Okay, welcome to How Do Bankers TradeForex? Now this is the most important aspect part to Capital Management.
Nowthis is where I believe, you know, most retail traders actually loose tradedmoney and thats primarily because they don't have a Capital ManagementSystem to guide their trade plan, their capital, their risk/reward ratios and thewhole structure of their trading.
Now let me just come back to the bankers and theway they do it and then I'll give you a quick slide show through ourCapital Management System and show you how it works.
Now with the bankersthemselves they're given sort of weekly mainly more primarily monthly limits okay, their given a budget so they have to make a Million Dollars.
So the bank doesn'tnecessarily want you to risk a Million bucks to make a Million bucks, right, itdoesn't really make sense so if you had a Million Dollar budget over thecourse of the year they might allow you, (this would be for the junior traders)they might allow you a 300k drawdown over the course of that year and whatthey'll do is they'll break it down over the 12-month period, so you simplyget on your calculator and 300 divided by 12 then you've got all by 52, you'vegot your weekly drawdown.
Which as a Chief Dealer and me managing the team Ilike to have a weekly draw down on the guys because if they have a brainexplosion and then they follow it up with some erratic trading aroundvolatile markets, you can lose your monthly or a couple of months of budgetvery quickly.
So you want to have those limits and as a Chief Dealer they wouldcome over and say to you “Okay, listen I'm down like 50 grand right that's my limitI need to tell you that” then I can make a judgment call whether the it was asituation where it was a mistake or they just got caught out on a certainrelease or whatever it was and then tell them to keep going or not right.
So as I said the traders have a budget they're looking for and they're tryingto make the big bonuses at the end of the year so what they do is say they'vegot a hundred thousand dollars drawdown for the month right, and you can put thatinto say four weeks and you've got like a 25k drawdown each week.
Now as I saidthis is more for probably junior traders as they come out of a graduatejunior role, your budget would be like a Million pounds or a Million US or a MillionAussie your senior guys your looking at at least 5million bucks, right and with that you'll have probably a couple million bucksexposure to play with so your limits are different.
Now let me just come back tothat say junior trader level, right a Hundred Thousand bucks over the course of a month, 25 grand say a week, right so what they'll do is they'll look at theweekly schedule okay, and they will start to allocate, so there's like three reallycracking opportunities that they think that could maximize the opportunityright so they might go through their 25k you know what this one is actuallyparticularly higher I'm going to put half my capital into that opportunity ifit arises, and then the others i'll just trim my trade size.
So what they'redoing is they're dynamically managing their capital, by their limits because asI said, you can listen to last week's webinar and understand that the bankers themselves aren't given a capital management system.
They're just givenlimits and then go mad right so, that's why a lot of guys don't make it over thefirst couple of years because they can't get in their head how to manage thecapital, they're breaching limits as I said if you're breached limits you'reautomatically sacked.
Right so it is a very important structure but at the endof the day you take out the risk you take out the profits and the managersknow that, so do the traders so they will try to maximize their limits aroundthe best trading opportunities and that's how they make massive gains veryquickly.
Now like most traders, if the market doesn't give them anything they won't look to utilize their full limits they will go inside their limits and tradesmaller lot sizes until they see a cracking opportunity where theFundamentals match up with the Technicals and that's when they willstart to utilize their full limits, all right, so that's the way the bankers doit, it's very methodical it's very structured as a Manager it's verystructured as a trader you put those two together it's a very stringent verydisciplined system that ensures the safety of the team longevity of thetrader and hopefully give them every opportunity to make those big bonuses, all right and that's where I want to bring it back to you guys and gettingback into when I set up trader4traders in 2009.
I was trying to think ofit easiest way to adapt that Capital Management limits system that we have in the banks, to a retail trader or investor, okay, give you somestructure.
Now as I said you having limits at home you'll break them andjust keep going but if you can get disciplined around a Capital ManagementSystem or structure that has a defined drawdown process and draw up process itgives you absolute structure.
Now the easiest way for me to explain this toyou is to take you through our Capital Management System.
Okay, and I'll run some slides here then I'll come back have a quick chat at the end and hopefully answer afew questions and then you'll understand how important this is, and for thosetraders that have joined us and are part of Traders4Traders you wouldalready understand how important the Capital Management System is.
Once yousee it and you embrace it, you know you're going to be trading for a long time, I was going to say have a huge amount of longevity but this is whereyour trading everything stems from, and as I said if you don't have this CapitalManagement System and not just our system but “a” system which controls everyaspect of the entry, exits, risk/reward ratios, your capital itself then youdon't have a structure right, and that's why traders generally bounce fromstrategy to strategy because they're not sure what works and you knowwhat, why don't last too long, because they're changing strategy to strategy tostrategy on all these different weird forums, what they end up is, they end uprunning out of capital, but this system will ensure you do have longevity andyou can try different things.
Funnily enough if you go through thewhole Pro Trader course, it will give you that much structure and profile, you'll already be making money so you'll be automatically getting rid of allthose poisonous toxic things that you may have learnt online just throughGoogle and I think you'll really enjoy this so let me just turn over to theslide show, and we'll get you started.
Okay, so what's your biggest fear withtrading? Well, I know what it is, it's actually the fear of losing your cash, right, now this is the number one reason why you need a Capital Management System, now going back to the bank is, they have limits, okay because the management fears that lose all their cash, but you yourself, you have access to your money so you need this structure and profile right, to give you longevity as atrader and protect your money whilst you are trading through these markets.
NowProfessional Capital Management think of it this way, it's planting the seed for your overall trading career.
If you want huge profitsyou know in three months six months in a year's time that are going to allow youto change your lifestyle, well you need to get this Capital Management Systemunder check, grow it, develop it, stick to it and that's where the cash is.
Goingfor the big winning trades straight up is the problem for most traders butunderstand it's not about constraining risk, it's just aboutcontrolling it right, if you take out the risk you take out the cash understandthat profile.
No Capital Management? Well you're going to be a 'sitting duck', because once the market turns against you, you can potentially lose all yourmoney in one hit.
So a Capital Management System though, doesn't stop you havinglosses.
What it does is, it's about effective risk management, it's abouthaving shallow draw downs and very quick draw upsthat's the whole profile as you can see on this chart here, the blueline effective risk management, someone who didn't have any Capital Managementwell that's the red line, and you can see it's completely opposite, you havemassive drawdowns because you can't control your risk around certain eventsand that's where you have massive drawdowns and that's, there are things thatyou have problems with getting out of.
Right so, coming back to the CapitalManagement System, okay, it's about managing your actual cash obviously, butthere's another couple of components your risk to reward ratio and also your tradeplan.
Three different parts to your trade profile that you need to stick to.
Riskreward ratio, what we talking about there? Well, on the general face of it when you look at a trade setup it should have a three to one risk reward profile, right, if it does, well then you've probably got a good trade setup, if it doesn't andit doesn't look like there's three to one in it well then you know what maybe it is thewrong trade.
So it's a good way to stop you getting into bad trades and good way to confirm that this trade has good potential.
Your trading plan, well that's pretty simple, your entry and your exits, okay this has to be donebefore you put the trade on otherwise you know, if you don't have a set planbefore you put the trade on, well things are just going to change.
Having a setprofile and a set trade plan, with your entries and your exits is critical.
Managing the drawdowns, back to the cash this is all about managing yourcash, so you don't run out of money before the good times come.
It's prettysimple and the structure of the Capital Management System right it's up theelevator right, you're making quick capital and when you lose cash, it's downthe stairs, nice and slow, to step it down as you go.
Now, let me just run youthrough the four consecutive loss rule, okay this is the whole profile that Iset up in 2009, okay you've got draw up levels and when you hit these draw uplevels you won't go back if you stick to the four consecutive loss rule I shouldsay, you won't get back down below your previous level and that's what thegreat thing about this whole system is now let's have a look at the fourconsecutive loss rule.
You start with a trading capital you have one, two, three, four losing trades okay, you just decrease your trade size in half.
It's simple, how hard can it be? This is not hard at allto understand, once you get back to your original trading capital, okay you getback to your original trade size.
It's very simple very methodical, you have to bedisciplined to stick to it though.
Let me just explain to you how it works.
Nowlet's just look at that overall parameters around the four consecutiveloss rule.
Okay you've got a risk reward ratio of three to onenow that's automatically encapsulated or captured I should say, in our trade planyou've got your entry your take profit of 75 points and your stop loss of 25.
Now theADR that's short for Average Daily Range when the majors kick into gear ifsomething happens, they generally run up like a hundred and fifty pointsalright, so that 75 points is well within the high and low.
Make sure thattrade gets executed and you're building capital, now of course you can widen out thestop-loss, if you widen out the stop-loss you've got to widen out the take profit.
Nowthe danger is you get closer to say a 50 point stop-loss your take profit will be150 points and for you to take profit on those trades isa little bit sticky all right so by all means 30 maybe 35 points stop-loss, butdon't go beyond that otherwise generally you've already got the wrong trade anywayand the markets moving against you so the minimum amount of risk you need toput on is 25.
Now the capital risk, two and a half percent the capital you gainor making a full profitable trade is seven and a half percent, and with thisprofile of course your objective is well about 100 percent, return.
All rightso let's just go with an example here you have $10, 000, okay we're risking witha trade plan once again 25 and 75 okay two-and-a-half percent of our capital istwo hundred and fifty dollars, so a 25 point move gives us a trade size (andyou're working at your trade size backwards) so at $10, 000 starting pointour full trade size is 100K and that gives us a two hundred fiftydollar loss and there's seven hundred and fifty dollar profit.
Now let me justgo through the drawdown process and show you how this works.
So if you have four losses in a row your down to $9, 000 you're down a thousand bucks you decrease your trade size in halfstraight away, you get to drawdown level 2 – okay decrease your trade size again 25k you're now incrementally reducing your trade size very quickly.
You get todrawdown level three you have $10, 000 and you don't go below that trade sizeotherwise you will never make your way back out.
Right now I'm giving you avery good example here of where you've got 20 losing trades in a row, which is a hell of a run I've got to say but you're still down less than$2, 000 or less than 20% of you starting capital.
Now if you didn't have thiscattle mating profile we'd probably close to ZERO and that's the beauty ofthis.
But let me go through the draw up process and then I'll run you throughother scenarios the draw up levels you can think of these as specific goals foryour trading.
You need to stick to them they are the guidelines of yourbusiness profile I was going to say your trade plan but your business plan overall.
Each goal isvery important, focus on the next one above, not the one four or five goalseach one is your next goal and that keeps you on track.
Now the good thingabout these specific draw up levels when you hit them, you can double yourtrade size and be confident knowing that you're not going to go back down belowyour previous starting point.
That's for all of these levels, so draw up level 1you make $5, 000 you've 15 grand but you double your trade size to 200k you're nowmaking one and a half thousand dollars per trade, alright and that''s agood thing, so you would have made money so you get to draw up level 2 -you're at $25, 000 you double your trade size to 400kand if you've sticked at the four consecutive loss rule you will never goback below $15, 000.
Once again you're confident you're already trading withmoney you've already made.
Then the next level 40, 000 draw level 4 75, 000 droplevel five 140, 000 drop level six two hundred and seventy thousand now the WTRokay, that's the Winning Trades Required how many winning trades you need, butdon't forget they're FULL winning trades of 75 points and you're not going to getthose all the time, but for this model it's best to show you the full maximumprofile, right, so as you can see on the far right hand side you've got theleverage, so as you go through that, okay you can see from the starting point you'reonly trading ten to one, so that covers trades in every jurisdictionokay, minimum 25 to one for the Japanese and Singapore traders this fits thewhole profile the whole way up.
That's the idea of showing you theleverage and if you see how the trade size doubles as you get more successfuland you don't need a lot of winning trades to get there.
The drawdown process, now let me just go through this a little bit in more detail, okay it's a parachuteas I said it's like going down the stairs it's just to slow you down on theway it's not like a quick lead balloon now let me just go through the DrawdownProcess okay in detail.
You're at ten thousand dollars you've had your firstloss you're at nine seven fifty, you have a second loss you're at nine a halfthousand your third lost your at nine 250 you have your fourth loss you'vefourth lost in a row, you're probably a little bit demoralized your at draw downlevel 1 you've got to decrease your trade size in half, and then you can seeyour trading when you're losing less it's less of an impactso as you continue and so for example we go through and have another fourlosses okay you're only losing 500 bucks so that's that it keeps you in the game, and I'd say if you have this profile your over trading yourselfor the market your trading when the market conditions are not suitable butthat''s the whole profile, and let me show you the draw up process becauseyou won't appreciate the drawdown process until you've had a bit of adrawdown process so say we're at $8, 875 you're at $50, 000 you have a winning tradeat $9, 250 another winning trade, you're at $9, 625 another winning trade, and you're back at$10, 000 and you increase your trade size back to normal.
So I just want to showyou the way down and that the way back out it's very methodical, and so what youshould be doing is, what you're looking at is you're thinking okay, you reallyneed to take your time with trade selection because this is very importantto your overall success and your capital management structure now the draw upprocess is very methodical very structured and this is going to keep youon track.
So once again starting with $10, 000 capital, okay you have onewinning trade you're $10, 750 and as you continue to have winning trades yourcapital just slowly builds.
Now this may be a little bit frustrating at first butit won't be once you start to hit the draw up levels, and that's when you startto really make serious gains.
Okay so six point six winning tradesyou're a draw up level 1 $15, 000 I know it says seven there but you actuallydon't need a full winning trade to get to that $15, 000 and now you arestarting to make some serious cash making $1, 500 a trade.
But let me show you the drawdown process because the four consecutive loss ruleis active the entire time you're trading regardless if you're in drawndown or draw up.
Here at $13, 750 okay, you have four losing trades you lose a thousand bucks you'reat $12, 750 you're drawing down very quickly you don't wait until you hit$10, 000 your starting capital.
That's theluxury of this program the drawdown level 2 $12, 250 drawdown level 3 $12, 000drawdown level 4 $11, 900 okay you still almost 2, 000 bucks, 20% up and you'veactually just had 16 losing trades in a row which is something that is almostunthinkable.
Right but that's the good thing about this, if you stick to thestructure, as you make money you will never keep going back down belowyou've your previous levels, so let's just look at the draw up process fromthat $12, 000.
Now you have to wait until you hit the previous draw up level, sodrawn down level 2 is at $12, 250 okay you get to $12, 250 after four winningtrades, you're increasing your trade size back to that original starting point again$25k and then you continue on until you hit the next level $12, 750 get back at$50, 000 and away you go.
Now that makes sure it gives you absoluteprotection, but we can take this a step further and that's why as you make moneyyou can start pulling some of that capital out of your account there's noneed for it to sit all there in the account right most of the brokers do give yougreater leverage than what you're actually trading and this is how we cantake advantage of it.
Now we worked this out over a number of years just from ourclients, we found most people were having trouble when they got to draw up level 3 andthat's because they had too much cash in their accounts and they got a little bit lazya little bit sloppy with their capital management, a little bit sloppy withtheir trade selection, so what the idea is we want you start taking cash out asyou start making money now the easiest way to work this out is if westart with draw up level one it's just the difference between all these levels all thedraw up levels so $5, 000 after draw up level 1, $10, 000 atdraw up level 2, $15, 000 at draw up level 3, $35, 000 at draw up level 4, $65, 000 at draw up 5, $130, 000 at draw up level six.
Now the idea is, if you've got$40, 000 in your account okay, or say $15, 000 you'll make different trading decisionsthan if you've had $40k right? We still trade – we still increase our trade size andstick to the four consecutive loss rule but your you'll be morespecific and more targeted if you stick with just $15, 000 in your account instead ofjust $40, 000, right and as you can see with the leverage hereokay forty to one we're still hitting our straps here on the initial outsetbut as we go up through the process you can see how the profile sort of sticksaround at fifty to one, and that works for most ofthe locations, so when you are and I've got here the capital required for Japan andSingapore, USA and other, you can actually sort of see how much capital you needto stick in the accounts or keep in the accounts.
Unfortunately for thetraders in Japan and Singapore once you get up to say draw up level six insteadof keeping $130, 000 in your account, if youwant to keep managing this whole profile you're going to have to keep $256k on your accountbut for everyone else, okay you can have that minimum balance in your account, andonce again allows you to reap the rewards of your trading as well asreduce your risk with the trading platforms.
So the idea is once you starthaving draw ups leave the minimum amount in the account, the rewardingprocess is hugely important don't underestimate it.
Start taking some cash outand spending it that's how you will really appreciate what you're doing andthat keeps you on track that's about refocusing you.
To make moremoney, the biggest problem as I said as you get into the draw up process it'sactually you will lose your ability to think clearly put it that way.
You willthink you know more things about it than you ever have and you'll start a tradevery big and you'll have some losses, some major losses.
So stick to it.
There'sone clear way to do this it's actually focusing on the number oftrades that you need to go from one draw up level to the next, okay so you know here the minimum balance you need to keep in your account, as we go along.
That's the difference between the levels, that's easy tounderstand those red numbers they're the number ofwinning trades required to go from one level to the next.
That's what I want youto focus on, don't think of the cash amounts think of the number of winningtrades, I think it's a good way to really keep focus and let me give you anexample, how to recalculate because in the real market right you'renot gonna make 75 points on every trade you may make 25, you may make 40 and sofor this instance you made 40 points you lock in four hundred bucks, so quickly werecalculate because it's not 75 points you need to do a quick recalculation, yougot your 5000 – 400 you need need to make $4, 600to get to that next draw up level how many trades required is that? Well it's$4, 600 minus our maximum profit you need six point one threewinning trades, this is a good way to stay focused as I said, trade 2 you makefifty seven points $570 recalculate $4, 600 minus 570you need to make $4, 030 how many winning trades is that? Well five point three seven right, and this isa good way to keep you on track in actual fact I would suggest you buysome post-it notes and write that number down so every time you come back to thecomputer you're not thinking of the cash you're thinking of the number of winningtrades you need, that's a great way to keep you on track.
Now let me just bringthis into reality and this brings it back towards where the bankers are.
Okayand how they manage their limits, okay Capital Management meets thefundamentals or if you actually say meets reality, okay.
Not every tradingsituation is the same so what we want to do is is give you the flexibility toadjust your trade size on the opportunity but still stick to the samedrawdown levels.
The levels are still there, but you have this structureand the flexibility to adjust your capital from say from just a rigid trade sizeto adjusting it on the opportunity itself, so instead of having a hundredthousand you might have twenty five thousand right but if you do hit thedrawdown levels you decrease your max trade size in half, but if youget back to the starting capital, you're back to your original trade size.
Samestructure, different underbelly, alright now let me explain this to you, somaximum trades are still two and a half percent of your capital at risk, so this iswhere you really need to focus on your understanding of the market, specific trades, entry levels and the trading opportunitiesso focusing on the job at hand.
Very important because not all tradingopportunities are equal okay you've got all these economic datareleases that are high impacting and they're high impacting because theycan change momentum very quickly if we've already got momentum and they comeout and they go with that momentum well then you have a really good strongstructured trade okay so what you need to do is, have a look at your capitalmanagement structure, if you've had no losses well then you can potentiallytrade one, two, three or four trades on this one opportunity, you need to assesshow good an opportunity it is.
If you've already had some losses well thenthere's no chance of you maximizing with say four trades if you've had two lossesalready so make sure you understand this it's very important and a lot of peoplebend the rules here.
So let me just give you an example, so say you're at fifteenthousand bucks you're trading $200k you need six point six winning trades toget to draw up level 2 but we've got a CPI release, high impactingperfect you had no recent losing trades, you'vegot four trades available so you decided to place the four trades on theopportunity 800k instead of your 200, now there's two scenarios here you've got tohave this in your head before you actually trade right, if you get awinning trade, right you've reduced the overall number of trades to get up todraw up level 2 by four.
You've had four winning trades in one hit, but your nexttrade size is 200k.
If you've had a losing trade that's like having fourlosing trades in a row, maximum trade size you're now in a drawdown phase andyou've got to do it, right, it's your medicine, right and it ensures yourtrading career so make sure you stick to it.
One of the biggest problems we'veseen is traders actually had falling trades right, then they justkeep maximizing their trade size on every opportunity and that's a real, no-noyou'll blow up very quickly, so if you're down two or three trades don't chasethe market wait for a directional high impacting trade to put you back in thegame, right the draw up process is methodical, stick to it.
So here's a little bit of structure of your trading.
How your trading shouldgo around the events so trading opportunity number one, you've got atechnical setup only, right with that maybe just half the trade size, tradingopportunity number two say it's just a fundamental release, no technicals, soonce again, maybe just half the trade size on that event.
Trade size numberthree we've got a geopolitical issue sort of going on in the background there's a bitof direction but we know that can change quickly so once again, let's try, butonly half the trade size.
Then our fourth opportunity coming up, we've gottechnicals and fundamentals all lining up all pointing in one way, well thenthere's a maximum trade size and this gives you a bit of an idea of how yourtrading adjusts with market activity then the next trade after that you'vehad a winning trade technical trade number five you've got technical setup onlywell then you quickly reducing your trade size to half, not going in gunsblazing, again just because you've had a win it's around the opportunity, ifyou stick to this you'll have strong capital growth and you've got completeflexibility with your trade size, right.
Now the hardest thing for new traders is getting this profile going because you want to make money quickly and then doit.
But you know you've got to take the baby steps, justlook at the dynamic drawdown here of of your whole system and you can see, asyou go through this, right the four consecutive loss rule you have fourlosses at one hundred thousand you're reducing your trade size but thisway you can have eight trades like I've got here in front of us where I'vechanged the trade size around the events okay you can even go 25kinitially and wait for those key events and hit them harder but I want toshow you that you can have potentially eight losing trades in a row right nowthe draw up process, why is this more beneficial? A Dynamic Capital ManagementSystem? So say you're at $9, 250 right and you see a really good trainingopportunity well you do one trade you're back at your starting capitalstraightaway, and you see you have a good trading opportunity after that theyusually come in runs, your at $10, 750 you have four winning tradesyou're at $11, 500 okay after having five losing trades ina row.
You're almost 15% and you've had these five losing trades, so DynamicCapital Management gives you greater flexibility and it allows you to comeout of a losing situation very quickly.
How do we do it? Now this is where therest of the webinars on how the bankers trade forex is going to come in toplace it's about isolating the best trading opportunities, okay what arethey? Low risk, high probability where everything is working in your favor andthe markets working with you.
So on these low risk high probability opportunitiesyou definitely load up right, key fundamental release yet the technicalsas well, that's when you start to think about maximum trade size, okay.
That'sgonna be awesome it's going to transform your results and the effect will beimmediate you'll go from sort of chopping and changing strategies tobeing more consistent with your strategies just changing your capitalprofile and when the good ones come up you'll have much bigger draw upsthat's for sure, and they'll lead to more consistent capital growth.
It doesn'tmean you don't lose money because we'll always have losing trades but when youwin you'll maximize the opportunities even more.
Okay, so that's pretty much abit of a rap the Capital Management System, the Four Consecutive Loss Rule, the Dynamic Drawdown, how it fits in with the bankers, okay don't forget they don'thave those massive structure they have limits and they work with those limitsthat's their profile, that's their capital management structure, if theydon't stick to it, it's their career for you it's your cash.
So make sure you spenda bit of time going through this.
If you have any questions, drop us a line attraders4traders.
com or give me a call or jump on the website inthe 247 Trade Zone.
No this sets us up nicely for next week, okay when we comeback and start to look at the fundamentals, isolating those those goodtraining opportunities, looking at the relationship with economic numbers thedifferent financial markets where your technicals and everything comes intoplay, right.
This is the main game and that's what you need to concentrate onall right this is where it gets exciting, all right, so I hope that made sense toyou guys thisCapital Canagement System it's no joke it is going to give you structureyou stick disciplined to this and I can can guarantee that you will be tradingfor a very long time and as you get trading with more experience you learnmore, your trading decisions get better so this is what you need to get throughinto your structure of your trading and it's going to give youthe growth and the foundations for a great trading career, as I said don'tforget give me a shout if you don't understand it, or jump on the site tryout the free trial we're here to help.
We look forward to working with you, cheerio.
