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san diego bobl  15:18:03 GMT - 05/10/2009  
Plan 2 ........ short term trading

Short term trading to me is trading in a range bound market, i.e. a trendless market. There are numerous way to conceive a setup for a trade. I'll go over them, but first let's look at some "ground rules".

1) a short term trader must be aware at all times of what may interfere, or ruin, his trade set up. This begins with knowing in advance of any news or data that is scheduled... this website makes that available daily so your work is done for you. The point is this: if you perceive a setup by your methods, and it is close to a potentially market moving data release, like NFP (employment), FOMC meeting, Fed member speaking etc. This applies to all countries involved in your potential cross .... and again, this site has some real pros that discuss their country market moving releases, i.e shanghi bc for JPY crosses, JP or Pumpkin for Canadian dollar, and so on. Again, the idea is to not allow yourself to be in a position where this or that release may subterfuge your trade. If already in a trade going into a release, protect yourself...tighten your stop, or hedge your position. Don't let a strong impulse like that seen on Friday take you down

2) Always remain within your "heat index" figure. If you are risking 2% of current equity on a trade, then you base your size and entry point accordingly. This calculation is made before the trade is entered. For example........take the one hour chart of eur/usd over the course of last week. If your "heat index" figure totals 100 pips, and you are trading support and resistance, as is well defined in last week's euro.
In this example, a range had been set up at roughly ........
low end = 1.3250
high end = 1.3450
Now, by support/resistance methodology you want to buy the low end when approached, and sell the high end when approached. Since you have a risk of 100 pips, you may choose to get 3 contracts, risk 33 pips per, and you now within your heat index and know exactly where to enter, risk, and exit. This method, based on 1 hr. chart., would have given very solid results on 4 separate entries. Only Friday the wheels fell off this situation, stimulated by DATA, and we went off to the races.

3) Since the topic this weekend is "money management" .... veteran traders will always know their entry points, reasons, targets, and s/l in advance of the execution of the trade. You absolutely must calculate your pip/risk per trade and inject that into your heat index, thus the size of your exposure, and by default that is your money management.

Now, the actual set up can come in a large variety or combinations of various technicals ( the more the merrier). I like to find a confluence of technicals in support of my short term excursions.

Here are some examples of what a trader may wish to view and use in his strategy....
support/resistance, as exampled above
Fib lines
moving averages
elliot waves
pivot numbers
market profiles
indicator or oscillator set ups
and so on........they are numerous

My point is that a "set up" becomes stronger, i.e. greater probability of success, when a confluence of this set up items converge on a specific point or area

Lastly, if you condition, or confluence of indicators, is taken out, as it was on Friday accross the board, then you need to have another plan to trade with the flow (note: this is personal preference.......I NEVER fade a max excursion trade. If I choose to use any of the above methods, or combinations thereof, I still ALWAYS require the market to be moving in the direction of my trade. Often I'll go the 1/2 hr. chart for this confirmation.... a half hour close off support or resistance, or whatever, in the direction of my trade means at least I am entering when the market is showing some desire to go in that direction. Buying falling rocks or selling rocketships is NOT for me.

I am really trying to get this chart posting thing done... then I could display to you software that takes the guessing out of the deal. I have already programmed into my systems the parameters/conditions that I require for a set up. Hopefully I'll get this done right and you'll see, plus I'll annodate the chart with directions

Hope this helps in understanding trade/money management on shorter timeframes. Please feel free to follow with questions.


Beijing hoho  12:53:49 GMT - 05/10/2009  
Jay, bobl, FM, J.B...thanks for such valuable posts..really great..

GVI Forex Jay  11:09:36 GMT - 05/10/2009  
There have been some excellent posts this weekend and we would like to thank those who contributed. However, this is also an opportunity for those who need help or have questions to use this help/learning forum not only to view but to participate. It is not time sensitive so you can post your question or comments and we or one of our members will eventually reply.

When we started the Help Forum over a decade ago, we stated that no question is too basic or too advanced to be posted here. This has not changed. I have had several members over the years come to be and express a reluctance to post for fear of looking inexperienced or foolish. All I can say is we all started in this business at the bottom and I wish I had a resource like this when i started out and then along the way where I could learn from other traders rather than having to learn everything through the school of hard knocks. After more than 3 decades in thrs business I am still learning. One of our goals is to see you grow as a trader and in this regard, we encourage using this help/learning forum for that purpose.

sofia kaprikorn  15:44:23 GMT - 05/09/2009  
Great posts and truly condensed wisdom in the theme!

I wanted to post this LOSS < -> GAIN RATIO chart for the non-pro's as it's an eye-opener of the Importance of Money Management.

san diego bobl  15:24:01 GMT - 05/09/2009  
Money/Trade Management is the least talked about component of trading and yet is absolutely the most important function of trading. There is no generic version of the mathematics or fixed "level of risk" that fits all styles of trading. Sure, a true hedge fund, has a mathematically based rule component for the funds traders. A good fund has a compliance dept., risk management dept. (whose job it is to make sure all protocals of fund disclosures and charters are being adhered to by the trading dept.), and then of course the trading dept.

For purposes of this forum, I am going to attempt to share some reliable guidelines and rules of money management. This is somewhat difficult because the very first consideration of management is "what type of trader are you?" For instance, in generic terms, there are trend/position traders, swing or intermediate term traders, and short term traders to daytraders. Obviously, with all different styles and objectives, there is no "one shoe that fits all", in money management.

A now popular term in money management (started by Ed Seykota) is called the portfolio "heat index". By definition, the heat index is sum total of trades exposure. A commonly used figure in money management is each trade allocation has a max exposure of 2% of CURRENT equity. In FX, if a trader has on 5 separate trades with 2% risk in each, he has a 10% of capital heat index. Now, do you really want to risk 10% of your capital in any given set of trades? I doubt it.....and if you do, I'll see you in the soup lines!

Now, let's approach this as an "individual" trader. For my first example, and this is what is actually what I personally deploy in my work, let's consider trend/position trading. This is the type of trader I like to consider myself. But, having been trading for 37 years now, I have learned (the hard way) that just because I want to be a trend trader doesn't mean there is a trend in the market to trade as such. So, I have to have a "plan 2" to confirm to current market conditions and volatility.

Plan #1......
I find a trend in the market, and I want to get on board. In this case my initial entry and exposure (heat index) is a maximum of 2% of CURRENT equity (I keep printing large type for current equity because too many traders say, I started with 10k or 100k or whatever, and then base their 2% exposure index on that figure). Risk is always calculated to the exact amount of money currently in your account. I, by default, begin with a small position. If the market works against me, then I am out with a max loss of 2% of equity, a figure I can live with. If it works for me, then I like to add to the winner (I personally NEVER add to losers). Now, the function and dynamics of adding can be done mathematically or technically. I almost always chose the technical approach. The theory being........if a market I am in takes out a technical point, usually a breakout or push through a cluster of a support or resistance area. Then I add to the position. I recalulate my equity, which has by default now improved, and I use that new figure to adjust size into my "heat index". I don't wait long to add to winners, with winning money deployed. The faster you can build, the more bang for your buck. Build too soon, or deploy more than original heat index figure, and then potentially shoot yourself in the foot. Now, look at a trend real time........usd/cad. The past couple weeks have been very strong downtrend, on what was already established as a downtrend back in March when it broke the uptrend, failed to a certain level, made a countermove (very normal), then got on its horse. If you look at a daily chart, and just quite simply, added (for purposes of this discussion) 1 contract at the end of each downtrending day, then you'd have built up a sizeable position without adding any additional risk to your original entry/heat index. Judiciously, if you moved your stop according to money deployed, or technicals, or whatever, you'd have been stopped out once, with a profit. As a matter of fact, if you archived me, you'd find some of usd/cad trade, management, adds, and profits taken points. The point is.........if I were in a "fixed amount of trade exposure", i.e. let's say 1 contract, then my max gain on the original confirmed downmove would yield 400-500 pips. But, if you had added, which I normally in the forums just call it "sizing up", full size, etc. Let's say you had been able to deploy 1 contract a day, by the time you are taken out, you would that 400-500 pips, then, for examples sake, call 300, 200, 100 more pips per adds, then this is at least 2 to 3 times the size of the fixed trade.

When I am stopped out of a winner that is a trend trade, I mark that exact spot with a horizontal line on my chart. However deep the pullback, I'm not in it.........but, if/when they take out my pullback stop level, I reenter, then add again when the previous (in this case) max low is taken out, then I'm on board again for the next leg. And, if you added 1 contract with profits per excursion to that figure (cost of contract), then you will see that you have 4 or 5 times the size of the new entry. Your risk remains the same, but your profit capability has multiplied substantially.

The bottom line rules are this:
1) max exposure, or heat index, is 2 % of current capital
2) add only to winners, with money advanced by your original not increase your leverage by anything but profits
3) trail stops, or adjust stops, daily to conform to your heat index
4) never let a good winner, let's say a 4% winner, turn into a loser.............ALWAYS make sure you take something off the table if you are correct in your trade

Some caveats...
For me, I will often enter in multiples of 3.......originally planning to take of a third at a fixed point or technical point, then another third at another point, then I hold the remainder with a b/e stop. BUT then, as is now the case for me eur/usd, I now have on only a third size. NOW, the add process begins again. I am way in the money....on Monday, even though I won't be here, I will have an order sitting just one pip above Friday's high to add. I will also, if elected, move my b/e stop up, to a point that no matter what happens to the trade direction, I will still profit. If that holds all day Monday, then I'll resubmit directions for Tues. for adds and stop movement. And so on....

These are only broad strokes.........there is a lot more to it in reality, real time. If big news hits, against my position, I'm not going to wait for a stop to get hit if I am at my station. If I'm gone for a couple sessions, as I will be this week, then each day I check my possies and adjust accordingly.

On my next entry onto this thread, I'll address the short term to daytrader. We all do daytrades........why? Because even if a long term trader, if you enter and get stopped out, then it is often a daytrade or short term trade. Anyway, I adjust my style to what the market is giving me. If there isn't a trend, then I'll daytrade or short term trade. I often post this way because that is what is most popular on the FF side.

I'll close for now with is my personal strong belief that the real money in trading lies in trends and proper allocations, ie trade/money management, to position trade. Daytrading is a tough business. I've been in enough trading rooms/ floors to see 1000's of cases of daytraders, and the big picture of that is not pretty. If you go to the GVI side, where some fantastic traders and talent are, you'll find professionals mostly trade with the bigger picture or theme. You won't see much for daytrade posts in that forum........why? because they are pros. Enough said!


Lahore FM  15:17:35 GMT - 05/09/2009  
from my view the size of the trade and the timeframe that provided the buy/sell signal shud be inseparably connected.

minor exposures can come off the 1 hour or shorter timeframes and twice or thrice as large exposure may well be proper for a trade off a 4 hour or daychart.

additionally i consider it very importnat that traders take parts off to offset the initial not move the stop to b/e too early.rather take half off and keep the stop as was my experience it is possible that your trades off 4 hour charts ,with larger exposure and with half taken off the table and stop unmoved till a directional move starts can get you in the biggest winners of the trading career.

GVI Forex Jay  15:08:25 GMT - 05/09/2009  
Here are some examples of using a "meaningful" stop:

1) On Friday, eur/usd broke some key technical levels. It broke the top of an up channel that had been guiding the pair higher for the past 3 weeks and the 200 day moving average for the first time in 9 months. This was a powerful breakout that saw the eur/usd accelerate to the upside. For those counter trading, trading against the upper channel had been working so placing a stop above it was a logical place. For those betting on the 200 day mva holding, placing a stop above it was logical as well. The point is if either or both of these levels were broken, the risk would be for an acceleration to the upside so a stop was needed to guard against this event. See chart below.


2) On Friday, the eur/usd set its low for the day at 1.3342 in early Far East trading, which was around 7 pips above the 100 hour mva, While not an easy one to catch, if you bias was to buy, you could have used a tight stop below the 100 hour mva. 8 hours later, there was a dip to around 1.3375. Once again, if your bias was to buy, there was an obvious stop below the low of the day, which coincidentally was now below the 100 hour mva so some protection ahead of it. Of course, this was 1-1/2 hours prior to the US employment report so a difficult time to be positioning but it is an example how to use a meaningful stop to initiate a trade. See chart below.


MTL JP  15:04:27 GMT - 05/09/2009  
I am with J.B -- Focus should - and must - be on their own account' s available margin. When trader trades as IF everything is a Qtn of some voodoo off a chart or price action, it is just a cavalier attitude that pretends that one' s account balance or account' s available and active leverage left, does not count. This is a recipe for a rude wakeup call from the dealer eventually one day, what is called Margin Call.

Recall that a dealer / broker observed that "... In general, when traders start having adverse movements against their position, many tend to increase the size of their position with the purpose to average down their entry price in one last attempt to recover from previous losses...."

The key word that I take away from that statement is "many". The broker plays the numbers game. Unless a  player (real one with real funding) has large - meaning large

relative to the size of his active bets - funding available to him at the time of his adding the last trade doubling his position, said player by then hangs on to their trade on a wing and a prayer and if not totally, then very close to, abandoning control to a Margin Call.


Table below shows the difference between risking a small percentage of capital vs a larger one. It shows the effect on Account Balance. Of critical note, but not shown, is

also the required percentage gain just to make up a loss. For example, to make up only a 33% loss requires a 50% gain to make up that loss. (100 - 33 = 66. To make up 33 requires 50% gain on remaining available 66 capital.)

$ Balance         Risk             $ Balance         Risk 100,000           2%             100,000            10% 98000            1960              90000              9000 96040            1920.8            81000              8100 94119.2          1882.38           72900              7290 92236.81         1844.73           65610              6561 90392.07         1807.84           59049              5904.9 88584.23         1771.68           53144.1            5314.41 86812.55         1736.25           47829.69         4782.96 85076.30         1701.52           43046.72         4304.67 83374.77         16,63%            38742.04         61,25%
                 of account lost              of account lost

This 10 bad streak of trades scenario is a demonstration of simple money management rule and its critical effect on results.           


Another critical note, but not shown, is the required percentage gain just to make up a loss. For example, to make up only a 33% loss requires a 50% gain to make up that loss. (100 - 33 = 66.. To make up 33 = 50% of remaining available 66 capital).

  This need to put the pedal to the metal in a desperate attempt at making up a loss is a fundamental psychological character weakness catalyst that often makes an unsupervised (or undisciplined) trader take desperate risks. 


The trick appears to focus on mitigating losses so that they hurt as little as possible, and when do occur, they still leave the trader with a deep pocket so that, financially, he can continue to trade. This is a Survivor Skill.

sofia kaprikorn  14:03:46 GMT - 05/09/2009  
J.B. - tnx for the post - I like to read and understand how fund managers operate - your post in a way answers SH HL's question - because if you manage 100 mio account and trade 1:1 - that is possible with a 10 000 account and a 1:100 however the risk is not comparable

ZEUS - I asked on the FF only in light of this discussion here /certainly if you would like to disclose such info/ after you scale in and then double up the exposure - what is the per-cent risk you are willing to take in relation to your account size?

I ask this as many times I see you post about final allocation of some reserve cash, all-in, etc. - I ask this because I like to trade with confidence in my approach - however if one goes all-in and the bet turns out not in favor one should know what exactly damage he is prepared to take.
my questions are only in the light of the current discussion - tnx!

GVI Forex Jay  13:36:41 GMT - 05/09/2009  
JB. Thanks for your input. However, retail traders are in a different position than a fund manager, such as yourself. They have to trade with leverage since they do not have enough capital to trade 1:1. So the question is what is proper leverage for a retail trader and what % of capital should he/she be risking per trade.

GVI Forex Jay  10:19:43 GMT - 05/09/2009  
My approach to using stops is simple:

Identify a stop level that has a meaning for you and the way you approach the market, and then evaluate whether the risk is worth the potential reward relative to your profit target on that trade. In other words, use a stop that means something to you and tells you, if triggered, that your idea was wrong or alternatively, if it not triggered, gives your trade time to work.

It can be as simple as a specific support or resistance, high or low, moving average, fibo level, trendline, former trendline, etc. The point is rather than only using a dollar stop (although the amount you are risking is a factor whether you decide to make the trade or now), use a stop that has some significance to the way you trade. A key to successful trading is to create staying power that allows your trade time to work.

Other factors then come into play in determining whether to place the trade:

- Is the risk worth the reward?
- If the stop is too far away for your risk/reward profile, and you feel strong about the trade, then consider using a dollar stop.
- Alternatively, consider adjusting leverage down if using a stop that is larger than usual for your trade,
- Avoid placing stops at obvious levels.
- Decide whether to give the stop a little leeway depending on how strong you feel about the trade.(e.g. add a few extra pips to the stop to account for the bid-offered spread or to account for the risk of an overshoot)
In any case, you must stay disciplined and adhere to your stop and not let emotion get in the way.

SH HL  05:14:53 GMT - 05/09/2009  
end of day, daily move in FX world is max abt 3%(300-500pips), weekly price go straight way at best we can achieve 10%? most case fx price is playing within the mean number like n period moving average. my simple conclusion is you either trade high frequency with high successful ratio or use leverage to level up the return....otherwise there is better return in other asset classes for real money investors. Please correct me if i am wrong.

U.K. J.B  04:30:27 GMT - 05/09/2009  
Simple rules for me. I have seen the same mistakes time and again. Forex is all about confidence. The more confidence gained due to winning trades the more leverage you use because we all think it is easy to make money ( 1st mistake ) You then go back over your results and see some nice profits only to see all this hard work being slowly wiped out because greed sets in ( 2nd mistake). I saw a figuare of 5 % used for a stop/loss, this is far to high in my opinion.

I break down my portfolio into 4 quarters and very rarely do i use any leverage, unless i have really caught the move and want to capitalize by using profits that have been made. I start building a position by using 0.25 % of equity max. position normally around 0.75/100 % of equity . When the whole position is on i have my stop in risking 0.5 % and looking to make 1 1/2 %. If i am stopped out, i am stopped out for a reason, my timing was wrong, my reading of the market was wrong so it provides me with a better opportunity to re-enter, but i have only dropped 0.5 %. Three bad trades in a row i am down 1 1/2 % not a disastrous story, not 15 %. I also know that there are a few nice trades only around the corner where i can make this loss back because it is in easy reach . I will reduce my position size until the confidence and the correct reading of the market returns. Simple rules but it works for me. Good week-end to all. safe trading...

GVI Forex Jay  00:04:06 GMT - 05/09/2009  
John just wrote this and it is worth repeating as it brings up a good point about using stops:

One thing about forex (or any leveraged trade), you cannot hold onto a loser indefinitely. This why we are so insistent on trading with stops. Furthermore, any pro will tell you that you are going to be wrong a lot of times. Just accept it. Don't blow your trading funds on a couple of bad trades.

I would like to see a discussion of what you consider a good strategy for placing stops. I will post my approach later on but would like to see how others determine where to place a stop. I look forward to a discussion on this as I view it as crucial to trading success.

GVI Forex john  18:33:59 GMT - 05/08/2009  
Excellent question. For retail traders scale the numbers down. For those with smaller trading equity positions just work with percentages. In the book we suggested that no more than 5% of one's equity should be risked on any one trade.

One thing about forex (or any leveraged trade), you cannot hold onto a loser indefinitely. This why we are so insistent on trading with stops. Furthermore, any pro will tell you that you are going to be wrong a lot of times. Just accept it. Don't blow your trading funds on a couple of bad trades.

USA ZEUS  18:31:56 GMT - 05/08/2009  
Never use leverage unless you know how and why. Risk comes from not knowing what you are doing.

SH HL  17:45:29 GMT - 05/08/2009  
Thanks for the question,

if i have 5 millions, i would take 100,000 loss on a trade, then i can trade no leverage in 5 millions with a stop loss of 200pips or 1:100 leverage with same stop loss of 200pips only using 50k capital as margin. Looks like leverage is indifferent to those who have large enough capital, is this a true statement? To me leverage becomes a powerful tool in the stage of accumulating capital and less important concept if the pocket is deep. How others use the leverage and fit their own trading condition, many thanks in advance for sharing stories(if its not private...).

San Diego bobl  16:04:06 GMT - 05/08/2009  
Still busy trading today, but will add a couple bullet points and elaborate on the weekend.

Rule #1 Never take a big hit ... manage risk above all else
Rule #2 For the novice trader, never add to a loser; they often turn into bigger losers....only add to winners.
Rule #3 Avoid using any leverage if possible until such time as you have steady methodology that is profitable mth to mth

GVI Forex john  15:15:29 GMT - 05/08/2009  
Our suggested topic for the weekend Help Forum discussion came from a new trader who wanted to learn about how to survive and prosper in forex.

"Money Management Techniques"

To help the discussion along, here is Chapter 2 from
Forex Essentials in 15 Trades
The Guide to Successful Currency Trading

Free Chapter (PDF file)**:
Ch 2: The Importance of Money Management
copyright John Wiley & Sons, 2009. Used with Permission

**To download this chapter, you must be a registered (free) Global-View member. To register, click on the register button. You need not register to view the forums. You only need to register once.


Do not feel in any way constrained to address this topic only. If there is something you want to bring up, feel free to do so. We need also need future special topic suggestions. This feature will only work if we focus on items of interest to the G-V community.

We now starting our weekly discussions now on Friday afternoon NY time, just as the market winds down for the week. Jay, I and others will be checking in on the discussion periodically and will participate when we feel we have something to add.

We have three simple rules:
  • Don’t over-leverage.
  • Don’t over-trade.
  • Always trade with a stop.

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