4 Tricks to Finding The Right Trading Method

Dear There,

Today I'd like to talk about how to find the right trading
method because we are constantly bombarded with new methods or
systems almost daily, and I believe traders have little chance
of being able to identify the right ones to use, the best
performing or the most educational.

With so many methods, systems and automated programs, how do you
select the one that is best for you, or the one that gives you
the best opportuntity for trading success?

I've developed a simple set of rules to follow when evaluating a
trading method, course, system or program and today I want to
share them with you.

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First and foremost, any trading method you consider must be
complete. By complete, I mean the trading method must teach you
the following:

1. The precise conditions under which you can consider a trade
to be entered into. These are known as the "setup" conditions
and refer to the technical indications (usually) that a trade
possibility exists.

2. The exact point at which you would enter into a trade
(price). This refers to the Entry Point (or Entry Rules) and
means the price at which a trade would be executed.

3. Rules for establishing initial and ongoing stop loss marks
for an open trade. As part of Risk Management, it is imperative
to have Stop Losses ALWAYS in place. If a trading method or
system does not teach or define these, you should abandon it --
without effective stop loss management you can be easily wiped
out in a single trade should the market move against you.

4. The exact points and an effective strategy for exiting a
trade. It is also important that a method teach you a strategy
for exiting a trade once that trade has become profitable.

Combined, these four elements will help you to eliminate chance
by streamlining your trading decision-making process. Without
any of these, no trading method, system or program should be
considered because in each individual case, traders will be
exposed to steep losses or taking poor positions.

Keep in mind that not every setup will execute into a trade, nor
should every trade be taken. Combined, these rules will help to
protect you both in evaluating a method for its use and in
executing the method when trading Forex.

Risk Management

Next, let's talk about risk management. This is perhaps the area
where 95% of traders make mistakes and lose money. Managing risk
is about reducing your losses and about protecting trade capital
by employing specific strategies to accomplish each of these
simultaneously.

What do I mean by that and why is it important?

First, most traders make simple trading mistakes: they take too
large of a position and expose themselves to serious and steep
losses should the markets move against them. Second, they fail
to protect their ENTIRE account by allowing ONE trade to put
their full account balance at risk.

Here's a quick and perhaps extreme example using Forex:

Suppose a Forex trader has a $10,000 account balance. The Forex
trader takes a 5 standard lot Forex trade on the EUR/USD pair.
The Forex trader now has at least $5,000 'margin' at risk (or
50% or more of the Forex trader's account balance).

For every 1 point that this Forex trade moves against the Forex
trader, the trader loses 1/2% of the total account balance. At
first glance, that may not seem like a steep loss. However,
should the Forex trade move a total of 50 pips against the Forex
trader, and the trader subsequently exits the position, the
Forex trader's total loss would be an INCREDIBLE $2,500! (25% of
the trader's account balance). This is poor risk management and
it frequently leads to complete wipeouts of Forex trading
accounts.

How did we calculate that loss? 1 pip for the EUR/USD pair is
equal to $10 (on a standard lot trade). A 50 pip loss equals a
monetary loss of $500; and remember our example Forex trader had
traded 5 standard lots -- for a whopping loss of $2,500!

Instead, any trading method should teach you very specific
guidelines for incorporating money management and risk
management into every Forex trade you take.

Money management should involve the distribution of an account
among the various trades a trader takes. For example, you should
never trade your entire account on a single trade, and you
should rarely have more than a few open positions. By utilizing
multiple positions, you distribute the risk among each of the
trades you have taken.

Risk management should involve the maximum risk in any SINGLE
trade, and should limit the impact of a losing trade on your
account balance.

Here are two quick examples, again using Forex:

Money Management: A theoretical Forex trader takes 4 separate
one lot trades on four separate pairs. Assuming here that each
of the pairs have a pip value of $10 on a standard lot, then the
total amount of the account being margined across all four
trades is about 40% (it may be higher depending upon the actual
pairs traded. With proper stop loss management, however, in
conjunction with risk management, it is UNLIKELY that the Forex
trader would incur a complete 40% loss.

Risk Management: In each of the theoretical Forex trades above,
the Forex trader risks no more than 2% of the trader's total
account balance on each Forex trade. That means a maximum loss
of $200 per Forex pair traded if ALL FOUR trades are stopped
out. Total loss in this case would be $800 -- a much more
recoverable scenario than the $2500 in the first Forex trade
example.

Furthermore, risk management has the capacity to make loss
recovery easier. For example, in the first case, where the Forex
trader lost $2500, the trader would need a nearly 250% gain on
their next trade to recover the lost value on the first trade.

In the second example, however, the Forex trader would need only
an 8% gain.

A second part of risk management not typically discussed in poor
trading methods is protecting gains. Though this begins as a
discussion on exit strategy rules, it is also an element of risk
management. Once a trade turns profitable, it is imperative that
you manage the gains with smart stop loss management. The worst
thing you can do is allow a profitable position to reverse and
become a losing position. Thus, managing risk extends to the
protection of gains on a trade, just as it does protecting
against deep losses on a trade.

Therefore, in considering any method for use in your trading,
you must ensure that risk management is not only discussed, but
clearly explained in conjunction with the use of the trading
method. If risk management is not present, unclear, or not
specific to the trading method, you should avoid using that
trading method.

I hope this discussion is helpful in directing you toward the
right trading method for you, whether you trade Forex, stocks,
options, ETFs, commodities, futures, or any other investment
vehicle.

Good Trading,
Bill Poulos

p.s. If you're brand new to Forex or if you're looking for a
step-by-step guide to getting involved, check out my
complimentary video presentation here... 

Profits Run Inc.

28339 Beck Rd, Unit F1
Wixom, MI
48393
US


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