Saturday, October 15, 2011

Excellent Money Management Flexibility


“Build a buffer around your emotions. The market doesn't care about your position size. A 50 pip move on a mini lot in the EURUSD is only $50. But a 50 pip move on 5 standard lots is $2500. Does the market care about your position size of 5 standards? No. The only difference is how the larger position size affects you. Building up your position size slowly allows you to not be emotionally affected by the massive changes in the profit and loss column from trading larger sizes.” – Rick Wright


Is it true to conclude that most traders fail in the long run because they lack enough money to practice sound position sizing? A few decades ago, this assumption was true, but now it’s no longer true. The power of leverage has changed that assumption. Leverage being the ability to control a large position with a small investment, is very good, provided one knows how to wield this double-edged sword flexibly and adroitly. Without good money management flexibility on trading portfolios, nearly all traders in the world would constantly find trading to be some recalcitrant deadlock. It was revealed that Stalin de-motivated prisoners by getting them to dig ditches and then fill them in again. Most traders are working at portfolios that are equivalents to that. They never seem to get ahead or fulfill their trading purposes.

Many a market speculator thinks that one must have a great amount of money in one’s trading account before one can use effective money management. But the fact is that you don’t need a big amount of money to practice good money management flexibility – on the condition that you use a proper trading account type with a reliable broker and that you don’t rely on the small account as a source of income. At the beginning of my trading career, I came across a trader whose aim was to turn $100 to anything from $300 - $600 per month. In a nutshell, he was planning to make between 200% - 500% on monthly basis as a news trader. He even wrote a book on how he would achieve this. Unfortunately, he disappeared from the scene in a few months.

Many people hate my position sizing recommendations because they think that their accounts are too small, and that the kind of position sizing I mention would prevent them from making a living from trading. That’s human nature for you. In trading, human nature is surely not your friend. People argue that 30% per annum is great on one million dollars but inconsequential on $500. This is a garbage notion that hasn’t helped 95% of traders. As a trader, you have to take your destiny into your hands. Don’t try to make a living from an account that is less than $2,000, otherwise your career would be short-lived. If your account is that small, the best thing is to have another source of income if you’re doing online trading, so that you won’t put your entire livelihood on your small account and eventually make regrettable mistakes.

How can one attain good money management flexibility with small accounts? To go straight to the point, I’d use some examples to show what I’d do if it was me. While I’m aware that one can even start trading with $1, I wouldn’t open an account with %1 – not even with $50 or $180. This is ridiculous! Based on my money/risk management rules, I’d never open an account with less than $200. This small amount would be put into a cent account, thus showing the balance as 20,000 cents. This would enable me to use 0.1 lots safely. The 20,000 cents would just make me start playing the markets in a safe way. However, I wouldn’t depend on an account that is less than $20,000 for a living. If my account was, say $2,000 or $5,000 or more or less, I’d need to find other sources of income.

I’d never put anything less than $2,000 in a mini/micro account on which 0.01 lots are allowed. Anything less than $2,000 goes to a cent account. In addition, if I’d between $2,000 to $20,000, I’d put that in an account on which 0.01 lots are allowed. If the minimum lots allowed on a type of account are 0.1 lots, I’d never fund it with less than $20,000. If the minimum lots allowed on an account are 1.0, I’d never fund it with less than $200,000. This is what can make me enjoy excellent money management flexibility. There’s no way around the fact that you’d go thru many losses in a row. Some losing streaks can even be painfully protracted, but victory is sure if you know how to defend your account.

It’s important to remember that trading isn’t an arithmetic exercise and these are real currencies, meaning you shouldn’t make a decision based on just your whims and caprices. Besides, always be on the lookout for unexpected news that can topple even the most carefully constructed speculative evaluation. Excellent money management flexibility is a tool that would make you overcome all the trials and tribulations you may experience as a trader.

I’ve a strong desire to tell people about the beauty of risk control in trading. Many traders have gotten support from risk management professionals when the going got tough. One of my past trainees reported that he was up to 9,000 points last year, but a series of losing streaks later came in. It just happened that whenever he opened new trades, most of them would sooner or later turn against him. This made him to be on the defensive for months. He went down to around 7,000 points, but he ended last year with 35% returns (7,000 points) – in spite of harsh losses. Most of his profits were successfully defended, not to mention his capital. Another client of mine who was formerly a losing trader said: “The knowledge about risk management in trading has touched me even to the point of tears.”

I’ll continue showing you some ways to be consistent in trading. Yet, to enjoy the benefits inherent in this, you need to learn how to choose those ways. Some topics like “Resist the Lure of High Risk” and “Developing the Right Attitudes towards Losses” will help you become a better trader and enjoy success. I’m sure that you’ll find my articles rewarding. If you also want to see how I apply effective risk control in my trading, you may subscribe here:

I conclude this article with some quotes from Thomas Wacker:

1. “You’ll have trouble finding a successful man who wasn’t driven by clearly-defined targets. Now almost every person has certain desires and goals, but very few make them become reality…. And to be really good at something inevitably requires experienced coaches and trainers as well as a high level of expertise.”

2. “As a trader, though, you’ve to decide on every little thing yourself: selecting brokers, marketing, products, strategies, trading times, investment horizon, learning sessions and time period s for analysis, just to name the most important things.”

3. “The earlier you plan your trading and structure it in the best possible way, the sooner you’ll be successful.”

NB: Please watch out for my coming articles with these titles: ‘The Most Important Trading Skill,’ ‘Recent Market Conditions,’ ‘An Intraday Moves Catcher – A Wealth Generating System,’ ‘Unlock the Power of Everlasting Triumph in the Markets (Parts 1 - 12),’ ‘How to Handle Uncertainties in the Markets,’ ‘The Issue of Stops (Come Back! Oh Come Back!),’ ‘Another EURUSD-USDCHF Correlation Strategy,’ ‘Experiment with Different Exit Tactics,’ ‘Mastering the Market Equilibrium Zones – A Time-sensitive Method,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple Positive Expectancy System – Trading Effortlessly,’ ‘Testimonies from My Subscribers,’ ‘Resist the Lure of High Risk – Part 3’ ‘Worst-case Scenarios – Facts Are Sacred,’ ‘Effective Swing Trading in Forex,’ ‘Gap Trading Revisited,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses - Part 4 (Losses Aren’t Abnormal),’ ‘The True Holy Grail – The Long Sought for,’ ‘Suicide Trading Techniques,’ ‘Forex Trading Vocabulary,’ ‘ Clarifying Some Issues – Part 5,’ ‘Navigating Turbulent Markets – A Double Timeframe Analysis,’ ‘Optimization of the USDCAD Hedging Strategy – Bringing the USDCAD to Subjection,’ ‘Overview of My Signals Strategies,’ ‘Uncertainty Has Become My Ally – An Interview with a Dogged Market Speculator,’ ‘The Cost of Discipline,’ ‘2 Examples of the USDCAD Hedging Trades,’ ‘Monthly Market Review,’ ‘Monthly Trading Report (August 2011),’ etc.

I end this article with this quote:

Your questions and opinions are highly welcome.

Thank you.

With best regards,

Azeez Mustapha

Forex Signals Strategist, Funds Manager &Coach

Senior Analyst

FX Instructor, LLC


Yahoo! Messenger ID: saazalmu

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NB: There is risk of loss in trading, but it is possible to be a successful trader.

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