Money is an idea backed with confidence. Trading Forex currency pairs is the idea. The confidence part is the standard following of the conditions and combinations in actually trading. All the knowingness you will ever have is already there, and it is summed up in be. (BE a highly successful trader. That’s unfortunately the entire secret to trading successfully.)

The Foundation: The Trading Rules, and Risk and Money Management

While following the four trading rules and proper money management techniques, we cannot ever lose money in the long run. The foundation of everything we do is tied to the four trading rules, and risk and money management. Everything else is built around that super strong foundation that is on super strong land. Everything else adds certainty or much higher probabilities on market movement direction.

Strength or Weakness Divergeneces are There or Not There

Signals are either there or not there. It’s not ever “close”. It’s not ever “almost there”. It’s not ever “forming”. There is no such thing as “maybe”. It is either there, or it is not there. If it is not clearly there, you’re on the wrong chart. There are no shades of grey. It’s yes, or it’s no. (I’m not always all “Aristotelian” in my logic, but it’s necessary here.)

We find that by locating specific patterns of discrepancies in waves in time, starting with future strength on a bigger chart, combined with agreement in past weakness on charts below the future strength, all agreeing on which way the market will move, we can accurately predict market direction, at least for a while.

We continually combine conditions and patterns of strength and weakness in temporal agreement on direction. In other words, for example, if we have strength to move up, we want to see weakness in downward motion on smaller charts. Strength on bigger charts combined with counter-directional weakness on smaller charts is what we want. We trade strength. We trade “Strengthenings”.

Every signal, every motion on the indicators and market, every wave have their respective aspects of strength and weakness. Combining these aspects in real time to get agreement on direction is what we do in predicting market action. It’s all about discrepancies in comparable waves in time.

Higher probabilities are still less certain than certainties. Thus, if we are trading the higher probabilities, we must be tighter on our stops. When we are trading our certainties, we can be looser on our stops. The certainties are the line-ups from a next chart in time that can push the market farther in a direction. The higher probability trades are given to us solely in the form of weakness with no larger chart future strength.

The answer to the question, “Is the market done moving in the direction it is currently moving (at least for now)?” is the exact same answer as the question, “Do we have a line-up from a next chart that can push the market right now?” Line-ups show our future strength(s) and our past weakness(es) to give us certainty that the market will move in the direction we say it will move.

We only ever work from the last larger line-up (and determine where we are in that line-up, as given by time) and now. We project into the future by determining what must happen to give us the conditions we must have to have a trade, or to continue in a trade.

When to ignore signals and/or line-ups is equally as important as when to heed them. The answer of when to ignore is found in TIME.

Time is nothing more than advanced wave theory (not ever to be covered on this blog, but in the coming membership site here (with a free option, too), and properly read, time has no more meaning than waves.

There is no such thing as the market behaving improperly. There is only reading the charts properly or improperly. The market is never wrong in what it is doing because it is doing it and you agree to it.

If you have any comments or questions, please ask or leave them. I’ll get to you as soon as I possibly can. Stay great and trade your favorite currency pair well!

Risk is basically exposure to the chance of loss. When you enter a trade, you are immediately exposing yourself to the chance of loss. So you want to balance the risk somewhat commensurate with the potential reward but with the odds in well in your favor, and do so as safely as possible given the current market volatility.

Money is an idea backed with confidence. The idea is trading the markets. The confidence is seeing what is there now, knowing that what you see is right, understanding why it’s right, and the proper execution of trades within the framework of following the line-ups, conditions and the rules.

Management is basically controlling the things in your sphere of influence. In other words, in managing your trading affairs, you control those things that you are able to control.

You are able to control the orders you place, the strategy you employ, your continued development as a chart reader and trader, and anything else in the playing of the trading game that you decide you can control and do control and know you are controlling and take responsibility for controlling, like your contribution to the creation of the move or trend in the direction you want.

The principle three things that you can control in your trading are when you place an order, what type of order you place, and the condition of each order. Oddly enough, it all boils down to your ability to do each of those three things, and to control just those three things.

Basic Order Types and Their Purpose

There are three main types of orders: Market orders, stop orders, and limit orders. Each has its time to use and purpose.

A “Market Order” says to buy or sell at the current market price. In other words, “just get me into this market now!” and in the direction of your prediction. If you say the market should move up, you buy at the market with a market buy order. If you say the market should move down, you sell at the market with a market sell order. A market order is placed when you are taking total control of a part of a trade at that moment because it’s time to do so. The conditions of that order are buy or sell, and “do it now”.

A “Stop Order” says to buy above the current market price, or sell below the market. So when the price gets to the level of your stop order, then the order immediately becomes a market order. If you say the price is going up, but you aren’t certain of timing and you want the market to prove it really does want to move that way by taking out a certain price level, then you place your “buy stop” at a price higher than the current market price. If you say the price is going down, but you aren’t certain of the timing and you want the market to prove to you that it is going down, then you place a “sell stop” below the current market price. A stop order is placed when you are handing over the timing portion of the order to the market. The condition of the stop order is price level at which you want to buy or sell, and you do that manually.

A “Limit Order” says that you want to enter the market, but the price you put in is the worst price you’re willing to pay for it. You would place a “limit buy” below the current market price. You would place a “limit sell” above the current market price. For an example, if you know the market is going to move up, but has moved a little too far for your risk management rules, then you place a “limit buy” below the market, which says that you want to buy, but you aren’t willing to pay any more than whatever price point you put into your order. If you know the market is going to move down, but it has moved a little too far and you say a pullback is going to happen, then you place a “limit sell” order above the current market price. A limit order is placed when entry now is too high a risk for your risk and money management rules, you’re certain which direction the market should move, but you want the market to come back to a more safe price before you enter the market. The condition of the limit order is the price level at which you want to buy or sell.

Be sure that you understand the difference between the limit orders and the stop orders. If you place a limit order to buy, for example, above the market, your order will get filled immediately because the current price is better than the price point you put into your order. If you were to place a sell stop above the market, your order would be filled immediately, too. If you do make the mistake of placing the wrong type of order, then you will quickly figure it out. It certainly doesn’t take too many mistakes to get the order types strongly embedded into your thinking. That’s also a good reason to paper trade, or paper manage your system, before you ever use real funds.

Control What You Can in Your Trading

Moving back to the control aspects of your trading, following the cycle of creation, on the start of trading we have entering a trade with a strengthening move or trend. As long as we have our line-up, or Time Synch, and the rest of the established conditions and rules are being followed or met, it’s okay. We have two consistently viable options to enter the market: Market Order or Stop Order.

We use the Market Order when we are in direct control of getting in or getting out, when we have total certainty that the market will move in the direction we want, and total certainty on the timing. Money is an idea backed with confidence, so the total certainty is the confidence part. That confidence is from proper time synchs: future strength combined with past weakness, and in proper sequence.

We use the Stop Order when we have certainty that the market is going to make a move in the direction we say, but not absolute certainty on the timing; the line-up is not exactly right or is in an advanced line-up, but good enough so that if the market moves beyond a defined peak, the market should continue moving in that direction. This is where we make the market prove to us that it does indeed want to move in that direction. The certainty is not total on the timing, and the risk level is higher than when trading with total certainty because now it’s probabilities that we’re trading rather than certainty. We always must have a certainty that the market will move in the direction we say, but sometimes timing may be an issue. If timing is the issue, then use stop orders for entry.

On the change of trading we have the period from when we entered the trade to when we exit the trade. That entire time is change. Change is most applicable where we have direct control, which is when we let our profits run and when we make them multiply.

We let our profits run by moving our stop once we have a profit so that we can’t reasonably lose money on the trade. Then as the trade gets more and more profitable for us, we continue to move our stop each time the market moves further in the direction we want, and then cancel our old stop order. That’s the trailing stop in practice. Each time we create another stop order, we then cancel our old stop order.

On the stop of trading we have the close of the position we earlier entered. Upon entry, we always place a stop-loss, or Stop Order, at a predetermined price level where we want to stop taking a loss, or retain so much profit. It is a following of the rule, Cut your losses quick and short. As our positions become profitable, so we move our Stop Order, lessen our risk, and now we’re saying, “This is the least profit I will take on this trade now.”

The stop order is handing control over your trade to the market (which is not bad).

Exiting on a Market Order is saying, “I want out NOW”. We use that tactic for exiting a trade when we are totally certain that the market is done moving in our direction. Since the definition of money is an idea backed with confidence, when we lose confidence in a trade, we exit immediately. Lack of confidence means don’t trade, means exit now, or at the very least, tighten your stop. Money is NOT an idea backed with hope, or fear, or prayer, or anything other than confidence. If you’re profitable when you lose confidence, it doesn’t matter, just plain exit, or tighten your stop. If you have an un-triggered Stop Order in place, cancel it immediately after you exit.

Limit Orders in Trading

Limit Orders have their own special place in trading – in the risk and money management sections as we progress in the levels.

Basically, however, we find that sometimes the market has moved a little too much in the right direction before the trigger to enter was given. We want the market to pull back a little to a certain level. When we begin see that, we place a limit order at the price we want. The use of limit orders will be given in more detail later on.

Using a limit order to exit the market is kind of a lazy way to do things. I wouldn’t recommend doing so because you’re still open to un-called-for risk levels.

Because we always use stops on our orders, exiting without being there to do the required actions (control), we increase our risk using limit orders as exits. As an example, if we say the market is going to go down, we place our order and our relevant stop order, and then place a limit order to take profits at a certain level below the market, our stop order is still in place. If the market backs up before our target price is hit, triggers our stop to take us out of the market, then plunges, our limit order will be filled, and there will be no stop order.

That makes it so that we could incur theoretically unlimited loss, which is not acceptable. In the same example, if our limit order is filled and we have our profits, the stop order is still present. If the market then takes off and our stop order to buy is triggered, then the market plunges, we’re open – again – to unlimited risk because we don’t have a stop order in place.

Hence, I would not recommend using limit orders to exit the market and then not being present to actually control the order.

Now, there are more advanced types of orders where you can give multiple conditions on one trade or part of a position, but unless they are built into your trading platform directly, and you have thoroughly thought it through how to use those more advanced order types, they can result in expensive learning losses. If you stick with the three basic order types, you will have kept things more simple for yourself. Usually, too, the more advanced order types are only combinations of the three simple ones.

I’m not recommending that you not learn the more advanced order types, but that you keep trading as simple as is acceptable to you. If you want the slightly more complexity added, then you are free to do so. It can be more profitable over the long run to learn how to use those more advanced, multiple condition order types, but it can also cause a lot of confusion learning how to use them profitably.

There is already quite a bit of information that should be learned well in this post. It is difficult enough to really gain the full understanding – where you know that you know – of the proper use of, and proper way to think with the information contained herein. When you are ready, however, I don’t think it would be unwise to gain the understanding of the more complicated order types.

In trading, the management of risk is crucial until you have moved a stop so that you “can’t” lose money in the market. Once the market has moved sufficiently and your stop is placed so that you “can’t” lose money on the trade or portion of the trade, then it becomes money management for the trade or for that trade’s portion of the total position.

Trade vs Position

The position in a particular market is the total number of contracts or shares or lots that you are holding, and in what direction. A trade is only a single trade within a position that may be larger than that one trade, or is not larger.

As an example, if a market is trending higher and you have placed three trades, not exited any, and each trade was 2, 2, and 4 contracts, then your position would be 8 contracts long from whatever the average price paid for those contracts was at the price level at which they were filled. So in trade #1, your trade and your position were the same: 2 contracts long at the price you paid. At trade #2, your trade was 2 contracts long at whatever that trade was, but your position was 4 contracts long at the average of the two prices paid. At trade #3, your trade was 4 contracts long at whatever that price was, but your position was 8 contracts long at the average of the three prices.

We are position traders, not trade traders. We add-on to our positions at predetermined points to take advantage of bigger moves, and we simultaneously keep our risk levels acceptably low. Being a position-type of trader gives us the ability to maintain more acceptable levels of risk, and it also gives us the ability to more safely multiply our profits as the market moves farther in the direction we want it to move.

Summary of Risk and Money Management in Trading, Order Placing

IN SUMMARY, a Market Order is used when we have total certainty that the market will move in the direction we say it will, and we have total confidence on the timing. A Stop Order is used when we are handing control over to the market because of less than total certainty on timing, but we still have total certainty on direction. Handing control over to the market is not bad. We use control toward a goal of profitability, and are thereby managing our trades, which is similar to managing our money. Manage your stops and cancel stops once other orders are placed that require doing so. Confidence is key. Emotions are not a part of money management, but your emotions can kick in and try to take control or skew the picture. Follow confidence. Ignore emotions.

There are three things that we can directly control: when we place and order, what type of order we place, and the condition that accompanies our order. Mastering the control of those three things is how we make our profits in the markets.

Now, if you have any questions or comments, please ask. I will answer as soon as I can.

Trade thee well, and prosper.

Risk and money management in trading is essential to long-term success in trading. I don’t just say that: It’s the very foundation of the very successful traders in every market.

Risk is basically exposure to the threat of loss. When ever you begin a position, you are exposed to the possibility of loss. There’s no way around it. The threat exists. That’s why we use mental or actual stops. (A stop is an order type, which we’ll cover another time, but in this context, it means stop loss. A stop loss is the price point at which you want to stop taking losses on a position or trade.)

Money is an idea backed with confidence. At least that what the central banks write, and every great thinker on the subject has written, so to me it’s a certainty - it’s definitely true. Confidence manifests itself in several ways, and those ways will eventually be covered by themselves here.

Management is essentially control. There are many things that you as a trader can and do control in your trading. There are some things which are out of your direct control, but that you can work around. You can control when and where you place your orders, which type of order, which indicators you use, which fundamental info you use, how you analyze it, how good you are at the various parts of your trading system, etc.

So Risk Management is controlling your exposure to the threat of loss.

Money Management is controlling your money - sitting in your account unused, being used, and additional that will be added when you close all or part of your position.

The 2 Primary Goals of Trading

There are only two goals in trading:

There are no other actual goals in trading. Every other conceived goal is one of the two above.

The two goals are in their order of importance.

When your goals are out of alignment with the two goals above, if your primary goal as a trader is to make money rather than protect your capital, THEN and only then will you be struck with greed, fear, “gotta make this work” (meaning you won’t), trigger shyness, and all the other bad emotion that ruins trader after trader.

That last paragraph is VERY important. When you are feeling greedy, your goals are out of sequence. When you’re fearful, your goals are out of sequence to what is required. That is the source of the bane of trading emotions: Your own goals are out of sequence of the rules of the game, or one goal is missing completely. Period. There is no other source of greed, fear, etc. than that.

Review: Two goals of trading are to protect your funds, and then to profit. You can control your risk to the degree you know how. You can control your money to the degree you know how.

Risk and Money Management tied to the Two Primary Goals of Trading

Risk management is the first goal: to preserve your capital, protect your funds.

Money management is the second goal: to profit from trading.

There will be no video for this post. It is very concise. Read it again and again, I suggest.

Have a truly phenomenal week!
Russell