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!

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.

Since I don’t have a forex training video for you tonight, I’ll write about chart reading.

The Purpose of Chart Reading in Trading

The markets are constantly changing. The markets have fundamental dynamic changes lasting various lengths of time, then those fundamental dynamics change again to another pattern.

It seems that as more and more automated trading programs enter the trading arena, the more crazy the markets are becoming. Big counter-directional moves occur at strange points, where the market seems like it should be moving up or down, the market just moves sideways. The basic principles in this training site, what has been written and more to come, however, still hold solid just as they have for a long time.

The basic purpose of reading charts for entry and exit is to increase the probabilities in your risk and money management rules. Understand that very, very well: The main purpose of the chart reading is to improve the probabilities in your risk and money management rules.

When undertaking any endeavor that requires an outlay of capital, the trained individual or group weighs the risks, the potential rewards, and the probabilities of those rewards. What the chart reading aspects of trading do is to give you a fairly quick method of market analysis so that you can more accurately predict what the market should do when certain conditions are met.

So the essence of what chart reading does is to analyze the three main questions any truly successful people ask themselves on some level:

1.What is the worst that can possibly happen, and can I handle that?
2.What is the most likely thing that will happen?
3.What is the best thing that can happen?

And then the successful people act according to the answers they come up with. If the worst thing that can happen is unacceptable, then there’s absolutely no reason to do it, and the rest of the questions don’t really matter.

A great example of this in the trading rules is, “What is the worst that can happen if I don’t set a stop-loss immediately upon entering the market?” The worst that can happen is that your entire account can be depleted and you can owe your broker a lot of money in addition to that.

So the truly successful trader knows that s/he will set a stop-loss immediately upon entering the market because the answer to not doing so is very unacceptable to him or her. Again, the bigger purpose behind chart reading is to more quickly be able to identify higher probability times when the market should move in a known direction so the risk and money management rules can work more efficiently and profitably.

It’s not rocket science (which really can be quite complicated!), but it is the exertion of self-discipline.

You know the market should make a move because the probabilities are strongly in your favor, then you can make the probabilities work more in your favor so your account can multiply more quickly.

This training tool begins with a basic, proven, time-tested and profitable model, then adds to it as the level of your knowledge increases. It’s a gradient approach that has shown itself to be more effective than any other training approach I know of, and it has proven itself workable with multiple students who are now trading more effectively than ever before.

So the basic risk and money management model is nothing more than a foundation to build upon. It’s a strong foundation, and it’s built upon solid ground.

As you are studying more and more, you will want to read this Forex training site, study this site with the intention of successfully applying the information so your account multiplies over time.

Paper Trading Basics

As you are paper trading, do not get sucked into a lack of discipline, into doing things just because you think it might just be profitable and want to find out, into trying to catch every single move that comes about in the market(s) you’re watching. Do your paper trading exactly – exactly – as you would with real funds. That’s the ONLY way you will ever truly, honestly, know what you can do with real funds. Exert the same self-discipline, the same risk and money management rules and sequences, the exact same everything. Before you change any part of the complete system that you are trading, exactly define every aspect of trading, as given throughout this site, and paper trade it EXACTLY as you have defined it.

Unfortunately, precise application in your paper trading over time is the ONLY way you will truly and honestly know what kind of results you can expect in the future with real funds. Discipline in your paper trading, knowing what you really did in a given situation, is the only way to begin to master the contents of this site to come. Please exert strict discipline in your actions, and don’t ever say something like, “I would have known that” or “I would have taken that trade”. That’s a maybe, and “maybes” are not certainties.

Manage Your Trading Well.

Okay, I’ve been challenged on Facebook to take the Forex Challenge. The Forex Challenge ends October 31, 2008. The first place trader is at $95,550+, starting with $10,000. I don’t know when the challenge actually started, but I’m new to it.

I’m trying to figure out the rules more, but it looks like being so far behind from my start, I’m going to have to forego my normal risk and money management rules for a while and just go balls to the wall. So I’ll either die miserably, or get my butt up the ranks quickly. There’s no in-between here for me.

I’ll get started on the trading side on Monday, June 23, 2008 (or Sunday night) and we’ll see what happens. Either way, it should be fun.

I’m willing to take a bit of time to learn the platform for the Forex Challenge on Facebook, and I’ll be trading anyway, but I’m not sure how I’m going to correlate the trades. Frankly, I think I should use what I’m teaching here so far and just use that as an example, of course using the add-on model because that’s where I’m headed here.

Would you rather see me trading this contest using only what I’m teaching here? Or using what I use to trade my own funds? Using what I’m teaching here, I’ll make videos, ongoing about using the system, and write about it, so there will be practical example. Using what all I use, I won’t because I’m not revealing everything here (there’s just too much to overload you with - really).

Let me know. Ask questions. Have a phenomenal weekend. I’m not sure if there’ll be a video this weekend, but there should be at least two next week. Stay great and trade great!

No pics or video today. Just the rules. Keep in mind that you have to be using an oscillating indicator to use divergences. Examples of oscillating indicators are MACD, Smoothed RSI, Smoothed ROC (Rate of Change), Slow Stochastic… And you must have the ability to look at multiple time frames. We won’t be using add-ons in this basic model. Those are for another time.

The purpose of this is to give you a simple, basic trading system that you can practice managing on paper.

I won’t here get into the risk management or money management aspects, but will on another post. Just pretend it’s one lot and your account is big enough to take the loss from peak to valley, or valley to peak of the trade. (I use 2/3% account as unit size - yeah, I’m a chicken, but I never risk more than 2% on any position, so…)

0. Peaks and valleys are found on the largest weakness chart in the sequence, just below the smallest future strength chart. If you’re on the 60 minute chart, the next smaller chart is the 20-minute or 15 minute. The next bigger chart is the 3 or 4 hour chart, where one bar represents the price action of a 3 or 4 hour period.

1. See if there exists larger chart future strength divergence, combined with at least 2 smaller chart past weakness divergences that say the market looks like it wants to reverse recent price direction. On the larger chart, the trend direction must be the same direction as the trade. (If you don’t know what I said for this rule, go back to an earlier video in this series.)

2. If not, there is no order placed.

3. If so, choose the closest peak (if future strength direction is up) or valley (if future strength direction is lower), and set a stop just beyond the peak or valley. If long, be sure to add in the spread for the currency pair, too. The stop for the trade is the opposing directions last peak or valley.

4. When you’re in the trade, and the market moves beyond the next peak, move your stop to just beyond the last opposing peak or valley.

5. Once the market moves farther in your direction, moving past 2 peaks (or valleys, if you’re short) which were made while you have been in the trade, tighten the heck out of your stop, or exit. (Only choice you get.)

And that’s it.

Practice well, and have a phenomenal trading day.

Today we’ll cover what happened with what I was talking about last night and how to really use the divergence patterns in combination with the basic trading model I talked about earlier. Now, really, you can be 55% wrong with this stuff, and with the risk, money and profit management stuff you’ll learn in the coming membership site (yes, there will be free level), you will be able to make 6X the profits you’re likely making, assuming that you’re a profitable trader already.

From the point we ended last night in the video, well look at what happened, what caused the buying and selling patterns that followed, and show you that you would have made a profit, twice - even though the market didn’t move much. Take a few minutes to watch the video below…

I want your comments, questions, and even your suggestions and criticisms on how I can make these videos better for YOU. I already know this stuff, but what I don’t know is what you don’t know, or need explained differently or more clearly, or more specifically.

Remember that the purpose of this site is to train more highly profitable forex traders - and you can learn all this basic stuff as my gift to you. Of course, later on some day, I might develop some sort of a program to teach more advanced principles, but until you know the basics COLD, there’s just no way you can possibly qualify for such a thing. (I’m really picky about who I train and what has to be known before we even start.)

The primary characteristic in successful traders (in any market the public can trade and has sufficient volume) is strict discipline in managing the trading system being used. When the trading system says to trade, you trade. When the system says to add on, you add on. When the trading system says to exit part of the position, or all of the position, you exit. The system says what actions to take. And your job is to know how and when to take those actions.

Remember, also, that the elite traders of the world are also those who have their goals aligned in the proper order of importance: FIRST is to preserve your capital, protect your funds, and SECOND is to profit from trading. You can see how discipline really plays a major role in trading.

How do you get really good at managing a trading system? The same way you get really good at anything: Practice. What’s really cool about practicing managing your trading system today versus 1995 and earlier is the ability to “paper trade” a system.

Another time we will cover how to properly use paper trading to get up to speed on managing your system trading forex. And tomorrow we will cover the rules, specifically, of using the divergence combinations with the basic trading model I talk about in the videos.

Stay great, ask questions, make comments, and have a truly phenomenal trading day!

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.

There seems to be an agreement by the neophytes and intermediate traders that there is some “holy grail” system of reading charts that will allow them to trade with 100% accuracy. There ain’t such a creature short of a time sight that will allow you to see what happened before it happens. And there isn’t one of those in existence on this planet yet.

While the chart reading system to be revealed down the road is as close as I’ve ever seen to such a “holy grail”, the sad truth of the matter is that we still have to read the charts. Anyone who has ever seen me call the market before it happens can tell you that I’m the best they’ve ever seen. Anyone who has seen me call a market extreme within moments of it actually occurring will tell you it’s just plain unreal.

BUT I have been unable to actually teach anyone to do what I can do in calling the market. The WHY behind that lies in people’s laziness: People in general will not do what I say has to be done to get as good as I am in calling the market. I’m just persistent and very disciplined. The truth of the matter is that you can be better than me if you’ll just work at it harder than me over time.

What is it that I say to do? Well, the first thing is to really learn the basics of risk and money management. Then really learn and understand the basic risk and money management system and how it operates in real time. Then really learn the basics behind chart reading. Then really learn each indicator, what it means, how it operates, how to read its signals, and how it fits into the basic risk and money management model.

Every piece of the chart reading system plays its part in the risk and money management system, basic through the advanced.

Then write a book every day on the sequences of charts and on the reverse of them covering how you should have looked at the market at the time if you were wrong at all, or how you saw the market as it was happening if you were right. And write that book every trading day for at least 6 months. It’s time consuming and it becomes quite boring after a while, but you will start to really “get it” and be able to think with it all quickly. You will acquire a sort of “feel” for the market you choose to do this with. Pick one market.

In fact, the complete system was directly enhanced in relation to, and around the more advanced risk and money management system. It was developed according the basic risk and money management model. I’m not aware of any system that has been directly created with the foundation of risk and money management to the degree that this complete system has been created.

We’ll get to a lot of that down the road, but I just wanted to give you an idea of where I am headed.

Have a fantastic Father’s Day! I will.

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

Welcome to Domination Trading! This site will not only teach you about being a great currency trader, but if you’re bright enough, pretty much how to dominate the Forex market of your choice.

What is planned for this site is nothing short of ground-breaking, and could change the face of Forex trading for a long time to come. The principles that will be taught by me (and hopefully others will contribute, too) are the foundation of all successful trading, and will be built upon into anything you want for yourself.

With all of the so-called “trading systems” out there, and I’ve personally bought, studied and tested over 250 of them in the past 14 years, only two were actually complete trading systems. Two out of over 250 - which is less than 1%. Well, that isn’t right.

The basic philosophy, the foundational philosophy, to the forex trading systems coming, all start with basic risk, money and profit management. That IS the foundation of all great trading. And the discipline to take the required actions when told to by the system that you’re using.

That boils down to trading system management. A lot more of that is forthcoming. I beg you to ask me questions so I can make you videos, write more content that you want to read, and direct you to becoming the best trader you can possibly become. There’s a lot involved. There’s a lot to learn. There’s a lot to know about currency trading in the Forex markets.

Let’s get a good start tomorrow. So register, comment, and tell people about this site… More is on the way.