Forex Money Management

Before we get into the actual tactics of trading the Forex markets we have to cover what

I consider the single most important element of trading: money management.

We can be the best trader in the business, but if we let our losses exceed our gains we’ll end up being a loser!

I often compare trading to gambling. If you’ve read my previous eBook, “$$500 Dollars per Trade,” you know what I’m talking about.

It’s called “gambler’s mentality.” If you gamble and make money you believe you can make more if you just keep betting more and more. Some gamblers even feel guilty about winning so much in such a short time – but that’s another story.

When you gamble at a casino the odds are pretty much even. Less than one percent at the dice table. That means you should lose only one dollar for every one hundred wagered.

So why is it 97% of the people go home broke? Do I have to answer that, or do you know the answer already.

It’s called greed.

And that’s what you must overcome if you are going to be a successful trader.

Here’s what happens if you’ve been making money and start to lose (which is inevitable). First, you lose control. You bet bigger and bigger as you lose. You toss aside whatever strategy was making money for you when you were winning. You start “chasing” your money.

Any idea of making a profit is abandoned. Your only thought is getting back even.

Until, of course, it’s time to go home.

And that’s what this chapter and the Forex markets are all about. You’re already home and the markets are still open. Forex is a 24 hour casino, right on your PC! And, unlike internet gambling, it’s legal.

Nevertheless you must accept the fact there are millions of traders out there – like a vast casino – that all have the same idea, “Make a bundle of money, and go home.”

Well, we’re going to rise above that “herd mentality.” Just like a cattle stampede you’ve seen in the movies. Do you want to be a part of that?

I didn’t think so.

So, here’s how we handle our money, plain and simple.

Let’s go back to my pizza trade. I made $10 using about five hundred dollars. Let’s see. . that’s two percent on my money ($10 divided by 500 . . duh!).

But what if I had lost $10 dollars? That’s two percent also. Would you agree that’s a reasonable amount to wager to make two percent? So, if we can just keep our losses at two percent we can maintain control of our money.

But now let’s say we actually had $1,000 dollars in our account. Our profit and loss would be just one percent. Are you starting to get the picture? We don’t have to “bet the farm” to make two percent. We just have to do the math!

And the Forex markets allow us to do that. We know exactly where to get in and where to get out to make or lose two percent. And many times we’ll lose much less than two percent – often just breaking even – which is fine with us.

Remember, our original goal is to make five percent per day. And that brings us to the hard part. What do we do when we’ve made five percent?

We quit for the day. “But why quit when we’re making money?” you might ask.

Let me ask you a simple question. What are you going to do if your very next trade is a loser? Are you going to quit then? Once again: I don’t think so!

Now can you see what I’m getting at. Our overall goal is to double our money every fifteen days. So, maybe it takes eighteen or nineteen because we had some bad days.

What’s a “bad” day? It’s when we lose ten percent of our money. That’s $50 on five hundred. Once again we quit for the day if our losses total ten percent of what we started the day with.

Some traders will argue that’s excessive. But, as we’ll see, our strategy is so strong that it’s rare to have a “bad” day.

And the next day we start out like nothing happened. We have a fresh mind and attitude and pretty much know our strategy will overcome our losses.

We’re not trying to “get our money back.” We’re not beating ourselves up because we had a losing day. We’re in control!

Now, let’s recap all this.

1. We never risk more than 2% on any one trade.
2. We quit for the day if we’ve made five percent on our money.
3. We quit for the day if we’ve lost ten percent.
4. We also quit at 3:00 PM Eastern no matter where we are simply

because the markets slow down around that time.

If you start your trading day like I do at 8:30 AM Eastern (5:30 AM Pacific) – since I’m retired – I’m usually done within 2-3 hours. Often in less than an hour!

If you have a day job you might trade after dinner instead of watching TV. Of course when and if you make a go of this business you can quit your day job!

Now, here’s a couple tips to help you maintain your discipline.

First, to keep you from going back to the trading table after you’ve quit, try using this website: http://www.webjillion.com/index.php It’s called Temptation Blocker, and once it’s activated it won’t let you go back to any program you’ve selected for whatever time you input. (You can override it but it takes an effort.)

Finding a Forex Broker

First things first. We need a broker to handle our transactions. This is a little dicey for me because I use a broker I consider the best: OandA. Not all broker/dealers are reputable. There are scoundrels at all levels. Since this is a world-wide business it pays to check out who you’re dealing with. I selected http://www.oanda.com on that basis and am very happy I did so. However, not everyone agrees with me.

It’s my own opinion and experience. And I don’t receive a dime for referring you to them. You may already have a broker of your own, but if not then give them a try. For one thing all the info you’re going to learn and see in this report is from their platform.

On the other hand, if you’d like to check out additional brokers, there’s a pretty good collection of opinions at: http://www.forexpeacearmy.com

Here’s a review from that site that expresses my sentiments completely.

From: Nick in Brisbane
Date of Post: 2008-10-27
Review: “I've been using OandA for almost 2 years and haven’t experienced any major issues with their service or platform. Their charting software is not the best but the most important things for me are tight spreads on the majors and reliable execution of orders.

The bitching that goes on here about wide spreads during data releases just confirms my opinion that most would-be traders here are novices with very limited experience or knowledge of themechanics of financial market places. During volatile market conditions all brokers have to face and deal with widening spreads from their liquidity providers. That’s the nature of the global nterbank market. For some reason all the "Johnny come lately" trade-from-home novices that frequent this site think that for some reason brokers such as OandA should bear the cost of this volatility by guaranteeing fixed spreads.

Trading currencies intra day is not a get rich scheme but a highly skilled niche skill. If you can’t devise a way to make money without betting on split second volatility during data releases then go and find something else to do.”

What he’s saying is there is widespread trading based on news events. For example, if you think an interest related report is coming out that is gong to move the markets, you jump on it.

But let’s be honest. Do you think you can catch that kind of trade consistently when your
competition is big banks with millions of dollars?

I don’t trade news stories. Never have. It’s just not worth the grief if you’re on the wrong side. So I would strongly encourage you to refrain from that kind of trading unless you have a really good crystal ball! Now that we’ve got that out of the way, let me be more specific. I only trade the Eurodollar/US Dollar (EUR/USD) pair, but my strategy works with any currency pair.

If one currency gets stronger than the other then the numbers go up (or down). To tell you the truth I don’t really understand why. The less I know about economics the less likely I am to be influenced one way or the other!

I just know how to trade the numbers!

Now, this is very important. On most days, at precisely 08:30 AM, Eastern time, and then again at 10:00 AM Eastern, a variety of reports come out that can shock the markets. We do not want to hold a position around these times!

Once again, for the few moments before and after these times, do not trade. When the
fireworks are over we go back to our regular trading pattern.

We make our profits on small, consistent trades that add up to five percent per day. We don’t shoot for a big killing that could result in devastating losses!

If we don’t reach our goal of five percent, possibly because of a very slow day, we don’t try to make up for it. We simply wait for tomorrow to continue our efforts.

We’re not in a hurry. We’re not greedy. We know we’re going to the world series even though we’re going to lose a lot of games on the way!

Before I finish beating this issue to death, there is one more thing you must take into account and that is the meeting convened usually eight times a year by the Federal Open Market Committee (FOMC). This is the group (commonly called the Fed’s Fund Rating) that defines interest rates.

This has a huge impact on the currency markets. DO NOT try to trade during the few minutes before and after the report is made public, around 2:15 PM. Eastern.

To obtain the dates, go to:

http://www.federalreserve.gov/monetarypolicy/fomc.htm#calendars

End of issue!

Forex Background

We’re going to start by debunking a bunch of myths.

First off, you don’t have to understand a lot about the currency markets. Most of us know there is a difference in the exchange rate if we take a trip to Canada, or Mexico, or Japan.

If you were to go to Japan right now, a dollar would buy about 120 Yen. You go to a kiosk or money changer, perhaps at the airport, and purchase whatever amount you think you’ll need. That’s easy enough.

But what if you’re a large bank doing business overseas. Your client has just purchased 1,000 new Toyota’s and they need to be paid for with Yen. That’s not so easy. That’s why the Forex markets exist.


Now for some facts. The market is huge. More money changes hands each day than nearly all the stock exchanges combined. That’s not that important to us as traders because we can trade with as little as $100.

There’s no commission charged, as there is at a stock exchange. That’s good. We don’t have to worry about paying extra if we get stopped out of our trade. (I’ll explain laterwhat that means if you’re not an experienced trader.)

Instead of a commission, a small spread between prices is leveled just like when you change money at the airport. For example, my pizza trade entry price was actually 1.33562. I had to make slightly more than $10 dollars to net ten.

The most important thing I want to impress upon you at this time is risk control.

You’re going to make money. But you’re also going to lose. How much you lose will determine your net profit. Always keep that concept in mind. You must control your losses if you expect to make the kind of money we discussed earlier.

Lastly, this is a “hands-on” trading manual. I’m going to train you to make money the same way I trained many pilots to fly jetliners.

That’s right. For many years, as an airline captain/instructor, trained by Boeing, I taught other airline pilots how to fly jetliners.

So what’s that got to do with trading? Just this.

When it comes to flying airplanes, you want to do it in the safest way possible. And the same thing is true when trading! You want to do it in the safest way possible.

Much of the material will be very specific. Much of it will be repetitious. But that’s how you learn. Don’t try to outguess the strategy. Everything you’ll learn has a purpose.

Keep an open mind and you’ll do just fine.

You don’t have to be smart. You don’t have to have a degree in rocket science.

You just have to follow the rules and procedures. Just like flying a jetliner!

Introdution to Forex

You’re about to partake on a journey like nothing you have ever experienced. By the time you’ve reached the half-way point of this book you’re going to say something like, “Maybe it really is possible to earn $500 Dollars a day!”

Let me introduce myself. I’m G.C. Smith. Perhaps you know me from my previous eBook, “$$500 Dollars per Trade.”

Maybe I’ve met you at seminars we’ve attended. Or maybe we’ve exchanged e-mails in the past.

Whatever the case, you’re going to enjoy the trip I’m going to take you on as we learn all about how to trade the Foreign Exchange Markets – Forex for short. It’s now 5:30 PM, Pacific Daylight Time on Sunday, November 9th 2008. I’m getting ready to watch 60 minutes on TV.

But first, I just happened to see an easy trade shaping up on my PC. I see so many of them it sometimes makes me frustrated. It’s like the patrolman watching speeders go by:“I can’t catch ‘em all!”

But tonight I bought a $10 dollar pizza from Papa Murphy’s. If I can trade the Eurodollar against the US Dollar from 1.3355 to 1.3350 I’ll make ten bucks.

Using the tactics you’re going to learn in this report I did just that. It took nine minutes. And this isn’t even my normal trading day – Monday through Friday.

Okay, maybe I’m showing off. But, now that I’ve got your attention, let’s look at my trade a little closer. Because this trade represents what could be your goal to make $500 Dollars a day – or one million Dollars by next year.

There’s no reason you can’t, as long as you follow the rules I’m going to outline and maintain the discipline it’s going to require.

Let’s take a look at the chart of the trade. Each bar is equal to five minutes. We’ll explain more about all this later. Note how prices are swinging back and forth? We want that. If they remained flat, no one would make (or lose) anything.

And, they were trending down! We sold 20,000 units (equal to $2 Dollars) using about $500 trading dollars. We entered the trade at 1.3355 and closed it at 1.3350. That’s equal to five, so-called, “Pips.” Five pips times $2 is ten Dollars.

Again, don’t worry right now about all the fancy words. I don’t know an awful lot more than you about what all this means – and I could really care less.

But I do know how to trade. And that’s what I’m going to teach you.

So, hold on to your hat, and bear with me as I try to describe what could be a turning point in your life.

Let’s start by crunching some numbers. How long do you think it would take to double our money if we made five percent a day? That’s right. Five percent a day!

Before I answer that let’s go back to my pizza trade. I made $10 using about $500 Dollars. If we were to make five percent on $500 Dollars it would be $25 Dollars (500 times .05). With just one trade we’re almost half-way there!

If we earn five percent a day it will take fifteen trading days to double our money. Hard to believe, but true.

Take a look at this table.

DAY START 5% END TOTAL
1 500 25 525 25
2 525 26 551 51
3 551 27 578 78
4 578 28 606 106
5 606 30 636 136
6 636 31 667 167
7 667 33 700 200
8 700 35 735 235
9 735 36 771 271
10 771 38 809 309
11 809 40 849 349
12 849 42 891 391
13 891 44 935 435
14 935 46 981 481
15 981 49 1030 530

Pretty impressive wouldn’t you say? If we could just double our money every fifteen days, the sky’s the limit!

In fact, let’s see what it would look like.

1st fifteen days: $500 goes to $1,000
2nd fifteen days: $1,000 goes to $2,000
3rd fifteen days: $2,000 goes to $4,000
4th fifteen days: $4,000 goes to $8,000
5th fifteen days: $8,000 goes to $16,000

In just a little less than three months we could be earning five percent on $10,000 Dollars – $500 per day!

Want to carry this a little farther? $16,000 goes to $32,000. $32,000 goes to $64,000. $64,000 goes to $128,000. $128,00 goes to $256,000. $256,000 goes to $512,000. And $512,000 goes to One Million, Twenty-four Thousand Dollars.

Is this really possible? Yes! Is it realistic? Maybe! But, not without a great deal of training and discipline.

For example. Right now, would you take $10,000 Dollars and try to double it? I doubt it. It’s too scary.

How about $500 Dollars? “Yeah, I could probably afford to risk that much,” you might say. Whatever amount you start with, that’s when your training begins. And, as you became more and more experienced, you can begin to trade larger amounts with more confidence.

That’s the concept I’m going to teach you.

How to handle ten thousand dollars as if it’s $500.