Forex,WHY? WHAT? WHERE? WHEN? WHO? HOW?

WHY? WHAT? WHERE?

WHEN? WHO? HOW?

Before choosing with read a book regarding playing a numbers game (other- wise recognised as funds management), many individuals need to be persuaded which the data is significant enough with be value their time plus effort. After they accept which the factors are compelling, they should know what income administration is plus how this differs from what many traders believe cash administration is. The upcoming logical query is where with apply cash administration principles. Are cer- tain markets or techniques unsuitable for cash administration? Do several function much better than others do? The trader whom knows why it"s im- portant, exactly what it is, plus where it should be used, upcoming asks, whenever do I commence applying it? Then? Later? After there is a certain amount of income? After the account enters into a losing time period? Who could apply funds administration principles? Isn’t funds administration for big accounts? Aren’t cash managers truly the only ones who really can utilize funds administration principles? Is it only for a cer- tain kind of trader? Are stock traders included? Finally, how with apply cash administration rounds off the standard issues traders many fre- quently ask regarding this topic. This chapter answers various of these issues generally; the rest of the book offers the specifics. Fasten a seatbelts, you"re going to enter the funds administration zone! WHY? Why inside the planet do I wish To persuade sane, smart visitors with willingly invest a limited hours understanding regarding a topic which is believed 2 WHY? WHAT? WHERE? WHEN? WHO? HOW? WHY? 3 with rival accounting inside boredom? Why? Because income administration is For those that trade a basket of currency markets including Swiss misunderstood-it is far from boring; it"s exciting. No additional franc, Deutsche mark, Japanese yen, British pound (SF, DM, JY, BP): knowledge inside the entire realm of trading or investing could ignite an account quicker than income administration. Look at the following num- 1. $20,000 per year inside income for five years. bers plus judge for oneself. 2. $5,000 per marketplace per year for the upcoming five years. A usual objective amidst various traders is with achieve $1 million inside 3. $416 per marketplace monthly for the upcoming 60 months, trading income inside their lifetime. It is a dream which many traders do 4. $96 per marketplace per week for the upcoming 260 weeks. not anticipate with actualize inside lower than 20 years (unless they are begin- ners, whom think they will reach $1 million inside trading income inside a lit- This comes with a small over 1.5 ticks a day per marketplace. For those tle over an hour). But, the following numbers are what we need that are perfectly diversified over 10 markets: with achieve $1 million inside income with the income manage- ment techniques inside this book. These numbers are based on a conser- 1. $20,000 per year inside income for the upcoming five years. vative cash administration approach (because opposed with aggressive). 2. $1,667 monthly inside income for the upcoming 60 months. 3. $167 per marketplace monthly trading 10 markets. To reach $1 million inside income utilizing a conservative Fixed- 4. Less than $40 per week per marketplace. Ratio income administration approach, we require $100,000 inside income based on trading a single device, contract, or way. Because you are dealing with math, the energy of the sort of income administration is not limited with really futures plus choices. To ac- complish the same objective trading 10 stocks of 100 lots each: That’s proper, we don’t want $1 million with achieve $1 million. We 1. $100,000 inside income over a five-year period. just have to build income which total $100,000 based on trading a set 2. $20,000 every year for the upcoming five years. amount of stocks or perhaps a single device, contract, or choice. What this 3. $0.37 per stock, per week. signifies is the fact that a individual whom trades a single contract, way, or set amount of shares of stock plus makes $100,000 at the finish of five 4. $375 per week total from trading 100 lots. years, rather might create $1 million by implementing right income administration or improving the risk on every trade. We could break this Why is cash administration significant? Because it may take an down into a five-year achievement goal: average or lower than average five-year return plus make more than enough income with retire throughout which five years. Money manage- 1. $100,000 inside income throughout the upcoming five years. ment takes the trader past the point of no return. A trader whom makes $40,000 over the upcoming 2 years plus then loses the $40,000 2. $20,000 income per year for the upcoming five years. throughout the following 2 years has a return of $0 (zero dollars) 3. $1,667 income monthly for the upcoming 60 months. following 4 years of trading. Had the trader chosen right income man- 4. $384 income per week for the upcoming 260 weeks agement, the $40,000 may have grown with $200,000 at the finish of 5. $75 a day on average for the upcoming 1,320 trading days. 2 years. Next, whenever the big losing period came, because much because $100,000 may have been secure. After the trader prepared it with This amounts with 3 ticks a day inside the Standard & Poor’s (S&P) $200,000, the account was able with withstand any Index, or lower than 3 ticks a day inside bonds, or $% inside stock trading size drawdown (because lengthy because the trader used cash management) 100 lots a day, or 6 ticks a day inside a currency marketplace, or 2 ticks without going back right down to zero. That is an account which is with the a day inside the coffee marketplace. We receive the pic. point of no return. The trader applying right cash administration is WHAT MONEY MANAGEMENT IS.. . AND IS NOT WHY? WHAT? WHERE? WHEN? WHO? HOW? 4 5 administration suggests to consider factors that cannot be up $100,000, while the trader not applying right cash manage- mathematically proven. Proper income administration claims which when A ment is at $0. plus B then C. Improper cash administration states which when A plus B Why cash administration? Because it really is responsible for 90 % then C . . . often. Proper funds administration not dictates of the $1 million inside income shown inside the preceding five-year illustra- where with receive inside or where with receive from markets. This really is better defined tion. It isn’t the program, it isn’t the marketplace being traded, it isn’t the because “trade” or “risk” administration plus ought not to be confused with alignment of the moon plus stars, it happens to be sound, mathematically proven, right funds administration techniques. funds administration techniques. That’s why. However, several techniques, including those indexed inside the past paragraph, are usually lumped into the funds administration category. And, you cover those techniques too. For instance, income manage- WHAT MONEY MANAGEMENT IS.. . AND IS NOT ment stops merely are telling we where with exit a marketplace with cut a losses inside any provided trade. Even though this has a relationship with the Money administration is 90 % of the game. Money administration is cash administration description, it happens to be better defined because a “trade man- the most crucial aspect inside trading with regards with the bottom agement stop” or “risk administration stop.” Proper funds manage- line. Larry Williams turned $10,000 into $1.1 million inside 1 year. He ment not has anything with do with where you need to enter or exit a states inside his book The Definitive Guide with Trading Futures
(Vol. II),
certain trade. Whenever placing a stop on any provided position, you may be
“Money administration [is] the most crucial chapter inside this book.”
determining where the trade is exited. Money administration plus
As a matter of truth, various lucrative traders rank income manage-
cash administration stops are 2 completely separate terms.
ment because the highest contributor with their total success inside the mar-
The trading way well-known as
pyramiding
furthermore is frequently con-
kets. If funds administration is such a important element, then it becomes
fused with income administration. The trader utilizing funds manage-
significant with recognize what cash administration is, plus is not.
ment looks at the account because a entire. Pyramiding found on the additional hand
There are numerous almost correct definitions of income man-
is limited with a certain trade inside a certain marketplace irrespective of
agement inside the industry now. I am going with define the expression because I utilize
the status of the account because a entire. Pyramiding states which because a par-
it plus because you"ll discover it throughout this book. Although several
ticular trade is successful, the trader can add positions to test with take
traders insist which when
we
look up
boring
inside the dictionary, you"ll
benefit of the cost moving inside the appropriate way. The further the
discover its description is “money management,” I have learned it is
cost moves inside the way of the trade, the more positions the
the most fascinating ingredients of trading.
trader adds, mostly 1 at a time. Rarely may we see a pyramiding
There are definitions of income administration which relate with protec-
way which begins 1 contract plus then adds on 2 more at 1
tive stops otherwise well-known as “money administration stops,” nevertheless this
cost level plus 3 extra contracts at a high level and so forth.
form of description is not employed inside this book. Money administration, because de-
Usually, when 1 is traded inside the beginning, every added position is
fined here, is limited with how much of the account equity is at
with just 1 contract. These decisions with add onto positions are not
risk found on the upcoming trade. It looks at the entire of the account, applies
based found on the total heighten inside the account, simply which 1 position.
right mathematical formulas, plus lets we recognize how much of the
Further, ordering or marketing another contract inside this condition is based
account you need to risk found on the upcoming trade.
only on cost action.
Money administration could then be broken down into 2 different
Another normal practice inside trading states which you need to just
categories:
right
plus
improper

money management. Proper money

take trades after X number of losers in a row. This method is claimed

management takes into account both risk and reward factors. Im-

to increase the winning percentage of trading systems. However, it

proper money management considers one or the other, risk or re-

cannot be mathematically proven. In fact, I mathematically disprove

ward. Proper money management takes into consideration the value

the notion that it can increase the winning percentage of trades. This

of the entire account. Improper money management only looks at

brings in a totally different category of trading though. It does not

certain account properties or characteristics such as winning per-

have to do with how much to risk on the trade. It does not have any-

centages or win/loss ratios. Proper money management discounts

thing to do with where a trade will be entered or exited. Taking trades

all factors that cannot be mathematically proven. Improper money

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WHEN?

7

6

WHY? WHAT? WHERE? WHEN? WHO? HOW?

only for system traders, or system traders believe that money manage-

only after X number of losers in a row answers whether to take a

ment is only for those who trade by the seat of their pants. The money

trade, when to take trades, and when not to take trades. This does not

management principles in this book should be applied to every form or

have to do with how much to risk on the next trade.

nonform of trading: day trading, seasonal trading, option spread trad-

In addition to the X number of losers in a row strategy, another

ing, synthetic options, long term, trend following, breakout-the list

strategy that answers whether or when to and when not to take

goes on and on and on. Further, it is especially applicable to any com-

trades is trading according to the x day moving average of the equity

bination of these methods simply because each method or market will

curve. This theory requires creating a moving average of the equity

either produce a loss or a profit. That loss or profit is not discriminated

curve. Once the actual performance of the equity dips below that av-

against according to which market or strategy it came from when ap-

erage, new trades should not be entered into until after the equity

plied to the equity curve. Therefore, it simply does not matter.

moves back above the moving average. Since this is a strategy that

Inevitably, when I speak at a seminar and try to make this point

determines when to stop taking trades rather than how much to risk

as bluntly as I possibly can, someone will still come up afterward and

on the following trades, it does not fall under our definition of money

ask if this is applicable to the British pound. For clarification, if you

management.

take a trade, you should address money management, period, end of

Regardless, neither the X losers in a row nor the average equity

story . . .

that’s all she wrote.

curve trading method can be mathematically proven to improve trad-

ing results. In the chapters dealing with these methods of trading, I

examine both the benefits and risks of implementing such methods.

WHEN?

Further, I show why you cannot rely on these methods mathemati-

cally to improve trading results.

When should a trader start applying money management to trading?

Therefore, the definition of proper money management states

In a word, yesterday. Money management planning should be a con-

that it must take into consideration both risk and reward, it must

scious part of preparation even before taking the first trade. Every

take into consideration the entire value of the trading account, and

single trader who has ever made a trade of any kind has one thing in

it must be proven mathematically. This is a narrow definition and

common with every other trader-they all made a money manage-

there are only two main methods that comply with it: the Fixed

ment decision when they decided how many contracts or options or

Fractional trading method and the Fixed Ratio trading method. All

markets or risk to place on the very first trade. Further, with every

the methods mentioned in this chapter are thoroughly examined in

single trade, the trader is making a money management decision

this book.

even when unaware that this is the case. You are, right now, applying

some sort of money management decisions to your trading. My goals

are, first, to make you aware of these decisions; second, to convey

WHERE?

that they should be your top priority in trading; and, third, to give

you the proper money management techniques to make the most out

Money management principles should be applied to short-term trad-

of your trading.

ing, long-term trading, options, stocks, futures, spreads, real estate,

If you have already started trading, it is time to reorganize and

and mutual funds. This book, however, deals with the application of

replan the strategy from here on out. It matters not whether you are

money management to leveraged instruments only. Therefore, this is

trading one contract or one option or whether your account size is

not a book of money management for mutual fund traders. It is also

$5,000 or $5 m’ll’ion. You need to apply proper money management1

not for stock investors who simply buy and hold for years on end al-

strategies now.

though it does apply to stock traders who use margin. It applies to all

If you haven’t started trading, you may be tempted to shove

types of options and obviously to every market in the futures and

money management aside for now. Don’t! Many believe money man-

commodities group.

agement is just an after-the-fact, or after-money-is-already-made

There is no type of trading for which money management is not ap-

scenario. The following story illustrates this attitude. Several years

plicable. Some traders mistakenly think that money management is

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-

WHY? WHAT? WHERE? WHEN? WHO? HOW?

8

HOW?

9

ago, a trader was excited about the potential effect of money man-

The basic principles of this book apply to all traders. Whether ag-

agement on the outcome of his trading. He called me up and bought

gressive or conservative, every trader applies the same principles and

my Performance I money management software program. A year

mathematically proven money management techniques. Questions

later, I received a call from the same man. I got on the phone with

such as when and who should be aggressive or conservative are an-

him and he said to me, “Ryan, I am ready to use the money manage-

swered in the following chapters.

ment program now, could you help me get started”? A bit baffled, I

I hope this chapter has convinced you to read on. The numbers

said, “Sure, but why did you wait a year to start using the program?”

alone are convincing enough. If you have never consciously addressed

He replied that he wanted to make sure that the method he was going

money management in your trading, you may need to go through this

to trade worked first. I said, “Fair enough” and proceeded to help him

book a bit slower than those who have. But if you take the necessary

out. Toward the end of the conversation, I asked, just out of curiosity,

time and stay the course, this will be one of the most beneficial books

how much he had made without applying money management. He an-

you will ever read in your trading career.

swered that he had made about $70,000 based on trading a single

contract! After I got off the floor, I told him that had he used money

management from the beginning, he could have easily produced in

excess of $600,000 instead of $70,000.

When? Now!

WHO?

Even though this answer has been indirectly answered through the

answers to the other questions, let me be direct and to the point. You.

If you are even contemplating trading a leveraged instrument,

whether it be stocks, commodities, options, or whatever other lever-

aged market, you must address the money management issue. If you

are already trading, you are running late and behind, but late is bet-

ter than never. You need to apply these techniques. It doesn’t matter

where you went to school, your age, sex, color, race, or religion.

Whether you are a mother, father, brother, sister, cousin, nephew,

niece, aunt, or uncle, it matters not. Am I getting the point across?

Numbers have no respect for humans. They just are.

HOW?

This is probably the only question that I cannot automatically assign

the same answer to everyone. How you apply these principles to your

trading is going to be different from how someone else views and ap-

plies them. How you apply these techniques will depend on several

factors including but not limited to how conservative or aggressive

you are, your goals as a trader, and your tolerance for risk.

WHY (PROPER) MONEY MANAGEMENT?

11

consistently. However, I had just purchased a new trading system

from one of those guys who was retiring from a long life of profitable

trading and had decided to reveal his age-old, proven trading method

to a few honored select traders for $100. I qualified because I had

2

$100. And, just for the record, I think the manual is still for sale if

you want to get your hands on a copy.

Anyway, I had coupled his method with some of my own analysis

I was doing in the markets. I had noticed something that I thought

WHY (PROPER)

would be a very high probability trade-divergences. I decided that if

I saw a divergence setting up, I would use the entry and exit tech-

MONEY MANAGEMENT?

niques described in this $100 manual. Soon after opening the ac-

count, I began trading these signals. There were, however, entirely

too few of them to make me happy. So, I started doing some other

things in the account to beef up the activity. Surprisingly (not then

but now), I did very well. At the ripe old age of 21, I took a $10,000

account and turned it into more than $20,000 in just four months.

Because all of my previous trading ventures had been complete fail-

All traders have one thing in common. Whether you are an options

ures, I was absolutely elated at this new-found success. Downright

trader, a day trader, a stock trader, or a little bit of everything type of

cocky might be a better phrase for it. I thought I had it made. And, it

trader, you are-at least in one way-like every other trader. No mat-

wasn’t because of some lucky trade that I had wandered onto. I had

ter what the market or method, every trader must make a money man-

methodically, trading 20 markets, inched the account, trade by trade,

agement decision before entering a trade. Sometimes this is not even a

to more than a 300 percent annualized return. At the age of 21, I had

conscious decision. For these traders, money management never even

achieved a status that only 10 percent of all traders achieved-posi-

crosses the scope of intentional thought. This is an extremely danger-

tive results.

ous way to trade. It is amazing to me how much time traders spend re-

That was on Thursday. On Friday, I was taking my wife on a lit-

searching where to get in and where to get out of the markets but then

tle weekend getaway. After driving for a few hours, I decided to

allocate to each trade with little more than a dart throw. Through my

stop, call my broker, and find out how my 11 positions were doing.

own experiences and a few illustrations, I hope to convey that proper

I was in everything from natural gas to sugar. In several of the

money management is the key to success in trading.

markets, I had two or three contracts. When I called, I was in-

In this chapter, I explain why and how I turned my focus to money

formed that 9 of the 11 positions had gone against me. Although it

management and then present several reasons you, and every other

certainly wasn’t devastating, I did not have the margin to carry

trader, should focus on how to manage the money in your account, even

all 11 positions through the weekend. Therefore, I liquidated a

before you decide on what system or method to trade.

few of those, rationalized that the others would make up the slack

When I trade, I examine something to a certain degree, make a

on Monday and went on my way. I was a little disappointed and

judgment call whether it is worth trading, and then do it. Paper trad-

even a little worried, but far from being devastated. That state was

ing can yield only so much information. The true story lies behind

still to come.

the outcome of actually taking the trades. During one of my early

Two weeks later, my $20,000+ account had plummeted to less

trading experiences, I had opened an account for $10,000. This was,

than $2,500! Now, I was devastated. My pride had been crushed and

at the time, the most I had invested in a new trading venture. I also

I was right back among the 90 percent of people who lose money trad-

had decided to trade straight futures with this account. Until then, I

ing. What happened? That was my question. I decided to take some

had traded options, option spreads, covered options, futures spreads,

time off from trading and investigate exactly what had happened to

and had written naked options. I had never traded straight futures

10

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WHY (PROPER) MONEY MANAGEMENT?

WHY (PROPER) MONEY MANAGEMENT?

12

13

round turn-40 of them-1 lost about $2,000 on the position that

this account. I was going to figure out what had caused the collapse if

supposedly was making me close to $7,500!

it was the last thing I did. Defeat is only temporary.

Next, I was chewed out for not returning the call regarding the

After analyzing the trades, I determined that the most reason-

margin deficit. I was informed that I was being charged full margin

able explanation for the demise was overtrading the account. How-

for the short sell of the options because they were on the December

ever, this was new territory to me. My first account was a $2,500

contract and therefore were not offset by the September option pur-

account where I bought five bond options (or five of one market, I am

chase. They were about to liquidate my position with or without my

not sure whether it was bonds or crude oil). I put the whole amount,

consent (rightfully so, I might add).

into that market. Two weeks into the trade, I had doubled my money.

Even though I had placed far too many British pound option

The day the market went my way, causing the prices of the options to

spreads in that account, I did not learn about overtrading the account.

spike, I called my broker to get out. However, he convinced me thatWHY? WHAT? WHERE?
WHEN? WHO? HOW?Before choosing with read a book regarding playing a numbers game (other-
smart well-known as cash management), many persons need to be persuaded
which the info is significant enough with be value their time plus
effort. After they accept which the factors are compelling, they should
recognize what funds administration is and just how this differs from
what many traders believe income administration is. The upcoming logical
query is where with apply income administration principles. Are cer-
tain markets or techniques unsuitable for funds administration? Do
several function much better than others do? The trader whom knows why it is actually im-
portant, exactly what it is, plus where it should be used, upcoming asks, whenever
do I commence applying it? Then? Later? After there is a certain amount of
income? After the account enters into a losing time period?
Who must apply funds administration principles? Isn’t revenue
administration for big accounts? Aren’t income managers truly the only ones
who can definitely utilize revenue administration principles? Is it merely for a cer-
tain kind of trader? Are stock traders included? Finally, how with apply
revenue administration rounds off the standard concerns traders many fre-
quently ask regarding this topic. This section answers several of these
concerns generally; the rest of the book delivers the specifics. Fasten
the seatbelts, you"re going to enter the funds administration zone!
WHY?
Why inside the planet do I like to persuade sane, smart visitors with
willingly invest a some hours understanding regarding a topic which is believed
2

WHY? WHAT? WHERE? WHEN? WHO? HOW?
WHY?
3
with rival accounting inside boredom? Why? Because funds administration is
For those whom trade a basket of currency markets including Swiss
misunderstood-it is far from boring; it"s exciting. No additional
franc, Deutsche mark, Japanese yen, British pound (SF, DM, JY, BP):
knowledge inside the entire realm of trading or investing may ignite an
account quicker than revenue administration. Look at the following num-
1. $20,000 per year inside income for five years.
bers plus judge for oneself.
2. $5,000 per marketplace per year for the upcoming five years.
A popular objective amidst numerous traders is with achieve $1 million inside
3. $416 per marketplace monthly for the upcoming 60 months,
trading income inside their lifetime. It is a dream that many traders do
4. $96 per marketplace per week for the upcoming 260 weeks.
not anticipate with actualize inside lower than 20 years (except they are begin-
ners, whom think they will reach $1 million inside trading income inside a lit-
This comes with a small over 1.5 ticks a day per marketplace. For those
tle over an hour). But, the following numbers are what we need
that are effectively diversified over 10 markets:
with achieve $1 million inside income with the revenue manage-
ment techniques inside this book. These numbers are based about a conser-
1. $20,000 per year inside income for the upcoming five years.
vative cash administration approach (because opposed with aggressive).
2. $1,667 monthly inside income for the upcoming 60 months.
3. $167 per marketplace monthly trading 10 markets.
To reach $1 million inside income utilizing a traditional Fixed-
4. Less than $40 per week per marketplace.
Ratio funds administration approach, we require $100,000 inside
income based about trading a single device, contract, or way.
Because you are dealing with math, the force of the kind of
money administration is not limited with simply futures plus choices. To ac-
complish the same objective trading 10 stocks of 100 lots each:
That’s appropriate, we don’t require $1 million with achieve $1 million. You
1. $100,000 inside income over a five-year period.
just should build income which total $100,000 based about trading a set
2. $20,000 every year for the upcoming five years.
quantity of stocks or perhaps a single device, contract, or way. What this
3. $0.37 per stock, per week.
signifies is the fact that a individual that trades a single contract, way, or set
quantity of shares of stock plus makes $100,000 at the finish of five
4. $375 per week total from trading 100 lots.
years, rather may create $1 million by implementing right income
administration or improving the danger about every trade. We will break this
Why is income administration significant? Because it may take an
down into a five-year achievement goal:
average or lower than average five-year return plus provide more
than enough income with retire throughout which five years. Money manage-
1. $100,000 inside income throughout the upcoming five years.
ment takes the trader past the point of no return. A trader whom
makes $40,000 over the upcoming 2 years plus then loses the $40,000
2. $20,000 income per year for the upcoming five years.
throughout the following 2 years has a return of $0 (zero dollars)
3. $1,667 income monthly for the upcoming 60 months.
following 4 years of trading. Had the trader chosen right income man-
4. $384 income per week for the upcoming 260 weeks
agement, the $40,000 may have grown with $210,000 at the finish of
5. $75 daily about average for the upcoming 1,320 trading days.
2 years. Next, whenever the big losing period came, because much because
$100,000 may have been secure. After the trader created it with
This amounts with 3 ticks daily inside the Standard