:04:39
a trade on even in a demo account you'll
00:04:41
lose your mind over it because it's just
00:04:43
can't you can't deal with the
00:04:45
uncertainty and there's really no money
00:04:47
on a line it's just that you're so keyed
00:04:50
up about being right and that's gonna
00:04:54
translate into problems with your money
00:04:57
management because if you need to be
00:04:59
right
00:04:59
you're not going to trade profitably
00:05:01
should traders always push their edge I
00:05:04
see this a lot online and it's one that
00:05:07
gets under my
00:05:08
skin because again gets back to the
00:05:10
first question is system accuracy
00:05:13
important I don't believe that a trader
00:05:15
should always get in there and push
00:05:17
their edge because no matter how good
00:05:19
you are how good your system is it's
00:05:21
going to incur a loss and you don't know
00:05:24
if it's gonna be a single loss or it's
00:05:26
going to be a series of losses and it
00:05:28
could be a string of losses that you
00:05:30
were not expecting and at some point
00:05:33
you're going to need to pull the plug
00:05:35
and say okay I can't trade anymore this
00:05:37
day or this week or even this month if
00:05:39
it's really bad
00:05:40
the problem with pushing your edges
00:05:43
you're always going to have a reason or
00:05:45
excuse to do so so I have over the years
00:05:49
built in kind of like a a breaker for my
00:05:57
activity and thresholds because if I do
00:06:00
not see a turnaround in my losing trades
00:06:04
or a string of losses I can very easily
00:06:06
wipe out on account just as well as
00:06:07
anyone else can so it has to be some
00:06:10
kind of a measure in place that helps me
00:06:12
throttle back when I'm active and when
00:06:15
I'm going to resume again so while I'm
00:06:18
not gonna be talking about that so much
00:06:20
I do talk about that new mentorship and
00:06:22
I do go into great detail with money
00:06:24
management and specifics with trading
00:06:27
plans that will be taught in 2019 but
00:06:31
the members should have gone through the
00:06:32
entire core content but for this
00:06:36
teaching I want you to focus on the
00:06:38
importance of sound money management and
00:06:41
risk control
00:06:45
what causes traders to blow out I
00:06:49
personally believe it's their inability
00:06:52
to weather a series of losses now anyone
00:06:56
can take a loss or two and it doesn't
00:06:57
really make anyone go crazy about it but
00:06:59
what happens is is if there's a
00:07:01
back-to-back consecutive five six seven
00:07:05
maybe even ten losing trades in a row as
00:07:07
a developing trader that's normal you
00:07:09
know if you're trying to avoid that
00:07:11
you're actually hurting and stunting
00:07:13
your growth as a developing trader so
00:07:15
you want to be able to experience that
00:07:18
phenomenon of being convinced almost
00:07:21
that your trades gonna work out but then
00:07:23
see it not come to fruition and then
00:07:25
having to wrestle with that because the
00:07:27
internal dialogue that takes place in
00:07:29
your mind the emotions that well up
00:07:31
after that you need to wrangle them
00:07:34
because they're going to always be there
00:07:36
as a trader now you either can make them
00:07:38
allies or you can view them as enemies
00:07:42
okay they're always gonna be plaguing
00:07:44
your your results and certainly plaguing
00:07:47
your your clarity or perspective on the
00:07:49
marketplace and you don't want to give
00:07:51
them that power
00:07:52
okay fear and greed they can be dealt
00:07:54
with but it has to be with a process and
00:07:57
a clear developed plan so
00:08:01
every trader bloser account with a
00:08:03
series of losing trades but it starts
00:08:05
with one losing trade it always starts
00:08:07
with one and what goes on between your
00:08:10
ears okay inside your mind is what
00:08:13
manifests in your account now if you
00:08:16
take the loss and you think to yourself
00:08:17
well that didn't work out next and
00:08:20
that's your mentality but you don't
00:08:22
think next I'm gonna get it back right
00:08:24
now and on the over-leveraged and go
00:08:26
through the martingale procedure if you
00:08:28
just took a loss of 100 bucks now you're
00:08:29
gonna risk 200 bucks when they ain't
00:08:31
gonna risk 400 bucks now you know risk
00:08:32
800 bucks that doesn't work
00:08:35
eventually you're busted so I've looked
00:08:38
at all kinds of money management
00:08:40
approaches I've studied Ralph Vince and
00:08:43
Ryan Jones work which i think is
00:08:45
exceptional work it's really hard to
00:08:48
read it's rather dry but if you can
00:08:50
tolerate those types of things it really
00:08:52
stimulates the ideas that are
00:08:54
potentially there for gaming theory and
00:08:57
the Kelly principle and Optimo F so if
00:09:03
we can see there are measures of
00:09:08
controlling risk and money management
00:09:12
approaches in gaming okay and for
00:09:15
instance like blackjack or roulette
00:09:18
which I admittedly have never been to a
00:09:20
casino to play either one of those but I
00:09:22
did study the games and I did study
00:09:24
gaming theory and I've always been
00:09:26
fascinated with the world poker
00:09:29
championships and I've always been
00:09:31
fascinated to see the same faces
00:09:33
generally make it to the last table or
00:09:36
so and I don't believe it's the cards
00:09:40
that they're winning with I believe it's
00:09:42
they know when to push their money and
00:09:44
when to cut it back and if you watch
00:09:47
them play I watched that part of it I
00:09:50
don't watch the what they're doing with
00:09:51
their hands because they have no idea
00:09:53
what the next cards are going to be but
00:09:54
they do know how much they're going to
00:09:56
risk from the pot
00:09:58
perspective if you will how much are you
00:10:01
gonna ante up and I've always been
00:10:04
fascinated with that so I've kind of
00:10:08
like used those ideas from professional
00:10:12
gamblers okay and use some of their
00:10:15
approaches and applied it to a money
00:10:18
management strategy which I think you'll
00:10:20
find rather interesting in this teaching
00:10:24
the takeaway is I'm going to teach you
00:10:27
how to flatline equity draw down
00:10:35
all right have a flatlined equity
00:10:37
drawdown all right so when we start
00:10:39
trading obviously we're all excited that
00:10:42
what we're going to potentially see as a
00:10:43
result you know you open your demo
00:10:45
account up you want to start seeing that
00:10:47
increase or that that jump up in the
00:10:50
demo equity that builds your confidence
00:10:53
to eventually at some point in the
00:10:55
future when you make the decision to do
00:10:56
if you ever do it to trade with live
00:10:58
funds you'll be able to have the
00:10:59
experience that look back on as a demo
00:11:02
trader and see that you've done certain
00:11:04
things over a consistent length of time
00:11:06
where it warrants by your own decision
00:11:09
in your own timing you elect to go with
00:11:12
live fund trading I never tell anybody
00:11:14
when to do that and I'm certainly not
00:11:16
advocating to use live funds with the
00:11:19
information I'm sharing here this is
00:11:20
just informational purposes only and
00:11:22
everything I teach it should be viewed
00:11:24
in light of a demo account application
00:11:26
only but if you're practicing with a
00:11:29
demo account you have how do we practice
00:11:31
money management approaches well we're
00:11:34
going to go into that now obviously as I
00:11:36
mentioned already the every trader is
00:11:39
gonna have to encounter a losing trade
00:11:41
that's a new trader especially if you
00:11:44
start with live funds you're trying to
00:11:46
avoid dis like the plague and Jan
00:11:49
generally it's a good idea to try not to
00:11:51
lose money but you can't avoid it it's
00:11:53
going to happen it's absolute you're
00:11:56
going to run into a brick wall and money
00:11:58
will be withdrawn from your account
00:12:00
whether demo or eventually if you ever
00:12:03
decide to do it live funds will come at
00:12:05
your account and it's guaranteed you
00:12:07
need to be able to have a frame of mind
00:12:10
and a procedure on how you're going to
00:12:12
encounter and engage and overcome that
00:12:14
obstacle equally so every trader will
00:12:18
experience a series of losing trades now
00:12:20
this is where that wave of emotion comes
00:12:24
in and you feel regretful you wish you
00:12:26
wouldn't have done certain things and
00:12:28
then certain emotions will trigger a
00:12:32
response that may result in anger you
00:12:34
may lash out at your computer will ask
00:12:37
out your friends and co-workers or your
00:12:40
family your spouse or children your dog
00:12:42
don't do that the
00:12:46
procedures that you need to have in
00:12:48
place is what you're going to do -
00:12:51
number one control the bleeding okay
00:12:54
you have to slow the bleeding whether it
00:12:57
be a live account or a demo account said
00:12:59
stop losing money slow it down and then
00:13:02
eventually look to mitigate it but you
00:13:05
can't come back from massive losses if
00:13:07
you don't first identify what you're
00:13:11
doing wrong and stop doing that very
00:13:13
thing
00:13:15
which is over leveraging or keeping risk
00:13:17
at a constant
00:13:21
now professional money management
00:13:23
concepts are used by the informed
00:13:25
speculators that can help keep their
00:13:28
equity base smooth
00:13:36
all right so we have here a hypothetical
00:13:39
random
00:13:42
result of 20 trades and these are not
00:13:47
actual trades it is hypothetical for the
00:13:50
purpose of giving an illustration here
00:13:51
it's all of the illustrations here are
00:13:53
hypothetical but they will give you a
00:13:56
comic a perspective to consider and it's
00:14:00
important for you to take these as
00:14:01
general rules of thumb go through using
00:14:04
a demo account using these applications
00:14:06
and you see what you get from in terms
00:14:09
of experience but the outcome with these
00:14:12
20 trades here for this particular
00:14:14
trader we'll call it the trader a the
00:14:18
trader starts with a $5000 account and
00:14:22
using a three to one reward the risk
00:14:24
model they're willing to hold on to a
00:14:26
trade three times what they're willing
00:14:28
to take as an initial risk or stop-loss
00:14:31
and they're using an aggressive start
00:14:33
that means they're going right in using
00:14:35
2% risk right from the start and they
00:14:38
show no regard for future losing streaks
00:14:42
the
00:14:44
typical equity this is what you may have
00:14:47
encountered with your demo account you
00:14:49
first started treating you start seeing
00:14:51
a little bit of a drawdown you know
00:14:54
something you get lucky with something
00:14:55
that starts to pop up in the equity line
00:14:57
starts to increase and it always feels
00:14:59
good and then all of a sudden starts to
00:15:01
drop down in here and it's this part of
00:15:03
the movement in your equity line this is
00:15:05
what causes the freakout movement
00:15:07
because when it's a little bit of
00:15:09
drawdown it's not that they would deal
00:15:10
but when it starts to be consistently
00:15:12
pointing lower our minds don't like to
00:15:15
see that okay we like to see Italy
00:15:18
increasing okay and what will happen is
00:15:21
you're going to want to do things more
00:15:23
frequently trade with larger leverage
00:15:25
and
00:15:27
do more than you should traded times
00:15:29
when you shouldn't be trading this less
00:15:31
active times in a 24-hour time of the
00:15:33
market day you don't want to be doing
00:15:36
those types of things but invariably
00:15:37
this line okay is the biggest indicator
00:15:41
okay
00:15:42
it makes traders do more things than any
00:15:45
other and it's not an oscillator even
00:15:47
though it does oscillate many times it
00:15:49
just goes to oversold and most traders
00:15:51
in terms of their equity dropping but I
00:15:54
think that this line or this cumulative
00:15:57
line of our equity drives more traders
00:16:01
to do the wrong thing than anything else
00:16:05
we could put on our chart
00:16:07
and I don't believe that indicators
00:16:09
should be used on charts but I think
00:16:11
everything that you would put on your
00:16:13
chart as an oscillator is safer than
00:16:16
worrying about this line
00:16:17
okay everyone that has the ability to
00:16:20
see what their equity line is or an
00:16:22
equity curve as a developing trader this
00:16:25
is the least important thing
00:16:26
okay there's so many rules that you've
00:16:28
got to apply before you would ever get
00:16:31
any kind of information or feedback loop
00:16:33
from this information because you don't
00:16:36
know what you're doing there's no system
00:16:38
or procedure or progress that way you're
00:16:42
just starting so the worst thing you can
00:16:44
do is look at your equity curve and base
00:16:47
that on whether or not you're doing well
00:16:49
enough because initially you could have
00:16:51
luck and many times and you've probably
00:16:54
done this open a demo account and done a
00:16:56
couple different things over leveraging
00:16:57
and you think that this was a skill that
00:16:59
caused that and when it was just a
00:17:02
coincidence and coincidences sometimes
00:17:05
happen in the marketplace so what we're
00:17:08
going to do is we're gonna look at how
00:17:09
we can engage trading and you sound
00:17:13
money management concepts to help
00:17:15
weather the storm through losing streaks
00:17:18
you
00:17:20
I said here's a model that's three to
00:17:22
one they were holding the trade are
00:17:23
willing to hold the trade three times
00:17:25
longer in terms of what they were
00:17:27
willing to take as at risk or a stop and
00:17:30
they had a soft start here that means
00:17:33
they didn't go right in at 2% or the
00:17:35
maximum risk that would be permissible
00:17:36
and this trader shows a regard for
00:17:41
future losses and I'll explain that in a
00:17:42
minute and the trader does drop to the
00:17:46
lowest unit of leverage after five
00:17:48
consecutive wins now what does that mean
00:17:50
in this little spreadsheet here this com
00:17:54
Dylan eats what the trade idea is gonna
00:17:56
be and this is assuming that you get a
00:17:59
full stop at 20 pips or full target at
00:18:01
60 pips now obviously these are
00:18:03
best-case scenarios and worst-case
00:18:05
scenarios just gonna be a askew and the
00:18:11
results obviously but from a practical
00:18:13
standpoint for illustrative purposes
00:18:14
we're using this as a means of providing
00:18:18
the illustration the set number here is
00:18:23
how many times you have five winning
00:18:27
consecutive trades when you have five
00:18:29
winning consecutive trades as we have
00:18:31
here one winning trade two winning
00:18:34
trades three 4/5 winning trade you have
00:18:38
to drop down to your smallest unit of
00:18:40
leverage okay so he starts with 25k or
00:18:44
$2 could you sense a perp it works up to
00:18:47
a maximum 60 K and then after that five
00:18:50
consecutive winning he drops back down
00:18:53
to his lowest one by doing that this
00:18:57
trader is actually preparing themselves
00:19:00
for the future loss or losing streak so
00:19:04
this gets back to should the trader
00:19:06
always push their edge no because you
00:19:09
will always push yourself right into
00:19:11
drawdown and most traders not everyone
00:19:15
but most traders
00:19:19
have an issue with drawdown they will
00:19:22
lose their mind as soon as they start
00:19:24
suffering draw them for a series of
00:19:25
losing trades they start panicking they
00:19:27
start freaking out and what's even more
00:19:29
amusing is they feel these symptoms in a
00:19:32
demo account which is it's odd but it's
00:19:38
true so maybe some of you have
00:19:40
experienced that you know you you want
00:19:43
control and you can't control price as
00:19:46
soon as you put the order in whether
00:19:47
it's a demo or live account you've
00:19:49
submitted to the marketplace whether you
00:19:50
like to admit that or not and the
00:19:53
markets going to do what it's going to
00:19:54
do and you have absolutely no control
00:19:55
over it whatsoever your control is
00:19:58
limited to what you have in terms of
00:20:00
where your stop-loss is or how long you
00:20:02
stay in a trade without being stopped
00:20:03
that's it so we can control the things
00:20:07
that are directly related to us but we
00:20:11
can't control price so we have to have
00:20:13
some kind of a shield so my threshold is
00:20:19
five winning trades so I have a
00:20:22
beginning unit leverage of more it's not
00:20:27
25k but for the sake of argument we'll
00:20:29
just say it's 25k that's my lowest
00:20:32
starting point okay two hours and fifty
00:20:34
cents per pip and I'm going to stay with
00:20:37
that okay until I can get above my
00:20:42
equity starting point which happens here
00:20:44
beginning balance is five thousand when
00:20:47
it gets back about five thousand then I
00:20:49
can start jumping I'll go up to the next
00:20:51
unit leverage which is doubling to 25k
00:20:55
to 50k so now it's five dollars per pip
00:20:57
I'm risking
00:20:59
if this is a winning trade I can start
00:21:02
now
00:21:02
utilizing the 2% rule as a maximum
00:21:05
leverage so 2% of 5350 brings us to 53 K
00:21:11
or 5 dollars and 30 cents per pip if 60
00:21:14
pips is hauled off that trade that's
00:21:17
$318 and this would go on I would keep
00:21:19
adding all the way up to the 5th trade
00:21:22
at that moment if I take a win on this
00:21:24
trade my next trade does not go to
00:21:26
percent of this equity balance it drops
00:21:30
back down to 25 K and then this is what
00:21:34
it's meant to do and eventually you're
00:21:36
gonna get a losing trade and now you
00:21:38
don't have as much leverage on there and
00:21:39
what that does is it flatlines your
00:21:42
equity drawdown see in here we have
00:21:45
initial drawdown but we are starting
00:21:47
with our lowest level of our leverage
00:21:51
unit now we can go lower than this but
00:21:53
I'm just using this as this model the
00:21:56
lowest one we'll go to is 25k and we'll
00:21:57
stay there until we can come out of that
00:21:59
drawdown this period here is this
00:22:03
drawdown here very modest very low then
00:22:07
it comes out we have some growth which
00:22:09
is seen through here but the fifth trade
00:22:12
that's aware I want to be getting out of
00:22:14
that cycle and preparing for a measure
00:22:18
of drawdown or a potential losing trade
00:22:20
the worst thing you can do is keep
00:22:22
building out your leverage and risking
00:22:24
the trade and then taking that biggest
00:22:27
loss because your biggest loss is gonna
00:22:28
come so I plan and schedule and if you
00:22:32
want to call it this I forecast the next
00:22:35
losing series of trades and to help
00:22:39
weather that I build in five winning
00:22:42
trades once I have five laying trades I
00:22:44
can not up my leverage I have to drop
00:22:47
back down to my lowest one and what that
00:22:49
does is it will Plateau
00:22:51
to draw them so I'll go up get equity
00:22:55
growth and then I know what's coming and
00:22:57
if I don't get a loss it doesn't matter
00:22:59
because it's still not going to show a
00:23:01
whole lot of movement in here and it
00:23:03
creates a real nice stair-stepping
00:23:04
approach to my equity curve I don't see
00:23:07
a whole lot of peaks and valleys I don't
00:23:09
see you know the ski slope or the you
00:23:12
the landslide if you will that sometimes
00:23:15
plagues traders equity curves what I do
00:23:19
is I want to protect what's been made in
00:23:23
terms of gains and there's no better
00:23:26
feeling or empowerment knowing that by
00:23:30
doing something like this it's such a
00:23:32
simple thing but it takes discipline to
00:23:34
do it see it feels good when you're
00:23:36
making money you're trading and it's in
00:23:38
that little voice in your heads gonna
00:23:39
say keep pushing it keep pushing your
00:23:43
edge up your leverage you're on a hot
00:23:46
streak and usually about then that's
00:23:48
when you're losing trades are gonna come
00:23:50
and they don't come just singular
00:23:51
they'll come in a wave and if you don't
00:23:54
compensate for that you can go through a
00:23:57
large degree of drawdown and it's
00:23:59
nothing fun about that at all
00:24:04
so with this approach contrasting with
00:24:07
the previous trader the drawdown is less
00:24:11
with this trader because they have five
00:24:14
winning trades and they cut their
00:24:16
leverage to the lowest unit of leverage
00:24:20
to anticipate future losing trades
00:24:24
results in three hundred forty six
00:24:26
dollars more of preserved gains so
00:24:29
there's a benefit even though we've used
00:24:31
random numbers here the benefit is the
00:24:35
equity curve is preserved and it's
00:24:38
starting to plateau versus going up and
00:24:40
then starting to go back down that's
00:24:42
what you don't want to do you want to
00:24:43
control how much it drops the best way
00:24:47
you can do that is forecast and schedule
00:24:49
drawdown you don't know when they're
00:24:51
coming just like you don't know when and
00:24:54
what's the next winning trade is either
00:24:55
but we can plan for and whether drawdown
00:25:00
and we're losing streaks by doing this
00:25:02
now if there ever is a losing trade the
00:25:08
equity
00:25:09
protected also by dropping down to the
00:25:11
lowest increment or unit of leverage
00:25:16
okay so here is another model where the
00:25:21
trader starts with 25k so it's a modest
00:25:23
start to the start - 25k winner the next
00:25:26
trade goes to 50k then from there a
00:25:29
standard 2% risk model is used on the
00:25:31
equity and three-to-one reward risk is
00:25:36
the idea behind this the trader is
00:25:39
willing to hold four moves that are
00:25:41
three times what the initial stop-loss
00:25:43
is and this trader shows a regard for
00:25:46
losing streaks and what that means is
00:25:48
when the trader has been making money
00:25:53
and takes a loss here that trigger drops
00:25:56
down to its lowest leverage unit 25k
00:26:00
happens the winner
00:26:02
so he bumps up to the next one 50k takes
00:26:06
a loss it has to drop back down to the
00:26:07
lowest one and stays there
00:26:10
okay until you get so a win right here
00:26:12
now as long as he's above his beginning
00:26:15
balance he can ante up to 50k if he was
00:26:18
below 5,000 in here he had to stay at
00:26:21
25k until he got above 5,000 dollars or
00:26:25
whatever the equity balance starts with
00:26:27
here winning trade takes him to 50k and
00:26:31
standard 2% rule applies
00:26:35
and then a losing trade comes then drops
00:26:38
back down to 25k which is the lowest
00:26:39
unit of leverage and the same procedure
00:26:42
starts again 2% model after 50k leverage
00:26:46
is used and keep doing that now what
00:26:48
happens here on the fifth winning trade
00:26:50
because have one two three four five
00:26:52
winning trades the very next trade he's
00:26:55
not going to or she's not going to use
00:26:59
this type of leverage here or higher
00:27:01
they'll drop back down to 25k because
00:27:04
there's been five consecutive winning
00:27:06
trades and you're on an equity high here
00:27:09
so you want to plan for drawdown so you
00:27:13
get a wave of wins plan for a drawdown a
00:27:16
wave of wins plan for drawdown a wave of
00:27:19
wins and now you're gonna equity high if
00:27:22
you've ever studied your equity curve
00:27:25
whenever it looks like this this is
00:27:28
where you want to send it on Twitter
00:27:29
okay this is where you want to put it on
00:27:33
Facebook because it looks great and it's
00:27:35
almost like magic soon as you do that
00:27:38
you know what happens boom if you don't
00:27:42
know what you're doing the equity just
00:27:44
falls off a cliff okay so the way we
00:27:46
avoid that and control it is I've built
00:27:49
in procedures where after five winning
00:27:51
trades okay that completes a complete
00:27:54
win set cycle for me okay
00:27:57
so the wind set cycle once this goes
00:27:59
through five wins okay then I would be
00:28:03
on cycle or set number two okay but wind
00:28:08
sets are what we have here in individual
00:28:10
trades that are consecutive but winning
00:28:12
trade that's one a second winning trade
00:28:15
it's two three four five on the fifth
00:28:18
one drop back to the lowest increment
00:28:20
unit for leverage okay and you're going
00:28:23
to determine what those are I don't want
00:28:24
to give you anything here except for
00:28:26
just stimulate the ideas you can use
00:28:28
these as general rule of thumb and play
00:28:30
with them see what you get in terms of
00:28:31
results we're going to look at some
00:28:33
things that help build a management
00:28:37
model that'll help with this equity
00:28:40
curve idea and also I'll give you some
00:28:42
examples of how you can accelerate it
00:28:43
and still keep drawl down at a minimum
00:28:49
all right so this is an example of what
00:28:52
not to do okay and we're gonna see the
00:28:55
effects of using a trading approach that
00:28:59
either is by way of a new trader seeing
00:29:03
very marginal gains and being excited or
00:29:07
scared to hold on to it and closing at
00:29:09
20 pips but willing to suffer as much as
00:29:12
40 pips per trade so we have a reversal
00:29:16
if you will of the reward to risk
00:29:18
they're only allowing themselves to make
00:29:20
20 pips but holding on to losers much
00:29:23
longer than they should and they're
00:29:24
averaging around 40 pips so with a 1 to
00:29:28
2 reward the risk model and 20 to 40
00:29:31
pips respectively this trader is using 2
00:29:34
percent risk but look what happens with
00:29:37
this approach we can see that the
00:29:38
drawdown takes us below the starting
00:29:40
equity so we have starting equity
00:29:43
drawdown which is never fun it's not
00:29:46
that bad when you're losing open paper
00:29:49
profits in other words profits that you
00:29:51
have not taken home and pay the income
00:29:53
tax on those those are little easier to
00:29:58
take us draw down on it's not fun but
00:30:00
it's better to take those than it is
00:30:01
losing what you put into the market
00:30:03
place yourself so we suffer starting
00:30:06
equity drawdown at this point here and
00:30:08
goes down to the degree of 6.7% of
00:30:12
starting equity so this is not fun we
00:30:16
don't want to see this so seeing
00:30:17
drawdown below the starting equity
00:30:19
balance not good so we're gonna look at
00:30:22
how we could use a money management
00:30:24
approach using this reversed
00:30:28
reward the risk model so in other words
00:30:31
we're only allowing ourselves to make 20
00:30:34
pips but suffering a loss of 40 pips
00:30:36
we're going to see the effects of doing
00:30:38
something like that next again risk is
00:30:42
twice the potential reward here you want
00:30:44
to avoid this
00:30:47
okay so now we have a model using the
00:30:50
money management approach
00:30:52
you see Singh losses in the same
00:30:56
location using 20 pips as their gain and
00:30:58
40 pips they're assuming in terms of
00:31:02
drawdown or being stopped out at 40 pips
00:31:04
when the trader takes a loss it drops
00:31:07
down to its lowest leverage unit which
00:31:10
is 5 K then 5 K drops down to 10 I'm
00:31:14
sorry moves up to 10 K after a win then
00:31:17
another loss comes and then drops down
00:31:19
the 5k and stays there for every loss
00:31:21
when it makes money but we're below the
00:31:24
equity balance beginning point which is
00:31:26
$5,000 so they have to stay at their
00:31:28
lowest unit once we get back to the
00:31:31
5,000 then we can start adding
00:31:34
and then we go to 15k which is a dollar
00:31:37
fifty per hip a loss is suffered they
00:31:41
move right back down to the lowest
00:31:43
leveraged unit which is 5k and we have a
00:31:46
series of winning trades after this five
00:31:48
winning trades they would have to go
00:31:50
back down to the 5k again to lock in or
00:31:53
preserve the gained equity which isn't
00:31:57
much it's only one hundred and sixteen
00:31:58
dollars from starting equity but you
00:32:02
have to do these types of things to keep
00:32:04
your open profits in your account
00:32:08
basically you want to allow the drawdown
00:32:10
to erode those profits now looking at
00:32:14
this you can see the effects of it is
00:32:17
marginal because the improvement isn't
00:32:20
not that appealing even though we were
00:32:23
able to get back above the $5,000
00:32:27
starting balance we dip down below it
00:32:29
twice and then we see this so even with
00:32:32
this drawdown being recouped this is not
00:32:35
encouraging at all because you're still
00:32:37
using a model that is going to make it
00:32:39
difficult for the effects of sound money
00:32:41
management to do its magic
00:32:46
okay so now we're looking at a model
00:32:48
where the trader has a one-to-one reward
00:32:52
the risk model that means the trade is
00:32:54
going to be taking 20 pips or 20 pips
00:32:56
risk and 2% risk and no money management
00:33:02
is plot here okay so when the losses
00:33:06
suffered as we see here we have series
00:33:09
of losses this trader sticks to the 2%
00:33:11
rule whatever the previous ending
00:33:13
balance is 2% of that like that by 20
00:33:16
pips
00:33:16
that's the leverage they'll use and 5
00:33:19
losing trades in a row nothing changed
00:33:22
in terms of money management it just
00:33:25
stated or static 2% not good you can see
00:33:29
that we had the initial run up and then
00:33:31
we have a nice drop down okay a riveting
00:33:35
all those gains and now below starting
00:33:37
equity balance okay so we have now
00:33:39
starting balance draw them not fun even
00:33:44
though it comes out and has a gain of
00:33:48
12% this to me is still not good because
00:33:52
we're not we're not handling the law
00:33:56
says we're not dealing with that
00:33:58
so we don't know if the losing streets
00:34:01
gonna end at 5 losing trades it could
00:34:03
continue on to 8 maybe even 12 and who
00:34:06
knows the emotional impact and
00:34:07
psychological impact of losing trade
00:34:10
after trade a trade on this particular
00:34:12
trader it may cause them to go in and
00:34:14
over leverage even more or take trades
00:34:17
that are not as valid based on their
00:34:19
rules or procedures so we don't want to
00:34:23
go below that opening equity balance if
00:34:26
we can avoid it that's what we're going
00:34:27
to try to do and now we're going to take
00:34:29
a look at this same model here
00:34:32
using reward to risk being equal again
00:34:35
2% risk leverage does never cut the
00:34:39
flatline the drawdown on this example
00:34:40
but now we're gonna take a look at an
00:34:41
another trader same scenario same losing
00:34:45
trades exactly where they would be but
00:34:47
this time the trader goes from using two
00:34:51
percent risk we take a loss they drop
00:34:53
down to 10k or one dollar per pip that's
00:34:56
their low-end lowest leverage unit so
00:35:00
they have a winning trade
00:35:02
you got one leverage unit to 20k or two
00:35:06
hours per pip it suffered a loss they
00:35:08
drop back down to 10k which is their
00:35:09
lowest leveraged unit and they stayed
00:35:11
there for every losing trade and then
00:35:13
they make a profit and they can start
00:35:15
bumping up because they're above the
00:35:17
beginning equity balance of $5,000 which
00:35:19
is what we started with on this
00:35:21
particular case study demo there's a
00:35:23
losing trade here they drop back down to
00:35:25
10k one dog for pit and I have five
00:35:28
winning trades the next trade that is
00:35:29
not in this list they would trade back
00:35:31
at one mini which is 10k or $1 for pit
00:35:38
and they would start building that model
00:35:39
again look at the difference between
00:35:41
this equity curve even though it was
00:35:44
relatively the same ending balance but
00:35:47
the drawdown we never went below the
00:35:49
beginning equity balance we stayed above
00:35:52
it the entire time
00:35:54
the reward the risk is again equal with
00:35:57
2% risk the leverage is cut to flatline
00:36:01
to drawdown in this example here and
00:36:03
let's take a look at contrasting opinion
00:36:05
because the results are less drawdown
00:36:08
and more equity not by much but it's a
00:36:10
little bit more but let's look at it
00:36:12
side by side which one of these equity
00:36:15
curves would you rather have
00:36:17
the one on the left is without money
00:36:20
management
00:36:23
and the one on the right is with money
00:36:25
management so we see a much more severe
00:36:28
decline and we go below with what we
00:36:30
started with the $5,000 um so we had
00:36:37
increase in equity same degree but then
00:36:44
the severe drawdown that was seen by
00:36:46
sticking with just a standard 2% risk
00:36:49
expecting every trade to be a winner
00:36:51
like a novice trader or a gambler will
00:36:54
they're always holding out for that next
00:36:55
series of winning streak trades a sound
00:36:59
money manager with their equity they
00:37:02
will see the loss and adjust it quickly
00:37:06
keep losses at a minimum
00:37:09
and then when we start making money then
00:37:11
we can start increasing the leverage and
00:37:12
we take a loss
00:37:13
we keep leverage low again until we take
00:37:15
a win and we can start ramping it up
00:37:17
again but we stopped at five winning
00:37:20
trades now you can increase this to say
00:37:24
7 or 10 winning trades where it'll
00:37:26
really allow your account to grow but
00:37:29
you still have to be aggressive about
00:37:30
when you take that losing trade you have
00:37:32
to go back down to your lowest leverage
00:37:34
unit so all these things are
00:37:37
customizable but I want to take a look
00:37:40
at another example where we can show the
00:37:42
benefits of using this with really good
00:37:45
opportunities
00:37:47
you
00:37:48
okay so we have a opportunity of using
00:37:52
three-to-one reward the risk
00:37:56
five thousand dollars and this is a
00:37:58
beautiful equity curve here
00:38:00
this is what three-to-one reward risk
00:38:02
and flatlining drawdown looks like
00:38:05
after taking a loss and using a soft
00:38:08
start so what we mean by that but we
00:38:10
have $5,000 but we're starting with
00:38:12
$0.50 per pip and going to $1 per pip
00:38:15
then a dollar fifty per pip then back
00:38:18
down after we take a loss to $0.50 per
00:38:21
pip then up to a dollar up to a dollar
00:38:24
fifty then we take a loss back down to
00:38:25
50 cents up to a dollar up to a dollar
00:38:27
50 up to $2 per pip up to two hours and
00:38:30
50 cents per pip and then we're at five
00:38:31
winning trades so I have to drop back
00:38:33
down to 50 cents per pip we take a loss
00:38:34
not a big deal take another loss it's
00:38:36
not a big deal we take a win now we can
00:38:39
start adding back building it up and
00:38:41
then we take a loss at dollar fifty per
00:38:42
pip we drop back down to our lowest end
00:38:44
and look at the look at the benefits of
00:38:48
that now granted we're not making a ton
00:38:50
of money here okay it's not a huge
00:38:52
astronomical amount of money okay but so
00:38:55
you had thirteen winning trades out of
00:38:56
twenty with losing trades sprinkled in
00:38:59
there and a random location just to show
00:39:01
the effects of what it would look like
00:39:03
but still having a series of five
00:39:05
winning trades in a row so you can have
00:39:06
a win set cycle of five winning trades
00:39:08
so you can see the benefits of it and
00:39:10
then we're taking a loss we drop down to
00:39:12
the lowest leverage unit the equity
00:39:13
curve is stunning this is beautiful now
00:39:16
if a trader uses this type of model
00:39:19
three-to-one allowing the trade to be
00:39:21
three times what they're willing to take
00:39:23
as a loss okay in other words they have
00:39:25
a limited amount of pips they will not
00:39:27
let it go beyond 20 pips so the model is
00:39:29
20 pips risked and we're aiming for 60
00:39:32
pips as a day trader you can do this a
00:39:34
couple of times a week now not every day
00:39:37
but you can do it a couple times a week
00:39:38
so if you figure out how many times you
00:39:42
could realistically do that per week
00:39:43
let's just say you do it two times a
00:39:44
week that means about approximately ten
00:39:47
weeks you could see a 12 percent gain on
00:39:49
your account I think that's reasonable I
00:39:51
don't think it's astronomical or too
00:39:53
high end of a objective or goal but if
00:39:57
you're a developing trader there's
00:39:58
certainly nothing wrong with this
00:40:01
now we're gonna take a look at something
00:40:03
that you can do this is a model that
00:40:07
shows same starting balance of $5,000
00:40:12
we're going to be using a slightly
00:40:15
different approach here there is the
00:40:17
reward model is 3 2 1 the leverage is
00:40:21
still 2% with an aggressive start that
00:40:23
means we're starting rate of 2% of
00:40:24
equity on our first trade and after five
00:40:29
consecutive wins our leverage is to be
00:40:31
cut to our lowest leverage unit and we
00:40:34
can see that here we have five winning
00:40:35
trades then we drop back down to the
00:40:37
beginning of 50k or basically $5 per pip
00:40:41
and we take a loss there it's not a big
00:40:43
deal no they lost not a big deal we have
00:40:45
a wind so now we can start adding up to
00:40:47
2% again so we dropped down after five
00:40:51
winning trades and here's the thing
00:40:55
we take a single loss we do not cut our
00:40:58
leverage we're allowing for that 2% rule
00:41:02
to be there you'll see a little bit more
00:41:04
drawdown sometimes on this model here
00:41:06
but the benefits are you'll let your
00:41:08
growth in these five winning trades this
00:41:13
is where you'll gain a lot of ground
00:41:14
okay so when this five winning set of
00:41:17
profitable trades come it really
00:41:20
accelerates and takes you high but you
00:41:23
can change this and you can tailor this
00:41:24
yourself to whatever appetite of risk
00:41:27
you want to assume this is obviously a
00:41:30
contest type model where you're willing
00:41:33
to take a loss once in a while if you
00:41:35
have a really good high hit rate for
00:41:37
what you're trading if you're not
00:41:39
configured a day trader and you know
00:41:40
you're looking for it doesn't mean
00:41:42
you're always right it as a day trader
00:41:43
I'm more apt to be accurate in that
00:41:46
model versus say like I'm trading on a
00:41:48
long term position or a swing trade I
00:41:50
might have to get in that entry point
00:41:52
another time I may get stopped out or I
00:41:54
may not be able to get the leverage I
00:41:57
wanted to put on because it has already
00:41:59
moved and it's changed my risk to reward
00:42:01
model when I first started looking
00:42:03
forward it's changed now it's skewed and
00:42:05
it's a little bit less favorable so to
00:42:08
me day trading is it's perfect and
00:42:11
scalping can be done too if we use the
00:42:13
model of say we do a 10 pip stop with a
00:42:17
30 pip objective intraday you can find
00:42:20
one of those every single trading day if
00:42:21
you know you're looking for and you have
00:42:23
the experience so this same model here
00:42:25
even though we're using 20 pips at risk
00:42:26
and 60 pips it's a game at three to one
00:42:29
model can still be applied to scalping
00:42:31
with 10 pips tops and 30 pip objectives
00:42:34
and you would still get similar results
00:42:36
like here using the same money
00:42:38
management approach
00:42:44
I hope you enjoyed this presentation and
00:42:46
if you'd like to find more you can visit
00:42:47
my website at the inner circle
00:42:49
trader.com