Yes, Risk and Money Management is that important when you’re trading Forex.

The basic risk and money management model is quite simple: it’s just the “previous peak take-out point” type of strategy that, over a sufficient amount of time, has proven itself profitable. That profit is made in trending markets, where the market keeps moving in basically the same direction. The losses incurred using just the basic model can be disheartening and frustrating, incurring many losses in a row, and quite often unacceptable.

The big “but” here is that it is NOT the system, it is a very basic model that will be built upon. Like any other basic models that are intended to be built upon, like any other foundation in any building that is intended to be built upon, it is not the final structure.

Imagine for a moment that you pay someone to build a house for you and stop by one day and there’s only the foundation in place. You wouldn’t immediately assume that you’re going to be moving in as is because the rest of the house isn’t there yet.

This is the same type of thing: this very basic model is only a foundation, and the rest of the pieces to build the full “house” are not in place. Without a strong foundation, the house will not long stand. This foundation is prime to be built upon.

In getting started with the very basic model, you will notice on the chart below that there are no indicators on the chart. All that is there are the bars for one time frame.

The “bars” on the chart above are called “Open-High-Low-Close Bars” or “OHLC bars” because on each bar there is a point which represents each of the Open, High, Low, and Close. The tick on the left side of each bar is the opening price for that bar. The highest point on each bar is the highest price the market reached during the time period of that bar, so the highest point on a bar is the high. The lowest price level on a bar is the low for that bar. The tick on the right side of a bar is the closing price for that bar.

Each bar represents the market action during the time period of that bar. The above chart is from a 5-minute chart, so each bar represents the market action during a five-minute period.

There are other types of charts, but this type, the OHLC bar chart is, in my opinion, very good and very useful, and there is not necessarily any more information on any other type of chart.

What is important about this type of chart is that we can see what are called “peaks”. In order to understand what a peak is, we have to define the characteristics of peaks and see what they look like in their various forms.

A “peak” is defined as “a point or plateau which exceeds the previous and next bars’ same-side extreme.” You can get the idea from looking at your pen and holding the point so it is facing up. You can see that the high point in the middle is higher than the left and right sides. If you then hold the pen upside down, you will see that the point is lower than the left and right sides.

Below you can see a chart with all of the peaks marked except one (can you find it?):

The grayed-in areas show “plateau-type” peaks, where the market hit the same price point during two or more consecutive bars and that price point extends beyond the extreme of both the left and right sides of that plateau. (Can you find the one plateau-type peak which is not grayed? There is one.)

After studying the above chart for a few moments, you can really see what a peak is and what does not constitute a peak. If you do find what you think is a peak by definition, but it is not marked, look for yourself to determine why it is not a peak (except for the one that is not marked).

Also note that it is impossible to have a peak in present time. In other words, there can be no peak in real time, right now, because there is no “next” bar for the current bar to be more extreme than. So in real time, there is never a peak “right now”. That’s a very important point to know.

Now that you know what a peak is, what is a “previous peak take-out”? What we’re talking about here is a previous peak on the same side, and the current bar, the “now” bar in real time, moves at least one tick farther in price. If we’re on the top side of the chart, then we’re looking to see if the market moves higher in price than a previous peak. If we’re on the bottom side of the chart, then we’re looking to see if the market moves lower in price than the last peak on the bottom side, or lower on the chart than that previous peak.

As soon as a new peak forms on the same side, that new peak becomes the last peak, or the “revious”peak. That peak two peaks ago becomes a previous peak, but not the previous peak. Please note that distinction, because later on it will be crucial to your understanding the difference between when I write the previous peak, and a previous peak. The is more specific, and a is general.

Since this “foundation” is the previous peak take-out point, it is the specific form.

So in starting out the foundation with no indicators, we are only relying on previous market peaks on one chart, one time frame, to tell us what to do – in this basic model, which we will not be using as it is directly, but are using to build from – and the chart on the next page will show the previous peaks, and when the previous peak was taken out, at what price level.

[Note that there is version of this basic model that is a previous peak take out, and the basic difference is that any old peak on a side that the price extends beyond, you trade in that direction as long as the peak is wide open to the price. “Wide open to the price” means that from the peak in consideration to the current bar there are no price bars (or candlesticks if you’re using candlesticks) in the way if you were to draw a line from the past peak to the currrent price bar.]

Please pay close attention to the previous peak, and when it was taken out, or the price moved beyond the previous peak’s extreme point. Each sequence is in a different color, so it shouldn’t be too difficult to figure out which goes with which. So look on the next page now:

From each “Previous Peak Take-Out Point” there is marked “The Previous Peak”, and in real time, it was that way. Notice that there are more of “the previous peak”s that were also taken out, or where the price moved beyond that level, but I want you to understand the concept. You should feel free to mark up where “the” previous peak was taken out by a market move to help you better be able to apply the basic information.

Great, so now we have what a peak is, the difference between the previous peak and a previous peak, and what it look like when the previous peak was “taken out” and what it means to have the previous peak taken out. So, what do we do now? How do we use that?

We use the previous peak in this basic model to get us in the market in a direction – in this basic model only. We will not be actually using this exactly as stated, but we will be building upon this basic model, this basic foundation, to be building upon.

What we do in this basic model is to let the market form a range, a peak on both sides of a chart, like the 5-minute chart, then we let the market enter us in a trade by setting the stop orders on both sides of the range defined by the peaks.

So what we do when the market has shown us a high peak and a low peak is to then set a buy stop for one contract above the high peak, and a sell stop for one contract below the low peak. How far? One tick beyond each peak. The buy stop is placed one tick above the high peak, and the sell stop is placed one tick below the low peak.

The Market Open is marked with the green line. After that line, the first market peaks are formed. When both are formed, you place a buy stop one tick above the first high peak, and a sell stop one tick below the first low peak.

When a new peak is formed on the bottom side one bar after the first high peak was formed, you move your sell stop to one tick below the new low peak and cancel your first sell stop, which was not filled because the conditions were not met yet.

Notice the red dot above, which shows where your sell stop was triggered, where the conditions were satisfied for your order to sell at that point. What this means is that you have sold one contract, assuming you are trading a futures market, and that means that you are now one contract “short”. Short means that you sold first looking for the price to move lower so you can then buy at a better price, a lower price, later on. So you are now short one contract, and your buy stop is now one tick higher than the second high peak.

Right after the market filled your sell stop, you are in a short position, you now change your buy stop to 2 contracts instead of one contract. What that does is to take your stop loss (the buy stop above the market, where you say you are now going to stop taking a loss on the position) and when it is triggered, you will now be long one contract. Being long one contract means that you have purchased one contract thinking the market will move higher in price so you can then sell your contract for a profit.

So in this basic strategy, you are always in the market either long or short. You always have an open position until near the end of the day once your first position is filled. The major plus of this strategy is that you are always protected with a stop order. The major negative is that on wildly swinging days, there would be considerable losses incurred.

You continue to move your stop orders for two contracts as new peaks are formed throughout the day until you close your final position near the end of the day. When you close your final position near the end of the day, you will do so by placing a market order directly against your final position. So if you are long one contract, you will sell one contract. If you are short one contract, you will buy one contract. That closes out your open position near the end of the day.

Your first exercise for this basic strategy is to mark and write down what would have happened on this particular day. Would you have been profitable or not? (Answer: Profitable.)

While this basic strategy works well on trending days, on non-trending or wildly swinging (whipsaw) days, the wins will tend to turn to net losses for those days.

Your next exercise for this basic, foundation-only strategy is to actually paper trade it for a day or two on a 3- or 5-minute chart in the market of your choice. Once your first trade is filled for the day, you should always be in the market either long or short until very near the end of the trading day’s regular trading hours (on most markets), or most active times (if a 24-hour market, like the FOREX). You must be able to think with the basic mechanics of this basic system, even though it will not be used directly in the full model. You should understand the mechanics of the previous peak take-out model – regardless of whether or not it is profitable for the day(s) you are paper trading it – before you progress to incorporating the basic add-on model, which follows. That means that if you are relatively new to trading, you will not have any indicators on your chart(s). You will only have the market action with a 5-minute OHLC bar chart representing that action.

[If you’re already very familiar with the basics involved and can follow it without hardly thinking, you may feel free to move on to the basic add-on model.]

So, how can we take this basic model and make it so we can make even more on the trending days than we lose on the non-trending or wild days?

When we look at the trading rules, we see rule number three: Let your profits run and multiply as safely as possible. Without the multiplication aspect, we are only making linear profits and losses, zig-zagging on either side of net profit and loss, with a long-term, gradual increase in account size. That is an undesirable condition. I certainly don’t tolerate it, and this leads us to the basic add-on model. You might just like this one really, really well because over time it’s usually very profitable when sticking to the rules.

I’m going to say the same things in the four basic rules of trading in different ways. Repetition is the mother of skill. Action, doing, is the father of skill. Every successful trader who has been around more than a decade follows these rules of trading. Many Forex courses seem to like to ignore at least two of the rules; some only one. But all the forex trading rules here, faithfully followed, will increase your probabilities of success.

Caveat: The trading rules are much easier said and explained than done.

Part of The Almighty “They” says that trading is risky/dangerous. It’s even required by law to tell everyone that in any advertising or material related to trading markets. Trading is risky and dangerous and before you ever trade with real funds, funds that you can afford to lose, you should consider and understand all the risks involved. That said…

1. Trade with future strength / Trade in the direction of future creation / Trade with the trend.
2. Cut your losses short and quick.
3. Let your profits run and multiply as safely as possible.
4. Manage risk, money and profits by managing your trading system.

The four rules of trading are really three rules, and a fourth rule that says to follow the first three rules with control. Pretty interesting, huh?

The Four Basic Rules of Trading Forex Successfully (In their order of execution)

1. Trade with FUTURE STRENGTH, the direction of future creation - also known a “trade with the trend”.

If you have ever realized that “everyone” is “always” wrong, and then looked at the way the classic statement of this rule reads, you’ll realize that everyone is, indeed, too frequently wrong. The classic statement of this rule is “Trade with the trend.” You’ve heard that “the trend is your friend”, but have you ever had a ‘friend’ turn on you? It’s not a good feeling.

Trends end, and by the time everyone realizes that a trend is a trend, it reverses. Friends can be tricky, trends can be tricky. It’s one of those things that “everyone knows”. So don’t do it unless it is the direction of future strength.

When you get to more of the chart reading portions of this system, the statement of trading with future strength, which is the direction of future creation, will make a lot more sense to you. You’ve already seen some of it with the divergences, but there are interesting sequences that will be given in the coming memebers area.

Be sure you study this whole site several times through. New things will be continually added - practically every day for quite a while.

You’ve got to figure that’s what the folks with the most money do, so you should, too.
We further elaborate on this rule by only trading strengthening legs of moves or trends. We almost only trade such future strength trades, with the rare multi-chart weakenss trade exactly according to the line-ups sections (in the coming members area).

We only add positions, if we do, on strengthening ends of legs or trends, never on the weakening end. In trading strengthening moves or trends, we must have future strength in the direction of the move or trend, combined with past weakness.

Smaller chart weakness without larger chart strength above are not trades until the market has proven with smaller chart “line-ups”, or “time synchs”, that the move or new trend has started strengthening. Trading weakness without strength above them is a direct violation of trade with future strength. There is only one exception to that, and you will learn of that exception in the line-ups, time synchs, section of the training.

It is best to enter the market by placing market orders, or by making the market prove it really does want to go that way by placing a stop order beyond the previous market peak in the direction you want to trade. (We will cover strategies for when to do all of the above.)

Limit orders are only used to ensure that you are out of a winning position at a certain price point.

2.Cut your losses short and quick.

Look, if you’re wrong, you’re wrong, admit it fast and look for another trade or another market to trade. To preserve and protect your capital with the least risk, you have to be willing to lose because you will not be perfect in trading the markets. Perfection is an absolute and in this universe, absolutes are not attainable.

So if you’re going to lose, lose just a little bit. If you’re following the chart reading system given herein, then you’ve got more to learn about time. That’s all it means. I don’t have it down perfect in real time, and I continue to get better as I go. The principles just don’t fail. But we all can make mistakes in our reading. We can all make good trades, too. Even with the flip of a coin.

Don’t get too attached to any given trade. Some setups are prettier than others, some moves are better than others. It’s just a fact, like the fact that prices fluctuate. Just a fact.

One observation that I have made in all unsuccessful traders, including myself just a few years ago, is the unwillingness to accept a small loss, combined with the unwillingness to accept a large gain.

The two seem to go hand in hand. If you have to lose big to accept the loss and finally bail on your position, then the odds are very good that you will only be able to accept a win if it is small. I’ve seen it too many times. The corollary also seems to hold: If one is willing to accept a small loss, then one tends to be able to accept larger gains.

I do know of one successful trader who can accept large losses and large gains. He happens to hold the official world record in trading, too. Larry Williams is the man. So he’s the one exception that I am aware of to that. I don’t know exactly why it seems to hold so well in nearly everyone else, but it just seems to work out that way.

Everyone I know who has lost in the markets has lost because of a few very large losses. Everyone I know who is doing well in trading is willing to accept small losses, and does make small gains, but also has the occasional very profitable winning trade. This rule of cutting your losses “short and quick” is huge. You must always know where your bail point (stop loss) is before you place your trade, and you must always stick to it, no matter what.

Money is an idea backed with confidence. Money is not an idea backed with hope. Money is not an idea backed with fear, greed, prayer, grief, terror, paralysis, pain, yelling at the computer monitors or anything else but confidence in its various forms. Money is an idea backed with confidence.

Confidence is knowing direction, taking responsibility, controlling the trade – including taking a relatively small loss if you “knew wrong,” and confidence is being a successful trading system manager before you ever place real funds on the line, then continuing to exactly follow your system and the rules.

As soon as your order to enter the market gets filled, you place a stop loss order. That is how you fill this rule. Where you place your stop is up to you, but a good guideline is either at a fixed amount that is less than 5% of your capital, or just beyond the previous market peak against your position, whatever the situation demands.

3. Let your profits run and multiply as safely as possible.

The old statement of this rule is to let your profits run. Well, with good money and profit management, your profits should also multiply, and do so as safely as possible. I’ve seen too many traders who are over 80% accurate in their predictions lose money, over and over and over. Even if they do what they can to cut their losses short, and even let their profits run, they don’t ever do very well over time.

What’s different in real and effective money management is the multiplication aspect, combined with safety. We will cover that in more detail soon enough (in the coming membership area - you’ll have free access to part of it simply by giving me your name and email address above and to the right), but your risk and money management system must have the benefits of systematic multiplication of profits while maintaining the relative safety aspects.

Too many traders will have a good trade, then lose the profits from that trade when the market channels, then lose more when it breaks out of the channel on the wrong side. There’s more to risk and money management than just the letting your profits run and multiply – you also have to do so in a manner calculated also reduce risk in case you are wrong, and produce superfluous abundance of profits when your are right. And do so in a manner calculated to be as safe as possible in markets.

No matter how good the chart reading system, there are different levels of application based on each individual trader of that chart reading system. What if you’re wrong? What if you read the charts right except for one thing, and that one thing is what matters the most for that particular trade’s timing? That one more move because, for example, you overlooked the weakening end of a trend (as given later in the membership area) can be the difference between profit for the week or month, and loss.

So you want to let your profits run, you want to let your profits multiply, and you want to do so in as safe a manner as you possibly can to accomplish the goals of trading.

As you become profitable in a position, move your stop just beyond the opposing peak of the market realignment periods (corrections, retracements…) Make sure that as you raise your stops, you also cancel your previous stop orders.

The major component in this is the definition of money, “an idea backed with confidence.” When you lose confidence in a trade, immediately bail on the trade, or at the very least move your stop tighter. When you see a move is about to end, bail then or move your stop tighter. When you have certainty that the move is done, then you close your position.

Always keep in mind that once you are profitable, especially when you can’t lose money on a trade, if you close out on your position you have made money in the market.

4. Manage risk, money and profits by managing your trading system

The funny thing about managing risk is that it is basically saying follow the three rules, in sequence, for any trade, for any add-on to your position. In other words, follow the first three rules of trading!

So we have Rule 4 saying to follow the first three rules: Trade in the direction of future strength, or trade in the direction of future creation; cut your losses short and quick; and let your profits run and multiply as safely as possible.

It’s a sequence. FIRST you enter your trade in the direction you know that the market is going to move or trend. THEN you place your predetermined stop-loss, or you do so in the entry order if your trading platform will allow it. THEN, when you can’t lose money (except in the case of a disaster), you let those profits run. You repeat that cycle with add-ons to your position, too.

So you enter, place your stop, let it run.

Enter with an add-on, place your stop on that part of the position, let it run.

Enter with another add-on, place your stop on that part of the position, let it run.

Move all your stops when your system says to do so.

Exit portions of your position at predetermined points if/when your system says to do so.

Tighten your stops on all open portions of your position if/when your system says to do so.

Yes, there may be more considerations in real time, and we will cover some of that later, but for now, REALLY understand that managing your risk and money and trading system is following the first three rules, in sequence, over and over, combined with your ability to manage, to control your own actions.

By following the above rules, you are managing risk as much as possible in this “risky” tool of trading. (This rule also includes Money Management, which is another section with another handout.) So, basically, Manage risk is saying to follow the previous three rules. So it boils down to the first three rules, and is reinforced by another rule saying to follow the first three rules.

Summary of the 4 Basic Rules of Forex Trading

The goal of playing any game is to accomplish what you want to accomplish, to do what you really want to do, to have what you really want to have. If you are really playing the game of trading to win, to profit in a big way, to live the life you really want, then you absolutely must follow the four rules of trading.

When your chart reading system tells you the direction of future creation, future strength, then you only enter in that direction. You place your predetermined stop-loss so you definitely know when you are wrong and cut those losses short and quick. Then, when you are right, you add more safety to the overall trade as the market moves in your direction, and add trades to your overall position. Each add-on to your position is in the same direction as your initial entry, and contributes to the further creation of the trend or move that you saw coming.

So your risk and money management system must follow the four rules of trading.

Above all, it is the disciplined application of a complete system that makes traders successful. Discipline encompasses patience. Discipline encompasses every other so-called trait of successful traders, like total responsibility for your own actions and mistakes, like sticking to the system despite your own opinions, like not listening to what the almighty “they” has to say.

Part of the almighty “they” includes experts and gurus. Be your own guru. Be your own expert. Don’t ever blame the almighty “they” who “control the markets” because “they” really don’t. The Almighty “They” is the complete group of traders who are actively trading and creating market direction. A few of the bigger traders are assigned as “they” by the other group called “we”. Further distinction is made later on.

Disciplined application of a proven profitable system is the hard part. What you will have access to here is a proven profitable complete system. The “disciplined application” part, well, that’s on your shoulders.

The principles are timeless. Only the market dynamics change, and the market dynamics consist only of the various characteristics of any given trend or move. And yet the principles can be seen to work over and over despite the dynamic changes in markets.

It then becomes a question of knowing how to think with the principles. That is where the work comes in, where doing what nobody else will do comes in. That is where you handwrite your “book” every day on the charts with that day’s action for ONE market. Front and back you should write, and do so every trading day for at least 6 months. Every chart you use in your trading system. The system can’t be outsmarted. The system can only be standardly applied or not applied.

Note: There will be no forex training videos this weekend. We’ve got our quarterly “fun weekend near home” planned.

If you have any questions, please ask your trading questions. I love answering questions about trading currency. Have a great weekend!

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