Well it’s 2016, and another year has gone by. New Years resolutions have begun, gym memberships are sky rocketing and everyone is motivated to become more fit, drop a bad habit, pick-up a new hobby, or set new budgets. Although I have never been convinced that the dawn of a new year gives you any advantage of actually accomplishing any goal, what I do believe is that by writing out your goal on paper and establishing a date, will give you a much better chance of completing it.
One thing I have looked at for myself in the past couple years is a specific Money Management philosophy in my trading. At the end of each year, I take stock of how well (or horribly) I have traded for the year and make sure that my strategy is sound and still valid. This is an exercise I wish I learned my first day trading because it would have not only made me more money, but it would have substantially mitigated a good percent of my total losses in my first year. So what I am going to share with you now is a very simple philosophy I follow that has helped my trading massively.
The difference between a new trader and a professional trader is this: A new trader thinks about how much money they can make, while a Professional Trader thinks about how much money they can lose. Do you see the difference? The moral of this story is that trading is risky, and although it is fun to think about all of the money you could potentially make, most new traders seldom like to think about the fact that one bad day of trading can cut their account in half, or how a misunderstanding in risk reward ratio can lead to taking far greater losses than positive gains. The market doesn’t care about how much money I have, what I lose or what I win. The market itself is pure and emotionless, but is driven by the emotions and beliefs of the people who participate in it.
This allows me to have a clear advantage over most traders if I can follow these simple rules while trading:
(I will explain these concepts now)
This is very simple math and this will keep you from not only having a really bad day trading, but also helps prevent you from biting off more than you can chew. It answers a very simple question of what lot size should I be trading? Here is an Example:
If I have an account balance of $1,000, then 5% of that is $50. So, if I am trading a lot size equating to $1, then a -50 pip stop out would reduce my account by 5%. This means that the most I am ever willing to lose on any one trade is 5% of my total account. Now I am not advocating take a -50, but you get the idea. The dollar figure and lots size is proportional to your account balance.
This is the mark of a professional trader and for me, this was a huge milestone in my personal trading. In order to understand what my risk and profit target is getting in to a trade I needed to really understand how the market works. When I can comprehend what I am looking at on my screen and I can say to myself (or anyone else) “this is good entry because….. and as a result of this I will know this trade is behaving when it does X and I will know it’s time to dump it if it does X,” then I am on my way to making some money in FOREX. This is how you make money. There is no luck involved. It comes down to being able to identify a trade set up and being able to pull the trigger. In actuality, this is the easy part. Let’s talk about where things really get hard…
If I am trading from a place of indifference all the time, why would I ever need to run a stop-loss? The answer is that we are a human beings and no matter how emotionally stable we think we are there will come a day where the market spins you out and makes you feel like you know NOTHING about trading. Any long time traders know this to be true, no one is immune from taking losses. The mark of a true professional is how clever we can be, and gracefully we can lose (I’ll cover this in the next section). To protect ourselves from ourselves, we need to preset a stop-loss when going into any trade that is automatically set the moment I click in. It is there to serve as a safety net to ensure that my emotions will not get the best of me in the event that things go wrong, which they will.
As I mentioned above when explaining the importance of a stop-loss, the next logical question is “what should my stop-loss be.” For me I use a 1:2 risk reward ratio. I will explain how this works. If my target PIP goal is 50 pips, then my stop should be set to -25. This way if I am making smart trades and my win Ratio is 50%, then I am profitable in my account. I’ll give you this analogy: If you flip a coin, you have a 50/50 chance of calling it correctly. Simple right? Trading should be no different and here is why: If I am only winning 50% of the time but I make 50 pips every time I am correct and lose on half that (-25) when I am wrong, then over a long period of time I am going to remain profitable in my account. This is what I meant when I was referring to losing cleverly and gracefully. Obviously, I don’t advocate blindly trading your account but I love the simplicity of this because you can become a profitable trader with a 50% win rate! Awesome.
An experienced trader trusts their methodology. If any strategy is going to be successful, you need to give it enough time to work. In the first year for me, it was all about gaining experience and trying not to lose money in my account. Every year after that has not become about how much money I can make, but about how little I am going to lose. My experience has shown me that the more I can depend on high probability averages (like a 50% win/loss rate on my trade) and trust them to be true, the more confident I become in the methodology. When a trader combines a sound methodology with experience, and solid foundation in Money Management and risk mitigation, then you are well on your way to becoming a Professional Currency trader.
Director of Enrollment
Goals are like leaders. Everyone knows they can be powerful parts of success, but because the term is used in such broad ways, vagueness can surround the term. Have you ever heard a one word definition of leader? John Maxwell says leadership is simply “influence.” This may not be a sufficient definition for some, but for me it was very clarifying. I’d like to share a similar epiphany I had when I thought deeply about goals.
Let’s start with a few semantics. To become financially free is what many people would consider to be a “goal” in life. It’s not mine. I want to become financially free so that my wife can stay at home with the kids, I can pursue my desire to coach full-time, and we can live a lifestyle that supports health, happiness and peace. These are huge motivating forces in my life. They are what get me excited and help me persevere through hard times. But they describe my dream… not my goal.
What is the difference?
I want my goals to be something over which I have complete control. So my one word definition for goals is “steps.” Maybe it’s my competitive nature or my competitive nurture growing up in sports, but I like there to be a winner and a loser…a yes or a no…did I accomplish the goal or didn’t I? I typically ask my teams, “What are your goals for the season?” Many times they’ll say, “To go undefeated.” Then they lose the first game. Does that make them failures? Should they quit improving and stop trying because their goal can’t be realized? Sounds preposterous, but I’ve seen it happen all too often.
So their understanding of goals (or lack of understanding) actually prevented growth. They didn’t have complete control over their goal. They had no idea if the goal was attainable because they couldn’t control how good their opponents were that season, who was going to get a season ending injury, etc. So why not call it a dream, not a goal, so it still has the purpose of motivation but doesn’t make you a failure if you don’t reach it? And here it is…the “certain aspect” that was so helpful to me in having goals play a meaningful part of success in my life: It is the fact that my goals are process oriented and not outcome oriented. Processes are actions by me that I can control.
The processes may be difficult for me to accomplish, but that is OK because they are completely within my control. Outcomes are not always in my control. For example: My goal is NOT 50 pips a week. That is where I want to be, but right now I don’t have the skill to accomplish it. So my goal for the week is to make all of my entries with a physical risk out. Because I don’t always recognize good entries or exits, because I don’t always measure from the right spot, because I trade emotionally, I don’t have 50 pips a week as my goal. But 50 pips will be an outcome of my behavior.
So if I’m going to improve my outcomes, I must improve my behavior as a trader. I must do things (take actions) that will improve my chances of positive outcomes. A high level trader, Billy Himan, looked at my screenshots and made the recommendation “never take a trade without a physical risk out.” So that has been my goal in the last 4 weeks. My trading has improved vastly. Only one of those weeks did I reach 50 pips, but I felt successful every week because I reached my goal and saw improvement. I am closer to my dream which is a great feeling! An addicting feeling actually.
And it was that simple goal or “step” that caused growth.
If you’re a new student don’t make your goal to get 10 pips this week. That is an outcome that you don’t have complete control over. You don’t have the skill to do that yet. You may get lucky and get 50 pips, but that doesn’t make you a better trader or get you closer to your dream. Instead, make your goal, “I’m going to ask two questions of the instructor every day this week.” Or, “I’m going to see if I can sit and watch the market for one whole session and NOT make a single trade.” Or, “I’m going to get to the classroom three times this week.” These were all goals for me because even though they were difficult for me as a new student they were completely within my control.
For some of you more experienced traders you know that 50 pips a week is a great goal for you because you know the process you need to follow to get that goal. I would still make the case that you should make other goals that focus on the process itself. My guarantee is not that you will gain more pips this month but that you will learn and grow – so that dream of yours will become a reality much sooner.
This blog entry is going to be short, and I hope, sweet.
We all want to maximize our winning PIP count and minimize our losing PIP count for every trade that we take.
After a month of trading with the Market Maker Course software (Smart Money Profile), I’m convinced that limit-profit to stop-loss (reward to risk ratios) can be 4:1 to 6:1 and even higher. In Market Maker Course language, this means we can often look to capture 20-30 PIP profits with a 5 PIP loss as our risk management number.
HOW can we dare use such a small stop-loss of 5 PIPs? Because when the SMP charts are showing high probability setups and entries, and you’ve chosen the correct direction to take your trade, the price-action rarely violates by five PIPs or more the significant price levels shown as dots, average price lines, liquidity lines, grid and net lines.
WHY use just 5 PIPs as your stop-loss? Two huge reasons. First, the conservative reason. Simply put, if you’re wrong three trades in a row, your losses will amount to about fifteen PIPs. One successful Market Maker Course trade can be well over twenty PIPs, but, let’s keep it at twenty for this example. Do the arithmetic, one success completely cleans up three losses and even after adding in all the commissions, leaves you about even. To me this is really smart risk management.
Second, the aggressive reason. I’m assuming you’re a veteran, seasoned Market Maker Course trader, able to see and act on, mostly, high probability trades when they present themselves. By practicing conservative five PIP stop-loss trading and adding in an overall winning trade percentage of 70%, I can see weeks where you will be up ten, twenty or more PIPs over your weekly PIP capture goal.
If you choose, you can decide to go after a big winning trade without endangering your weekly PIP goal count. An example: your weekly PIP count is twenty above your goal; you see a setup/entry opportunity with an 80 PIP target; allow yourself, on this trade only, a wider 15 PIP stop-loss; this allows you the luxury of a wider negative drawdown on the way to a possible 80 PIP win. If you’re right, that’s some nice icing on the cake for the week; if you’re wrong, you’ve still met your week’s PIP goal.
Simply put, the five PIP stop-loss allows you to be a flexible trader, if you choose—in my case, mostly conservative, sometimes aggressive.
“If someone offers you an amazing opportunity and you’re not sure you can do it, say yes – then learn how to do it later.” -Richard Branson
As many of you know, there are some groundbreaking changes taking place at the institute this month. Most noteworthy of all is that the institute will now be using Smart Money Profile (SMP) as the school’s primary platform for instruction.
Before I share my list of concepts that Wealth Smart students need to know about the SMP platform, I would like to take a moment to celebrate Wade and Shane Guth for their amazing work developing and fine tuning the revolutionary SMP software. Additionally, due to Shane’s skillful and dedicated teachings, every SMP trader I know absolutely loves the platform. Kudos gentlemen!
I have been an SMP student for three months. With that in mind, here are the things you’ll need to know as a new student making the jump into the SMP program.
When a person first opens the SMP software to trade it for the first time, it may be a little intimidating. The multi-colored candles, lines, dots, boxes and the ever fluctuating rate indicator can easily create a sensory overload for newcomers.
Although the task at hand may appear difficult, once you understand the Market Makers business model, you will understand the genius and simplicity of the SMP software. By helping you discern what the Market Makers are doing, the SMP platform allows you to make predictive and logical assumptions about potential trading opportunities. As you learn to recognize the best trading opportunities, your win rate can soar into the 70 and 80 percent range.
From time to time, cross-traders at the institute (those that trade SMP and WealthSmart) explain that one of the greatest advantages of the SMP software is that the exit points for SMP trades are clear. The SMP platform is a map. As part of that map, the software clearly shows you points where the market may turn or possibly take a large breath. Once price approaches one of these points, it is easy to see your exit and book your profit.
Additionally, as you gain experience with the software, you will learn to finesse your entries so that you have less and less risk in your trades. Of course every trade is unique, so there is no rule that says, for example, “Keep every stop loss set at 6 pips.” However, within a relatively short amount of time, you will likely be able to keep your risk at a minimum as you enter into high probability trades. The ability to combine high probability entries with clear profit targets and low risk exits is a magical combination that can lead to long term trading success.
When you first get involved in the SMP program, you will find there is quite a bit of subjectivity to everything happening in the SMP arena. Some students may see the market preparing to go long, and others see it preparing to head in the opposite direction. No matter what you see on a particular day we encourage you to share it!
There are no guarantees in trading, but if we are able to gather our information together, we all benefit from the opportunity to make good, well-informed trading decisions.
For anyone who may be worried about making the transition from WealthSmart to SMP, fear not! You have already furnished great skills as a Wealth Smart student. Although the change may be uncomfortable at first, you will be surprised at how well you will adapt and become proficient with this truly phenomenal software.
The value of patience and discipline in Forex trading cannot be overstated. In order to be a successful trader, you must possess these two traits with unwavering consistency. As I have gone through various phases of learning, failure, and success over the past 17 months, I have had moments and weeks where I have been extremely patient and disciplined. However, maintaining that unwavering consistency has been one of the biggest challenges in my trading.
Lately, for a little over a month now, I have finally started to exhibit some reasonable level of self control. I realize I have not yet absolutely mastered these essential survival skills. Even during the past month, I experienced back to back days where I allowed myself to over-trade (the only two truly bad trading days I have experienced since mid-May). As such, I am constantly seeking new thoughts and inspirations for how and why to maintain steadfast patience and discipline. I believe I am starting to turn the corner. I find that I am no longer easy prey for the market. I now lie in wait and take quick small bites out of the market.
So, what has been working? What is helping me maintain my patience and discipline? I go through a routine before each trading session. The first thing I do is look at the lot ladder. I must warn you, without the right mindset, this can be a double-edged sword. The lot ladder allows you enter the number of pips you expect to average per day (along with some other variables) and then see how much money you will be making each week if you climb the lot ladder one rung at a time. The reason this is so dangerous is that you can make the mistake of raising your daily pip goal so that you can make huge money so much faster. This is completely counter-productive as it leads to over-trading, not covering profits, etc.
However, I have set my daily pip goal at the Fx365 Institute’s long-time suggestion of just 7 pips a day. Once you have been trading on the Smart Money Profile platform for some time, you know this is truly a modest goal. Before any trading session, I look at where this highly obtainable goal can take me. Here is a screen shot of what one part of my lot ladder looks like:
I take a few moments to really focus on the truth that averaging just 7 pips day turns a $1,000 account into a $20,000 a month income in a ridiculously short time frame. I mean, this is incredibly powerful stuff. It helps me cover smaller trades rather than trying to swing for the fences. I still need to get better at not caring if the trade runs another 30, 50, 100+ pips. It’s tough knowing that I could have made my whole week on one trade, or hearing that someone else pulled a 40 when I had better entry and only pulled a 10 or 20. However, I come back and look at the lot ladder again and realize I only need 2-4 of my modest winners a week. I have to always remember, trading is a long-term race. By taking those smaller positives, I avoid taking negatives that make it harder to reach my goal. Then, at the end of the week when I have made my goal and am moving up the lot ladder again, I am one week closer to the financial freedom that $20,000 a month brings. Isn’t that the whole idea?
My other monumental struggle has been to avoid over-trading after taking a negative. Now, although I am making significant progress towards trading at indifference, there are still times when I take a negative trade and literally feel the stress prickling through my body (what a horrible feeling). When this happens, I absolutely must exhibit tremendous discipline and STOP TRADING until I have calmed down. If I look at where I want to be by the end of 2015, I ABSOLUTELY CANNOT ALLOW MYSELF TO DAMAGE MY ACCOUNT.
At those crucial moments, I lean on something Fx365i’s Head Trader Wade Guth once told me. He asked if I was planning to trade tomorrow. I said yes. He asked if I was planning to trade next week. I said yes. Next month, next year, etc? Yes, yes, and yes. So he asked me, “Why on earth would you get worked up about one trade or one negative day?” I also reflect on Shane Guth recently telling me that the biggest thing he NEVER wants to do is let one bad day cause him to lose his buying power. Live to fight another day!
Over this past month, I have also started telling my wife how my trading went each and every day. She has believed in me and allowed me to stay on this journey despite several months without positive results. Believe me, it is not easy to tell her when I am down for the day. However, when I have taken a couple of wrong trades and walked away with relatively small losses, I can proudly tell her I kept my discipline and didn’t throw money out the window like an idiot. Knowing I will have to report to my wife on a daily basis helps me maintain steadfast discipline and patience in my trading.
One last thing I think about is basically a lesson from Rhonda Byrne’s famous book, The Secret.” The Secret teaches that if we want something, we have to hold it in our mind’s eye, believe we have already obtained it, and be fully grateful for having received it from the universe. So yes, I am thankful for my huge trading account. More importantly, I am thankful for being a highly successful trader with tremendous patience and discipline. I know I did not get to this point by getting emotional and overreacting at every unexpected twist and turn in the market. I am thankful for the self control and confidence that made me the trader I am today.
I realize the lot ladder may not help everyone. Of course everybody is not married or willing to discuss their daily results with their significant other. I also know that not everyone has the same view of The Secret as I do. That is not the point. What is important is that I have found ways (and will continue to seek and find new ways) to exhibit patience and discipline in my trading. If you are struggling with patience and/or discipline in your trading, maybe you can use one of my tools. Some of you will have to come up with something totally new that works for you. The key is to find something that truly resonates with you – something powerful enough to give you the internal fortitude to do the right thing in the face of strong negative emotion. Once you find ways to be patient and disciplined, you will be much more likely to survive in the unforgiving Forex jungle.
Two quick notes:
1) One other thing that has helped is writing this blog. Thank you so much to everyone who reads it and especially to those of you who reach out to discuss your own trading experiences with me. Thank you, thank you, thank you!
2) In regards to the 7 pips, you may be saying, “Well what about the commission?” On my personal spreadsheet, I subtract 1.5 pips from each trade to come up with what I call “net pips.” This number will vary depending on the pair you trade and whether you are in a micro account. I can help you figure out the exact number if you need help with this.
As always, please feel free to reach out to me at email@example.com. I LOVE hearing from fellow traders!
Smart Money Profile Trader