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!

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.