Money Management: The good, bad, and ugly…

1. Money Management: The good, bad, and ugly…

2. Why is this so important? • The market can only move up or down, yet most traders fail to make money consistently. • Traders tend to focus on technical signals and fundamental catalysts (news) and disregard risk. • A baseball player is right 30% of the time, may go to the hall of fame!!! • Mickey Mantle Career ERA : .298 • Yogi Berra Career ERA : .285 • Babe Ruth Career ERA : .342 • Professional Traders & Money Managers may only be ‘right’ 50% of the time, and do very well… • ‘How much’ we win and lose is just as important as ‘How often’ we win and lose.

3. How much should we risk? • We should never allow ourselves to risk more than 5% of our current account equity on any single trade. • The more we risk the greater the chances of a margin call, and a shortened account life-span, and a halted trading career. • It’s better to make a little, than lose a lot…

5. How to calculate risk? • Long Trade: • Entry Price – Stop price • Buy EURUSD @ 1.2230, Stop:1.2180 • Risk = 50-pips * Position Size • Short Trade: • Stop Price – Entry Price • Sell short GBPUSD @ 1.8980, Stop: 1.9030 • Risk = 50-pips * Position Size

6. Maximum Portfolio Risk • Account Equity: $5,000 • Max Allowed Risk: 5% ($250) • Trade: • Buy EURUSD @ 1.2230 • Stop: 1.2180 • Position Risk: 50-pips ($50 / mini-lot) • Max Position Size Allowed: • Max Allowed Risk / Position Risk • $250 / $50 = 5-mini lots

7. Risk vs. Reward Ratio(At least 3:1) • Entry: Buy EURUSD @ 1.2230 • Stop Order: 1.2180 • Risk: 50-Pips • Limit Order: 1.2380 • Potential Profit: 150-Pips • Risk Vs. Reward Ratio: • 150 / 50 = 3:1

10. Risk between various currency pairs • Do Not: • Buy EURJPY • Buy GBPJPY • Buy USDJPY • Buy AUDJPY • Sell-Short EURUSD

11. Sector Risk Among Various Pairs • Commodity Currencies: • AUD, NZD, CAD, CHF. • Do not: • Buy USDCHF • Buy USDCAD • Sell-short AUDUSD • Sell-Short NZDUSD • Buy AUDNZD

12. Geographic Risk Among Various Pairs • AUDNZD , EURGBP, EURCHF, EURGBP • Do not: • Buy AUDUSD • Buy NZDUSD • Sell-Short EURUSD • Sell-Short GBPUSD • Buy USDCHF

13. Trading Tips: Why we should ‘Stagger’ Entry, Stop, and Limit orders…

14. Staggering Entry Orders:

15. Staggering Stop Orders:

16. Staggering Limit Orders:

18. A Stop order is like a Seatbelt; They should be used every time, but they should not be our ‘exit’ strategy… • Protective Stop orders should be placed at a logical point on the chart, where we believe the market ‘should not’ trade to… • Stops that are triggered tell us the market has changed or we have ‘read’ the market incorrectly. • We must accept a lose as a ‘cost of doing business’ until we find the ‘right’ trade.

22. Proper use of Trailing Stops: • Use Trailing Stops to protect profitable positions, as a % of total profits. • Bought EURUSD @ 1.2200. • Currently trading @ 1.2400. • Current profits = 200-pips. • Set Trailing Stop to protect 20% of profits • 40-Pip Trailing Stop • Adjust Trailing Stop as position shows additional profits • When Current profits = 300-pips, • set 60-Pip Trailing Stop.

23. Setting the Trailing Stop to a Technical Indicator

24. Using RSI as a Trailing Stop

25. Using Support & Resistance Levels as a Trailing Stop

26. Using the MACD (Histogram) as a Trailing Stop

27. Maintain a Trade Journal • …So we can look back and determine: • Which indicators we use most effectively • Which currency pairs work best with our trading style • Regulate % risk per trade • Regulate total risk of the account • Determine implied ‘Risk : Reward’ Ratio

29. Q & A