stock investing and trading best techniques - garrys guide to becoming a millionaire in the...

7/23/2019 Stock Investing and Trading Best Techniques - Garrys Guide to Becoming a Millionaire in the Financial Markets

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Garry's Guide to Becoming a

Millionaire in the Financial Markets

using Risk Management

Garry Anthony DSouza


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GARRY'S GUIDE TO BECOMING A MILLIONAIRE IN THE

FINANCIAL MARKETS USING RISK MANAGEMENT

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To enroll for the Certified Money Manager Course and/or buy more products:kindly send an e-mail to [email protected] / [email protected]

OR

Visit www.forexmillionaire.me

Thank YouFor purchasing my book.

I hope you enjoy reading it and become rich. Please read it till

the end.


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-:Disclaimer:-

Everything discussed in this Book is for educational purposes only.

I do not want anybody to use real money to apply the techniques discussed in this book unless

he has tried them out in demo accounts or with paper money, before using his real money to

actually trade in the markets. Also, he must be comfortable with the techniques and must make

an informed decision as to whether he plans to trade with real money in the markets or not.

I say this because I know that trading the markets can be risky as there are many variables

involved including psychology, and I dont want to be responsible for you losses (although I

would like to take credit for your gains).

The goal of this book is provide you with a valuable lesson that will help you become rich by

participating in the financial markets. However, the financial markets are dynamic and always

subject to change. A successful financial market participant must be able to adapt to the

markets.

Moreover, participating in the financial markets may not be suitable for everyone due to time and other

constraints.

I am not a financial advisor and everything I discuss in this book is the product of my personal

opinion and experience in the markets.

All I know is this muchthere are a lot of books, articles and advice is floating around in the

market. Many people are always looking out for a magic pill which will help increase their

chances of success. I have read lots of books and seen tons of hours of seminars, and if youpardon my language sifted through hours of bull-crap to tell you this much....


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MY BOOK IS THAT MAGIC PILL.

You have to be open minded and understand and choose to accept my concepts, if you're a

newbie the book is self-explanatory. If you're not then, there may be concepts in this book that

you may not necessarily accept...but I have tried and re-tried them with varying degrees of

success...If you noticed the words varying degrees also notice the word success. Follow my

principles and get used to it. Good luck"

Garry DSouza, Forexmilionaire & affiliatedcompanies shall not be

held responsible for any issues caused due to implementation of any

advice expressed in this book.


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Preface

Okay, so now I am going to discuss what this book is going to be about. In this book, I am going

to touch upon some core concepts which are vital to success in the financial markets. Then I will

discuss some concepts (risk management concepts) that I have developed that can help you

reduce risk drastically in the financial markets.

Later on, I will get into some techniques I personally use while investing in the markets.


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However, please note that I do not reveal my exact investing style in the financial markets as

I do not wish to publish it in a book, as these days books are easily reproduced and

downloaded over the internet for free. For this reason, I only discuss my personal investment

techniques in the Certified Money Manager program which you can enroll for on my website

www.forexmillionaire.me. It is a course and at the end of the course there will be an exam.

You will be able to find a sample exam paper on the website. If you need any more details

regarding the course, kindly send an e-mail [email protected]

Essentially, the course explains how we can make money using some basic technical analysis

like buying the dips in an uptrend, and adds some very, very advance risk management

techniques not discussed in this book, to make it a risk-free strategy. We keep repeating this

procedure and there are very fine rules to apply it. There will be a workbook which details all

the techniques, concepts, and the risk-management models. Towards the end of the course,

there will be an exam and the exam paper will contain charts and you will have to answer thequestions that relate to the charts of the price of a financial instrument and what action

would you take and how you would eliminate risk.

The strategies discussed in this book led me to the current investment technique I employ for

my investments. Though drastically different, one leads to another, and through practice and

experience in the financial markets, we tend to learn what works and what doesnt, even when

it comes to risk management.

In the coming sections of the book, I am going to explain all the important issues that need to

be considered if one wants to be rich by participating in the financial markets. I will also provide

a system that fits these concepts together and explains how money can be made easily in the

markets (easy does not mean no physical effort on your part, unless you are using a robot to

invest in the markets).

The risk-management techniques I will be discussing in this book are unique and I have

developed them on my own. It is on a whole new level and completely different from the other

techniques that have been developed until now.

Throughout this book, I am going to place much emphasis on the Forex market and stock

market, as these are the markets I am familiar with in particular, the Forex market.
http://www.forexmillionaire.me/http://www.forexmillionaire.me/mailto:[email protected]:[email protected]:[email protected]:[email protected]://www.forexmillionaire.me/


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Why the Forex market you ask?

A Global 24-Hour Market

The Forex market is unique in that traders can access a 24-hour market very conveniently,

without having to wait for the markets to open. At any time, there is always a major

financial center open where banks, hedge funds, corporations, and individual speculators

are trading currencies. Traders can trade during anytime of the day or night, and do not

have to wait for any markets to be opened before placing their trades. This is particularly

beneficial to people who hold nine-to-five jobs since they can trade it without any problems

in the evening or night. The market runs 24 hours for 5.5 days a week because markets

around the world open and close at different times. In stock or futures markets, you can

only actively trade for less than 7 hours a day.

FX market GMT

Tokyo Open 23:00

Tokyo Close 08:00

London Open 07:00

London Close 16:00

New York Open 12:00

New York Close 21:00

With the stock and futures markets, one would need to have access to electronic

communication networks (ECN) for pre-market trading, or would have to wait till the

markets open. The chances of the prices gapping up or down against you are high especially

if there have been news while the markets are closed.

Worlds Most Liquid Market

According to the Central Bank Survey of the Forex market conducted by the Bank for

International Settlements, as at 2004, daily trading volume reached an all-time record high

of $1.9 trillion, up 58% from 2001. Do you know that this humongous daily trading volume

is about 20 times that of the New York Stock Exchange and the NASDAQ combined?

With about 80 percent of foreign exchange transactions having a dollar leg, you dont have

to worry about liquidity issues when trading any of these big-economy currencies, which arenamely, USD, GBP, EUR, CHF, JPY, CAD, AUD and NZD. However with stocks, futures,


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options or commodities, you tend to be restricted by their illiquidity especially during after-

hours.

Limited Slippage

Most brokers guarantee fills on stop-loss and limit orders on up to a certain number of

standard lots, and provide instantaneous trade executions from real-time quotes which are

displayed on the screen. There is usually no discrepancy between the displayed price and

the execution price during normal market conditions. However, you may be subjected to

slippage when you trade during news or during periods of high volatility. In the futures and

stock markets, execution price can be vague because all orders must be done through the

exchange, and slippage and partial fills are common especially in the futures market due to

the chaotic open-outcry system.

Buy or Short-Sell Anytime

When trading stocks, short-selling is only allowed with an uptick, so it can be very

frustrating for traders to wait and see their stocks trend downward, while waiting for an

uptick. In the futures market, there is a limit down/limit up rule which kicks in when the

contract value declines or increases by more than a certain percentage from the previous

days close. However, in the Forex market, you can short a currency pair anytime without

having to wait for any upticks and this translates to a more efficient and instant order

execution.

Profit In All Market Conditions bull, bear or sideways

With Forex, you can have the freedom to long or short currency pairs whenever the

opportunity comes, since there are no exchange-enforced restrictions on daily activities, like

for stocks or futures.

Flexible Leverage

The Forex market offers the highest leverage available for any market. Leveraged trading

allows Forex traders to execute trades up to $500,000 with an initial margin of only $5000.

That means you get as high as 100-to-1 leverage or more, offered by most online Forex

firms on standard-sized accounts. However, it is important to note that while this type of

leverage allows investors to maximize their profit potential, the potential for loss is equallylarge. The good thing is, it is up to you to select the amount of leverage that you are most

comfortable with.


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Differences between Forex and Stocks

Forex Stocks

Largest and most liquid market in the world Liquidity dependent on stocks daily volume

24-hour trading action for 5.5 days a week Less than 7 hours of trading time per day

Can profit in both bull and bear markets Most people buy stocks instead of short-sell

Can short-sell anytime Need to obey uptick rule in order to short-sell

Minimum slippage and order errors More room for slippage and error

100:1 leverage on standard-sized accounts 2:1 leverage to the average stock investor


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How do you open a Forex trading account?

The first thing that you'll need to do is decide on a broker. This can be accomplished by playing

with different Forex demo accounts by various brokers. Once you've decided on a broker, the

process becomes a standard bureaucratic process that is similar to opening a bank account. A

Forex demo account is basically an account where you do not risk any money. They give you free

paper money or fake money and you can play around with it just to test the software and the

markets and get a feel of how warm the water is.

Here are a few things that are typically required:

Name

Address

Email

Phone Number

Account Currency Type

A password for your trading account

Date of Birth

Country of Citizenship

Social Security Number or Tax ID

Employment Status

Financial Questions:

Annual Income

Net Worth

Trading Experience

Trading Objectives

You might ask yourself, why do they want to know all of these things?

The simple answer is to comply with the law. Forex has been a bit of a Wild West industry

since it went retail some time ago and because of that regulations have been put in place to

"protect" account holders from various types of harm.

It's unlikely that you will find any broker opening an account for you without requiring these

questions to be answered. If you do happen to find one that isn't asking many questions,you should be suspicious.


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If you are ever not feeling too sure about a particular broker you can look them up through

theNational Futures Association (http://www.nfa.futures.org/basicnet/)to find out their

status.

Once you've turned in all of your information to be processed, the broker will verify it and

typically ask you to send in some verification documents such as a government issued ID,

and maybe a utility statement to verify your name and address. This can slow down the

process by a day or two, but it's nothing to worry about. Once your information is verified,

you can fund your account and begin trading.

Personally, opening a Forex account has been a very easy process for me. I had to submit

my proof of address, photo ID, answer those questions and then my Forex account was

active. Thereafter, I funded my account by bank transfer from UAE Exchange directly to my

trading account. It is a very simple process and the bank transfer details to transfer the

money to your account can be found on the website when you access your account and clickon transfer funds to your account. Kindly check your respective brokers website for more

details (In my case, Oanda).

If you are ever not feeling too

sure about a particular broker

you can look them up through

theNational Futures Association

(http://www.nfa.futures.org/basicnet/)

to find out their status.


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Which Forex brokers?

I personally use and recommend Oanda for buying and selling currency. However, I use

FXCM micro trading station 2for charting purposes.

Please find the links below:

http://www.oanda.com/

http://www.forexmicrolot.com/

I have a real account with both these brokers; however, my Oanda account is well-funded,

but my FXCM micro account has a small balance in it but I use their charting software as I

like it. Hence I have not closed my account with FXCM.

The first thing that you'll needto do is decide on a broker. Thiscan be accomplished by playingwith different Forex demoaccounts by various brokers.


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Concepts

Moving on to concepts that form the framework for the strategy discussed in the finalsection of this book

Short selling

Everyone has heard of buying a share or currency pair. But, have you heard of short selling a

share or currency pair?

Short selling is basically borrowing shares from your broker, selling those shares you

borrowed in the market now, and buying them back in the future (at hopefully a lower

price) and giving those shares back to your broker. In the process you make a profit.

This is demonstrated below.

1. You borrow 1 share from your broker when the price of that particular share is $100.2. You sell that share you borrowed in the market now at a price of $100.3. Now you have $100 cash with you by selling that share you borrowed.4. Now say that the stock market falls and that share is now worth $50.5. You use your $100 cash to buy the share which now costs only $50.6. So you have an excess cash of $50.7. You return the share to your broker and you are left with $50 cash or $50 profit.

We do the same thing in currencies but we dont have to go to our broker personally and

borrow currencies. Everything is automated and done with a click of a button.

For example, if we click the buy button on the EUR/USD currency pair, and later click sell, we

bought that pair and sold it later.

But if we FIRST click the sell button on the EUR/USD pair and then later click buy, we short-sold

that currency pair and bought it later. Buying it later is also called buying to cover. It is just a


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technical term so you need not worry too much about it.

Short-selling is essentially betting that the market is going to fall, and profiting if it does fall.

Risk Reward Ratio

This is a very important concept. In Investing, we normally buy at a low price and hold it for a

long time till price rises maybe three or four times its original price. In this case our risk-reward

ratio is 1:3.

Let us consider a practical example:

Say the price of a share is $50.

{Note throughout this eBook I will be using shares to illustrate concepts as it aids understanding as generally people

are more familiar with the share market as opposed to the currency market.}

Towards the end, I will switch to examples using currency prices.

Lets say the price of a share is $50. We buy it at $50. Our maximum risk of loss is $50 if the

price falls to zero.

But let us say we establish a plan that says that we will sell the share when it reaches a price of

$200. In this case, if the price does reach $200, our profit will be $150 ($200-$50).But if theprice falls to zero, our loss will be $50.

Hence we stand to lose $50, but we stand to gain $150. In this case, our risk-reward ratio is 1:3.

Now it is very important that we maintain a good risk-reward ratio as, even if we have high

probability of successful trades, market conditions can change and it is the risk-reward ratio

that will keep us in business.

This is demonstrated below:

Let us consider 10 trades or investments. In 7 out of those 10 investments we lost $50.

Our total loss will be: 7 * $50 = $350


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But in 3 out of these 10 investments we make money. In each case we made $150. We make

$150 in each investment because we held on to them for long.

Our total profit will be: $150 * 3 = $450.

Our overall net profit after 10 investments will be $100 ($450-$350).

Notwithstanding the fact that we had 7 losing investments and 3 winning investments, we still

made $100 overall net profit with a risk-reward ratio of 1:3.

Hence, risk-reward ratio is a very important concept.

We must never book our profits so quickly such that our losses outweigh our profits. The size of

our profits must always be greater than the sizes of our losses in order to stay in this business.

And you can only become a millionaire if you stay in the game. All newbies or new

investors/traders make this mistake so it is essential that you keep the concept of risk-reward

ratio firmly ingrained into your mind. The mistake they make is, when they are winning, they

book their small profits immediately. However, when they are losing money, they let their

losses run and become huge till most of their money is lost in the financial markets and they do

not have any liquid cash to pursue further investment opportunities. They do this because they

cannot stand the fact that their investments are losing.

In the Certified Money Manager course, I explain how we can maximize the expected risk-

reward ratio.

Cutting Losses short

What does cutting losses short mean?

It means limiting your losses by selling your share when the market starts falling immediately so

that you do not lose a lot of money. For e.g. suppose we buy a share at $100, and the price

subsequently falls to $90, we sell the share when the price of it is $90 for a $10 loss ($100-$90)

Our loss is limited to $10. We cannot lose more than this amount provided we sell the sharewhen the market is falling.


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This is essential to succeed in investing and giving us a positive mathematical expectation vis--

vis risk reward ratio and probability. However, our loss need not be limited to $10/share

provided our reward is much, much greater than our risk (i.e. 10). For example, we may book a

loss of $50, provided we hold the share long enough to make, say, $400 in profit (a risk-reward

ratio of 1:8).

Now the question that may arise is: What if I was not on the computer to monitor the trade

whilst the market fell. The solution to this is to place stop loss orders.

What is a Stop Loss order?

A stop loss order is an order placed on your brokerage trading platform to sell your share if

price falls to a certain point. For example: suppose you bought a share at $100 and you place a

stop loss order at $90, when price reaches $90 your brokerages computer software will

automatically sell your share at $90 for a $10 loss. Stop losses are essential to minimizing risk.

The alternative is to stay on your computer screen and monitor your investment and exit it if it

works against you.

Equally, one must place take profit orders in order to book their profits.

What is a take profit order?

A take profit order is an order to sell your share once it reaches a certain price and you are

making money. For instance, suppose you bought a share at a price of $100 and you placed a

take profit order with your broker to sell the share at a price of $150; once price reaches $150,

your brokers computer trading software will execute that order for you and sell the share at a

price of $150 for a $50 profit ($150-$100)

The benefits of placing take profit and stop loss orders are that you need not be behind the

computer screen all the time monitoring your positions. The computer does the needful for

you.

Additionally, you may not be able to act quick enough if you execute the orders manually and

by the time you execute them, price can move against you; hence the need for setting stop lossand take profit orders.


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Multiple accountsOanda brokerage allows you to open multiple accounts without going through the registration

process that entails opening your first account. Once you have opened an account with Oanda,

you can create a sub account which is a fairly simple procedure which takes just a matter of a

minute. What is a sub account? A sub account is basically a 2nd account. You can have multiple

sub-accounts up to a limit.

Kindly, check with Oanda for more information. Having multiple accounts can be very useful

especially because of the FIFO rules (First in First Out). While applying money management, we

may want to exit our last position first but this is not possible with current regulations. In order

to circumvent this, we may want to open a sub account and use that sub account to manage

our second position.

Trading like a turtle

Okay, I want to explain the importance of trading like a turtle. There are many analysts who try

to predict the direction of the market and are wrong some (if not most) of the time.

No one can predict the market 100% of the time at least no one I have heard of! Correct me if I

am wrong and you know someone who can predict the market all the time.

Hence, trying to predict market direction in advance is a futile activity. You are better off

monitoring which way the market is going and, once the market has displayed which direction it

is headed, following the market in that direction by placing buy market orders if the market is

headed up, or short selling orders if the market is headed down. You may have not picked the

exact bottom or top, but you will be fairly close to the bottom or topwe dont want to protect

our egos and prove to ourselves that we guessed market direction to the pip or penny; instead

we want to make money and take advantage of persistent market movement driven by news,

psychology, momentum, and many other factors. As you have noticed, once a trend manifestsitself in the markets, it generally lasts for some time before changing its course. It dips then


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rallies, dips then rallies, and so on and so forth. What we want to do is get in fairly early in the

trend and ride it all the way along to maximize our reward and minimize our potential losses

in the case that the trend we assessed turned out to be a fake signal, by setting stop losses.

If you want to know more about the benefits of being a turtle trader, refer to this Wikipedia

article about Richard Dennis:

http://en.wikipedia.org/wiki/Richard_Dennis

This article is about a very rich trader named Richard Dennis who apparently pioneered the

turtle trading strategy.

Adding to existing positions

Adding to existing positions is required in order to be a successful investor or trader. It was said

that Jesse Livermore, the worlds greatest speculator that lived, used a pilot position (or small

position) to enter the market and, thereafter, added to his existing positions when he was right

in his assessment of the market price trend. For illustration purposes, suppose he bought a

share at $100 and price moved to $150, he would buy another share at $150 and if price then

moved to $200, he would buy another share and so on and so forth.
http://en.wikipedia.org/wiki/Richard_Dennishttp://en.wikipedia.org/wiki/Richard_Dennishttp://en.wikipedia.org/wiki/Richard_Dennis


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What are the benefits of adding to your existing positions?

The main benefit is that when you are right in your assessment of the trend, you accumulate

large gains that more than offset your losses if and when you are wrong in your assessment of

the trend. You are at a theoretical mathematical advantage.

For the purposes of this book, I am not going to talk any further about adding to positions as,

having been mentioned in the beginning of this book, that will only be disclosed in the Certified

Money Manager course. I personally use this technique as part of my investment style. It is a

concept that is ignored by the vast amount of financial market participants as they do not

understand the mechanics of how it works successfully. They are skeptical and think that

adding to positions at higher prices only risks losing more money as price tops out, reverses,

and all positions that were added to the initial position get stopped out for a loss.

If you believe so, I am sorry to burst your bubble, but this is far from correct. I used to think that

way when I was a relatively inexperienced investor.

Money Management

What is money management? In the context of my trading strategy, money management

basically means not risking all your money on one trade; increasing your position size when you

make money; and decreasing your position size when you are losing money.

For example:

Suppose you have a $1000 account and you bought 1 share worth $100; you would never buy 2

shares worth $200 (or $100 each) unless your account size increases to, say, $2000. When your

account size increases to $3000, you would buy 3 shares and so on and so forth.

These are sound money management principles that increase your chances of accumulating

huge sums of money efficiently. In addition to this, maximum drawdown must always be taken

to consideration.

Let me illustrate the benefits of money management.


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Let us consider two types of investors: one who applies money management and one who does

not.

First Scenario: The investor who does not apply money management.

An investor has $500 in cash.

He bought 10 shares at $50 each and price rose to $100 per share. He made $50 per share or

$500 in total.

He now has $1000 in cash.

He now bought 10 shares at $100 each and price rose further to $150. He makes $50 per share

profit or $500 in total.


He now bought 10 shares at $150 each and price fell from $150 back to $50.A $100 loss per

share or $1000 in total.

He now has $500 in cash after the loss above, which brings him back to the starting point whenhe had $500 in cash to begin with.

Second Scenario: The investor who applies money management

An investor has $500 in cash.

He bought 10 shares that costs $50 each and sold it when price reached $100.


He now buys 5 shares at $100 each and price rises to $150.

He now has $1250 in cash

He now buys 2 shares that costs $150 and price falls to $50.


Compare the second scenario to the first scenario: The change in price is the same in both

scenarios; however, in the first scenario the investor is left with $500 in cash, whilst in the

second scenario the investor is left with $1050 in cash at the end. This is because of the way the

second person managed his money.

In spite of suffering the same loss or downward movement in price for both investors, thesecond investor managed his money in a better manner and hence made money. At higher


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prices, he buys less number of shares and hence made money in this case even though prices

dropped against him.

DRAWDOWN

What is drawdown?

Drawdown in the context of the strategy in my book is an interim loss that we do NOT realizebut wait for the markets to move in our favor before we book our profit. In the Currency

market, one cannot have huge drawdowns as one may receive a margin alert in Oanda and, in

worst cases, a margin closeout.

Example of a drawdown: We bought a share at a price of $100. Price falls to $50 the next week.

Thereafter, it rises to $200. When price fell from $100 to $50: that was our drawdown. It was

not a loss because we did not sell the share. We sold our share only when it rose to $200.

In Forex and other leveraged markets, you cannot have as big a drawdown as you wish likeshares. Because we are using borrowed money in Forex to trade and in other leveraged

markets, there is something called a margin call where, depending on how many units you


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bought (the less, the better) you can only withstand a certain drawdown before your broker

closes your positions (or the more likely scenario you have to add more funds to your

account). But all this is not a problem if you invest in reasonable amounts i.e., do not bet all

your money on one investment. If you can buy 100 000 units of a certain currency, buy 50 000

at most as a rule of thumb.

I do not think it is necessary to get into the details of what is a margin call or margin closeout.

What you basically need to know is that in Forex you are using leverage or borrowed money to

trade and hence when the currency moves, you stand to gain (or lose) more than the currencys

actual movement. Hence margin comes into play here.

In order to avoid margin calls, which is the worst thing that can happen to you as a trader, you

need to assess your maximum drawdown and risk a little of your capital. As a rule of thumb, if

you can afford to buy 100 000 units of EUR/USD, buy 10 000 units per trade instead of 100 000.But we never randomly decide how many units to buy. We always base our number of units to

trade based on our maximum drawdown or how much we expect the market to move against

us and, consequently reducing our account balance, before turning back in our favor and

increasing our account balance. We should buy such number of units that would enable to

withstand as big a drawdown as envisaged in our trading strategy without giving rise to a

margin call. This will all become second nature to you once you get started trading Forex.

In your brokers trading platform, it will be displayed when a margin call will be due. They will

display to what amount your account will need to fall before you receive a margin call. So youneed not worry too much about this. Just dont bet everything on one trade or investment or

you will get a margin call faster if price moves against you.

Now let me talk about compounding:

Compounding is basically reinvesting your gains, so that your account grows very fast much

faster than if you did not reinvest your gains.


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The power of compounding is illustrated below.

Suppose you have a $1000 account and you make 20% profits each month then, after 12

months, your account will grow to:

$1000 * (1.2)12 = $7430.08

Or

$1000 * 1.2 * 1.2* 1.2* 1.2 * 1.2 * 1.2 * 1.2 * 1.2 * 1.2 * 1.2 * 1.2 * 1.2 = $7430.08

1.2 stands for a 20% increase in capital. Since there are 12 months in a year, we multiply 1000

by 1.2, 12 times.

1000 +20% increase in month 1= 1200



The procedure above is repeated till month 12 when our capital base increases to $7430.08.

Contrast this with what happens if you do not use compounding:

Say you have a $1000 account.

You make 20% on it i.e., 200

You withdraw the same.

You now have $1000 and make 20% on it and withdraw the same.After 12 months, your total profit will be 200*12 or $1200. Add that up to your starting capital

and you are left with a new capital base of $2200 as opposed to $7430 above had you re-

invested all your 20% gains.

Do you see the power of compounding here? You made more than 7 times your money by

making just 20% a month. But kindly note that 20% a year is considered very good returns for a

fund in a year. A bank account provides nearly 5% a year.

20% a month is generally not considered feasible in the investment world; however, there are

many traders who have achieved spectacular returns in the financial markets and have turned1000s into millions. It will not be easy task to do by any means, but it certainly is possible.


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I have provided links of some of these traders below who have made spectacular returns:

http://en.wikipedia.org/wiki/Jesse_Lauriston_Livermore

http://en.wikipedia.org/wiki/Timothy_Sykes

http://en.wikipedia.org/wiki/Richard_Dennis

http://en.wikipedia.org/wiki/Larry_R._Williams

Fixed Value Loss

First, let me get our readers comfortable with the notion of fixed value loss. This is something I

have invented, as far as I know, in the finance industry.

With fixed value losses, we as investors or traders, dictate the amount of loss we want to suffer

for a given price movement.

I will use currencies to illustrate my point and then use shares to explain the concept.

Suppose we purchased the EUR/USD currency pair at 1.3100.

Price has fallen from 1.3100 to 1.2950. Let us say we bought 10 000 units on the Oanda

brokerage platform.

In a normal scenario, we would lose $150, which is essentially the difference between the

price-fall from 1.3100 to 1.2950.

But with my fixed value loss strategy, the loss would only be $45.

We do this by fixing our loss for every 10 pip move against us at $3.

What is a pip? A pip is a measurement of a movement in a currency pair. For example, if the
http://en.wikipedia.org/wiki/Jesse_Lauriston_Livermorehttp://en.wikipedia.org/wiki/Jesse_Lauriston_Livermorehttp://en.wikipedia.org/wiki/Timothy_Sykeshttp://en.wikipedia.org/wiki/Timothy_Sykeshttp://en.wikipedia.org/wiki/Richard_Dennishttp://en.wikipedia.org/wiki/Richard_Dennishttp://en.wikipedia.org/wiki/Larry_R._Williamshttp://en.wikipedia.org/wiki/Larry_R._Williamshttp://en.wikipedia.org/wiki/Larry_R._Williamshttp://en.wikipedia.org/wiki/Richard_Dennishttp://en.wikipedia.org/wiki/Timothy_Sykeshttp://en.wikipedia.org/wiki/Jesse_Lauriston_Livermore


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price of the EUR/USD currency pair moved from 1.3100 to 1.3099, we would say that it fell by 1

pip. Conversely, if the price of the EUR/USD currency pair rose from 1.3100 to 1.3101, we

would say that the currency pair rose by 1 pip.

So now, how do we fix our loss for every 10 pip move against us at $3?

We know that with 10,000 units purchased and a 10 pip move against us, our loss should be

$10.

We do this by exiting our units in piecemeal. For example, we would exit 3000 units when price

fell from 1.3100 to 1.3090. In such a case our loss would be $3. A 10 pip move but only 3000

units exited hence our loss is $3. Keep in mind the ratio 10 000 units and a 10 pip fall means a

$10 loss. 3000 units and a 10 pip fall equates to a $3 loss. It is simple mathematics.

Now, when price falls further from 1.3090 to 1.3080, we would exit 1500 units. Why 1500units? Because: we want to maintain a loss of $3 for every 10 pip move against us from the

current price. The current price is 1.3090, and when it falls to 1.3080, we only want to suffer a

$3 loss. If we exit 1500 units at 1.3080, this will be the case. We initially bought 10 000 units at

1.3100, sold 3000 units at 1.3090, and further sold 1500 units at 1.3080. At the price of 1.3080,

price is essentially 20 pips away from our starting point which is 1.3100. So now we would not

sell 3000 units. Because: with a 20 pip move against us, and by selling 3000 units, we would

lose $6. But we want to lose $3. Note that if we sold 10 000 units for a 20 pip move against us,

we would lose $20. Hence, since we only want to lose $3, when price moves from 1.3100 to

1.3080, we would sell 1500 units at 1.3080.

As price falls further and further, we would exit less number of units in order to maintain a $3

loss for every 10 pip move against the current price. We exit less number of units because the

distance between current price and our initial price that we bought gets bigger. It is simple

mathematics.

I have attached a table below to demonstrate the number of units to exit as price falls further

and further from our starting point which is 1.3100, in order to maintain a $3 loss.

price $loss

$loss/row

number

row

number

units=row

number*column 3

1.30900 3 3 1 3000


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1.30800 3 1.5 2 1500

1.30700 3 1 3 1000

1.30600 3 0.75 4 750

1.30500 3 0.6 5 600

1.30400 3 0.5 6 500

1.30300 3 0.428571429 7 428.5714286

1.30200 3 0.375 8 375

1.30100 3 0.333333333 9 333.3333333

1.30000 3 0.3 10 300

1.29900 3 0.272727273 11 272.7272727

1.29800 3 0.25 12 250

1.29700 3 0.230769231 13 230.7692308

1.29600 3 0.214285714 14 214.2857143

1.29500 3 0.2 15 200

Okay. Now I am going to explain the table above.

I will start by saying the table pertains to 10 000 units of EUR/USD currency pair.

When we buy 10 000 units of EUR/USD currency pair and price moves up by 1 pip, our profit is

$1 and vice versa. Through logical deduction, if we were to buy 3000 units of the same and

price moves up by 1 pip, our profit would be 30 cents or $.3

We have bought 10 000 units of EUR/USD pair at 1.31000 and what we have witnessed in the

table above is a 150 pip fall in price. Hence, without risk management, our loss should be $150.

(10 000 units; 150 pips = $150)

But using risk management, our loss is $45, as we can see by adding column 2 of the table. The

total number of units sold is 9954. Please note that this is very close to 10 000 and that I am not

aiming for spurious accuracy but trying to get my point across. The difference is insignificant in

terms of profit and loss vis-a-vis the benefit we get by using $3 as our loss per 10 pip and

considering a 150 fall in price. If we aim for spurious accuracy it only becomes less intuitive for

us to perform our operations. We want to keep it simple -- at least for the sake of this


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workbook and the explanations I am about to provide.

Coming back to the explanation; A 150 pip fall in price. 10 000 units bought. And actual loss

suffered is $45 instead of $150.

Now how do we do this? We do this by the value loss averaging strategy that I have discovered

and conceptualized in the investment world.

What we basically do is that, for a 10 pip fall in price, we sell the number of units as shown in

the units column or column 4 of the table. So in the first instance, for a 10 pip fall in price, we

would sell 3000 units. Our loss would be $3 when price falls to 1.3090. When price falls to

1.3080 (a 20 pip fall in price because we initially bought at 1.31000) we sell 1500 units. Now

why do we sell 1500 units as opposed to 3000 units? If we sold 3000 units, our loss would be

$6. Hence we do not want to sell 3000 units all the time. As price keeps falling, we reduce the

number of units we sell to keep the loss at a value of $3. We continue this procedure as price

keeps falling and our total loss after a 150 pip fall in price is $45.

Do you like this concept? I love it!

Now the caveat is that price may fall from 1.31000 to 1.3050 say, and then come back up to

1.31000. In such a case, we would add back the units we sold at 1.3090, 1.3080, 1.3070, 1.3060,

and 1.3050 respectively. We do this by placing limit orders to buy at 1.31000. That is, we would

only add back these units when it comes back to the starting point or 1.3100.

Now let us consider what will happen if price rises 150 pips. Since the number of units we have

purchased of the EUR/USD currency pair is 10000 units, we will make a $150 profit. (10 000

units. 150 pip move = $150) We do not sell any units on the way up until it reaches our target of

150 pips. This is unlike what we do when price moves down we exit some of our units for

every 10 pip move against us. But when price is moving in our favor, we do not exit any units

but hold onto our whole position till the end (150 pips).

HedgingOkay. Now I am going to talk about hedging.


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What is hedging?

Hedging employs various techniques but, basically, involves taking equal and opposite positions

in two different markets (such as cash and futures markets). Hedging is used also in protecting

one's capital against effects of inflation through investing in high-yield financial instruments

(bonds, notes, shares, real estate, or precious metals). For the purposes of this workbook, by

hedging I am referring to taking offsetting positions to reduce or control risk.

For example: If we buy 10 000 units in our primary account and short sell 10 000 units in our

sub account or secondary account. We have hedged our risk completely. No matter what

happens price falls or rises, we do not lose money. On the same token, we do not make

money too. How do we not lose money when price falls? Because our sub account where we

short sold 10 000 units will make some money, when our primary account where we bought 10

000 units will be losing money.

Let us expand from the above example. We have bought 10 000 units at 1.3100. If price falls

150 pips, we lose $45 as illustrated in the table. Now I never want to lose any money -- and so

do you!

So I am going to tell you to open another account or sub account and short sell 3000 units in

that sub account.

Now when price falls 150 pips, our sub account will make a $45 profit and our primary account

will lose $45. So no matter what happens, we do not lose money, which is what we want toachieve.

A caveat though is if price meanders between 0 and 150 pips without reaching our target. This

is considered as a consolidating market and that is the only time where there is a possibility of

losing money. But this is still better than not controlling risks at all. From time to time, we can

accept small losses provided our gains are much greater in amount as discussed when

explaining the risk-reward concept.

Note that with the fixed value loss concept, you need not accept a $3 loss only for a 10 pip

move. In fact, this is a concept and the variables can be modified to suit your investment needs


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in particular your style of investing or trading. For example, if you are a long-term investor or

trader, you may want to take losses at a slower pace.

For illustration purposes, I have attached a table below where we take a $2 loss for every 10 pip

move against us, as opposed to a $3 loss in the table above.

price $loss

$loss/row

number

row

number

units=row number *

column 2

1.30900 2 2 1 2000

1.30800 2 1 2 1000

1.30700 2 0.666666667 3 666.6666667

1.30600 2 0.5 4 500

1.30500 2 0.4 5 400

1.30400 2 0.333333333 6 333.3333333

1.30300 2 0.285714286 7 285.71428571.30200 2 0.25 8 250

1.30100 2 0.222222222 9 222.2222222

1.30000 2 0.2 10 200

1.29900 2 0.181818182 11 181.8181818

1.29800 2 0.166666667 12 166.6666667

1.29700 2 0.153846154 13 153.8461538

1.29600 2 0.142857143 14 142.8571429

1.29500 2 0.133333333 15 133.3333333

1.29400 2 0.125 16 125

1.29300 2 0.117647059 17 117.64705881.29200 2 0.111111111 18 111.1111111

1.29100 2 0.105263158 19 105.2631579

1.29000 2 0.1 20 100

1.28900 2 0.095238095 21 95.23809524

1.28800 2 0.090909091 22 90.90909091

1.28700 2 0.086956522 23 86.95652174

1.28600 2 0.083333333 24 83.33333333

1.28500 2 0.08 25 80

1.28400 2 0.076923077 26 76.92307692

1.28300 2 0.074074074 27 74.07407407

1.28200 2 0.071428571 28 71.42857143


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1.28100 2 0.068965517 29 68.96551724

1.28000 2 0.066666667 30 66.66666667

1.27900 2 0.064516129 31 64.51612903

1.27800 2 0.0625 32 62.5

1.27700 2 0.060606061 33 60.60606061

1.27600 2 0.058823529 34 58.82352941

1.27500 2 0.057142857 35 57.14285714

1.27400 2 0.055555556 36 55.55555556

1.27300 2 0.054054054 37 54.05405405

1.27200 2 0.052631579 38 52.63157895

1.27100 2 0.051282051 39 51.28205128

1.27000 2 0.05 40 50

1.26900 2 0.048780488 41 48.7804878

1.26800 2 0.047619048 42 47.61904762

1.26700 2 0.046511628 43 46.51162791

1.26600 2 0.045454545 44 45.45454545

1.26500 2 0.044444444 45 44.44444444

1.26400 2 0.043478261 46 43.47826087

1.26300 2 0.042553191 47 42.55319149

1.26200 2 0.041666667 48 41.66666667

1.26100 2 0.040816327 49 40.81632653

1.26000 2 0.04 50 40

1.25900 2 0.039215686 51 39.21568627

1.25800 2 0.038461538 52 38.46153846

1.25700 2 0.037735849 53 37.73584906

1.25600 2 0.037037037 54 37.03703704

1.25500 2 0.036363636 55 36.36363636

1.25400 2 0.035714286 56 35.71428571

1.25300 2 0.035087719 57 35.0877193

1.25200 2 0.034482759 58 34.48275862

1.25100 2 0.033898305 59 33.89830508

1.25000 2 0.033333333 60 33.33333333

1.24900 2 0.032786885 61 32.78688525

1.24800 2 0.032258065 62 32.258064521.24700 2 0.031746032 63 31.74603175

1.24600 2 0.03125 64 31.25


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1.24500 2 0.030769231 65 30.76923077

1.24400 2 0.03030303 66 30.3030303

1.24300 2 0.029850746 67 29.85074627

1.24200 2 0.029411765 68 29.41176471

1.24100 2 0.028985507 69 28.98550725

1.24000 2 0.028571429 70 28.57142857

1.23900 2 0.028169014 71 28.16901408

1.23800 2 0.027777778 72 27.77777778

1.23700 2 0.02739726 73 27.39726027

1.23600 2 0.027027027 74 27.02702703

1.23500 2 0.026666667 75 26.66666667

1.23400 2 0.026315789 76 26.31578947

1.23300 2 0.025974026 77 25.97402597

1.23200 2 0.025641026 78 25.64102564

1.23100 2 0.025316456 79 25.3164557

1.23000 2 0.025 80 25

1.22900 2 0.024691358 81 24.69135802

1.22800 2 0.024390244 82 24.3902439

Basically, what we are seeing in the table above is that for every 10 pip move against us from

our starting point that we bought EUR/USD currency pair @ 1.31000, we book a $2 loss.

Hence if price were to fall 820 pips, we would book a $164 loss in total compare this to the

loss we would have booked had we held on to our 10 000 units position for an 820 pip move

against us our loss would be $820. Hence by exiting our position in parts we have averaged

our cost without any significant concomitant risks.

The only risk is if price does not make any sizeable moves and keeps consolidating in a range.

Now I will post an example in terms of shares, for all the people who do not invest in currencies

and are not familiar with the mechanics of how the retail currency market works. But the real

investors will deeply appreciate my core risk management techniques that I use to manage my

personal investments that I havent disclosed in this book as mentioned in the beginning of the

book, but will provide the secrets only to students who apply for the Certified Money Manager

course. Below I have attached a table. Below that table will follow the explanation of what thetable is about and what is in the table.


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The situation for shares is a bit different.

Please find the excel sheet below along with the corresponding explanation.

$ price

shares

sold

$ loss per

share $ loss

990 1 10 10

980 1 20 20

970 1 30 30

960 1 40 40

950 1 50 50

940 1 60 60

930 1 70 70

920 1 80 80

910 1 90 90

900 1 100 100

890 1 110 110

880 1 120 120

870 1 130 130

860 1 140 140

850 1 150 150

840 1 160 160

830 1 170 170820 1 180 180

810 1 190 190

800 1 200 200

790 1 210 210

780 1 220 220

770 1 230 230

760 1 240 240

750 1 250 250

740 1 260 260

730 1 270 270720 1 280 280


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710 1 290 290

700 1 300 300

690 1 310 310

680 1 320 320

670 1 330 330

660 1 340 340

650 1 350 350

640 1 360 360

630 1 370 370

620 1 380 380

610 1 390 390

600 1 400 400

590 1 410 410

580 1 420 420

570 1 430 430

560 1 440 440

550 1 450 450

540 1 460 460

530 1 470 470

520 1 480 480

510 1 490 490

500 1 500 500

490 1 510 510

480 1 520 520

470 1 530 530

460 1 540 540

450 1 550 550

440 1 560 560

430 1 570 570

420 1 580 580

410 1 590 590

400 1 600 600

390 1 610 610

380 1 620 620370 1 630 630

360 1 640 640


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350 1 650 650

340 1 660 660

330 1 670 670

320 1 680 680

310 1 690 690

300 1 700 700

290 1 710 710

280 1 720 720

270 1 730 730

260 1 740 740

250 1 750 750

240 1 760 760

230 1 770 770

220 1 780 780

210 1 790 790

200 1 800 800

190 1 810 810

180 1 820 820

170 1 830 830

160 1 840 840

150 1 850 850

140 1 860 860

130 1 870 870

120 1 880 880

110 1 890 890

100 1 900 900

90 1 910 910

80 1 920 920

70 1 930 930

60 1 940 940

50 1 950 950

40 1 960 960

30 1 970 970

20 1 980 98010 1 990 990

0 1 1000 1000


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Notes: We bought 100 shares initially at a price of $1000. Price fell from $1000 to $0. Our

total loss can be found by taking the sum of column 4. In this case, our total loss is $50,500

for a 1000 dollar move against the point we bought 100 shares. How is that possible? If price

moves 1000 dollars against us, our loss should be 100 shares * 1000 or $100 000. No. But it is

$ 50 500. What we have effectively done is averaged our costs in a more safe manner than

plain doubling up or averaging down on losing positions by entering new positions and

perhaps greater positions than our previous ones.

Okay. Now the question that would arise is: how do we average our costs in a safe manner in

the share market? As demonstrated above, for every $10 move against us, say from $1000 to

$990, we would exit 1 share. If price moves from $990 to $980, we would again exit 1 moreshare. If price moves from $980 to $970, we would again exit one share. We keep on repeating

this process till price falls to 0 (highly unlikely).

But note that if price only rises from our starting point - $1000 to, say, $2000, we make $1000

per share. With 100 shares that equates to a profit of $ 100 000. Compare this to the loss we

would have made if price fell by the same amount ($1000) in this case, our loss would be $ 50,

500 because of the averaging technique I discussed above.

In real-time, it may be very difficult to monitor the market at all times and exit a share for every

$10 move against us. This is why we must place stop loss orders with our brokers tradingplatform or perhaps widens the distance when we will exit shares from, say, $10 to, say $100. I

need to mention that this strategy is flexible and with the help of an excel sheet, you can input

different values and arrive at different results. There is no one size fits all for this strategy so

request you to play around with it as everything that can be discussed concerning it cannot be

conveniently fitted into this book.

A caveat is that price may fall, take out our stop-loss orders, and then rise back up to reach our

profit target of $2000 (we initially bought at a price of $1000). If this is the case, we must

remember not to worry as we have a very big margin of safety (potential $100 000 vs. highly

unlikely $50 500).


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Let us use the above table to illustrate such a case.

Say price fell from $1000 to $700, and then rose to $2000.

In such a case we would have booked the sum of the losses as shown in the 4th column upto the

31st row (which is when price is at $700 in the table). Our total loss would be $4650. Now when

price rises to $2000, our total profit will be $ 100 000. Hence our net profit would be $ 95350.

Wow! That is a huge profit. Yes, it pays to know when an asset is headed higher with

reasonable accuracy in the long-term and cut losses in the short term.

This along with the hedging strategies discussed in the previous section can be combined to

make money irrespective of market direction, majority of the times, to give us an overall

positive mathematical expectation and, using money management, increase our position size

with time to accumulate large sums of money well into the thousands and millions.

If you decide to continue your education further, and enroll for the Certified Money Manager

course, where I explain my core risk management techniques, then your target of becoming a

millionaire is almost guaranteed.

Just to put the above risk-management strategy in perspective, let us consider how a layman

would average his costs by doubling up.

Doubling up is akin to gambling and not recommended by almost all experts in the finance

industry.

DOUBLING UP

What is doubling up?

Doubling up is basically increasing your position by twice the size as price moves against you in

the hope that it will rise back up subsequently and you will book handsome profits as your

highest positions were bought at lower prices. This is explained below.

Say, you bought 100 shares at a price of $1000Price now falls to $500. You now buy 200 shares at a price of $500.


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Let us say price rises up to $1000. The 100 shares you bought at a price of $1000 will be in a

breakeven situation or no-profit, no-loss situation.

The 200 shares you bought at a price of $500 will have made a profit of $500 each when price

rises from $500 to $1000. Your profit will be $100 000 overall.

All is well and good provided price rises up subsequently. But, what if the company goes

bankrupt? Though it is unlikely, many people who have used this technique have experienced

their shares drop and not rise for decades, losing a lot of money in the process. Some have even

gone bankrupt.

So let us consider one such scenario.

You bought 100 shares at a price of $1000.

Price falls to $500. You now purchase another 200 shares.Price falls to $250. You now purchase 400 shares at a price of $250 each.

Price now falls to $100, you think it cannot go any lower, and you purchase 1000 shares.

Price eventually falls to $1.

Your total loss will be $100 000 on the 100 shares you bought at a price of $1000 each.

$100 000 will be your loss on the 200 shares you bought a price of $500 each.

$100 000 will be your loss on the 1000 shares you bought at a price of $100 each.

Totally, your loss will be $ 300 000. Compare this to the loss we would have suffered using theprevious strategy of exiting 1 share for every $10 fall in price the loss would have been

$50,500.

But note that the people who double up usually do not wait for price to fall from $1000 to

$500. They double up much faster at prices like $800, $700, $500, $400, $300, and losses really

grow in size, much larger than the $300, 000 loss discussed above.

This is why the industry considers this as gambling, especially when applied in the Forex and

futures markets, as in these markets people trade with borrowed money which leads to margin

calls. As I mentioned in the first few sections of this book that due to margin calls, we cannotwithstand as much of a downward move like in shares by buying as many units as we can. If we


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get a margin call, the broker will either ask us to provide more funds into our account or, in the

event of a margin closeout, close all our open positions at a loss.

Doubling up not recommended.

Other things regarding being a trader

Back TestingIt is very important to back-test your strategy before applying it in the markets. What back-testing means basically is that you go back in time in the charts and see how your strategy

played out in the past and see whether it made money or not before applying your strategy in

real-time. This is essential because you will get an idea of how robust your financial trading

strategy is and whether it actually makes money in the financial markets.

Stress control

Trading the financial markets will give you an enormous amount of stress as it is your moneywhich is on the line and research says that you feel ten times worse when you lose money, than


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you feel when you make money. Hence it is essential to keep stress under control. I

recommend doing some meditation, studying some Buddhist topics on alleviating stress &

anger which can be researched on Google or watch some videos by the Dalai Lama. If you are a

Hindu, Christian, Muslim, or Jew, you can go to your places of worship and pray.

I also like to visit this websitewww.2knowmyself.comit helps to give me some knowledge and

improve my understanding of myself.

Now I am going to put all the concepts of this book together (except the technical and

fundamental analysis) and explain a strategy we can use to trade the Forex market. Note that

we can use this strategy to trade other markets as well.

In the share market in certain countries, brokers do not allow you to short sell or there may be

restrictions on short selling. This can be a hindrance. This is why I trade the Forex market it

gives me the flexibility to trade however I want, and the only issue is to know which way price

direction is headed. We can make money on the way up and on the way down.

But if you do not want to trade the Forex market, or you want to remain as a buy-and-hold

investor, do not worry, as the Certified Money Manager course is very suitable for stock market

participants. It explains some of the best techniques I have discovered in my trading career. We

can make money in all markets without risk.
http://www.2knowmyself.com/http://www.2knowmyself.com/http://www.2knowmyself.com/http://www.2knowmyself.com/


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Forex Trading Strategy/Financial Markets Trading

Strategy for this book

I will be explaining the strategy in this book in terms of applying it in the Forex market;

however, the strategy can be applied equally in other markets provided similar trading

conditions apply.

Firstly, in order to trade using this strategy, we will require more than two accounts. (This is not

a requirement but it makes it easier to apply the strategy that way)

In fact, due to the FIFO regulations, you either need to enter all new orders with a take profitand stop loss order or, if you are unable to do so conveniently, it is recommended that you

have more than two accounts to apply the strategy.

We need not open two separate accounts with our broker.

Especially the Forex broker Oanda allows us to have more than one account.

It is a fairly simple process; we log in to our account, and click - add a new account. We now

have a second account to trade which is our sub account.

Our first account is our primary account.

Throughout this section I will be referring to sub account#1, sub account#2, sub account#3,

which are basically new accounts that we will be adding to our existing account. Or, in other

words, we will be having multiple accounts or more than one account.

I recommend using the strategy below on the EUR/USD or GBP/JPY currency pairs. Note that

we have to be flexible and adjust our targets and stops based on market volatility. However, for

the purposes of explanation I will use a standard take profit and stop loss level to explain the


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strategy.

Some currency pairs are more volatile than others and, hence, we need to set different stop

loss and take profit order levels for different currencies. While a 60 pip profit target may be

suitable for the EUR/USD currency pair, a higher profit target may be applicable to the GBP/JPY

currency pair.

I will also be using a position size of 10 000 units to illustrate the concept. Those with larger

accounts will be using a position of, say, 50000-300 000 units and hence the profit will be much

larger than what is explained in the book.


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The Strategy

We buy 10 000 units in the primary account and short sell 10 000 units in sub account#1 both at

the same price and the same time. Let us say, the current price of EUR/USD pair is 1.3100. So

we buy 10 000 units of EUR/USD at 1.3100 in the primary account and, at the same time, short

sell 10 000 units of EUR/USD currency pair in sub account#1.

If we dont do anything from this point and just hold on to our units, there is no chance of

losing money as we are completely hedged if price goes up our primary account will make

money; however, if price falls, our sub account#1 will make money. Either way, the profits and

losses will offset each other, because we bought and short sold 10 000 units at the same time.

So, in order to make money, we need to exit our losses in parts as mentioned in the beginning

of this book in the concepts section, and we need to book our profits in whole (not in parts). All

the while we need to maintain a good risk-reward ratio as mentioned in the concepts section of

the book.

Now I am going to get to the part where the EUR/USD falls in price and we book losses in our

primary account. Then I will get to how we book gains in our sub account#1. I will use excel

tables to illustrate the process.

EUR/USD

price $loss

$loss/ row

number

row

number

units= column

3*1000

1.30900 5 5 1 5000

1.30800 5 2.5 2 2500

1.30700 7.5 2.5 3 2500

total= 17.5 10000

Say, the current price of EUR/USD is 1.3100.

As you can see in the table, price has fallen from 1.3100 to 1.3090 to 1.3080 and 1.3070.

Now I always mentioned that we exit our total position of 10 000 units in parts.


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So, as per the table above, we would exit 5000 units at 1.3090, 2500 units at 1.3080, and 2500

units at 1.3070. Our losses would be $5, $5, and $7.5 respectively. Totally this adds up to $17.5.

So, we have booked losses of $17.5 when price fell from 1.3100 to 1.3070, in our primary

account.

Now I will get to what action to take in sub account#1 using an excel table just like the one

above.

EUR/USD

price $ profit units closed

1.30900 -

1.30800 -

1.30700 -

1.30600 -

1.30500 -

1.30400 60 10 000

Note that, as per the table, we short sold 10 000 units in sub account#1 at a price of 1.3100.

When price falls from 1.3100 to 1.3050, we do nothing. However, when EUR/USD rate reaches

1.3040, we close 10 000 units at a profit. It is a profit because price fell and we short sold (go

back to concept section if you are not familiar with short selling). So we wait for a 60 pip fall

before we book profits in sub account#2. The profit will be $60. Compare this to the loss of

$17.5 in our primary account.

Our profits outweigh our losses.

Now how did this all happen logically? Essentially, what we have done is taken our losses at a

faster rate (5000 units sold for a 10 pip fall; 2500 units sold after a 20 pip fall; 2500 units sold

after a 30 pip fall), thereby reducing them in size, and taken our profits when price made a

sizeable move of 60 pips thereby increasing the size of our profits.

This works in reverse too, i.e. if price rose from 1.3100 to 1.3160, we would still end up making

a net profit of $42.5 ($60-$17.5).

For illustration purposes, I have attached excel sheets below to demonstrate the process.


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First let us consider what would happen in our primary account or buying account if the

EUR/USD currency pair rose from 1.3100 to 1.3160

EUR/USD

rate $ profit

units

closed1.31100 -

1.31200 -

1.31300 -

1.31400 -

1.31500 -

1.31600 $60 10 000

Note that we initially purchased 10 000 units of EUR/USD currency pair at a rate of 1.3100.

Price rose to 1.3160 and we booked our profits of 60 pips (1.3160-1.3100) which equates to $60

for 10 000 units.

Why do we book our profits at a rate of 1.3160? Remember, I said we always book our profits

slower than our profits.

Below we will consider what will happen in our sub account#1 at the same time price rises from

1.3100 to 1.3160.

In our sub account#1, we are short selling; so our sub account#1 will lose money while the

primary account or buying account will be making money.

EUR/USD

rate $ loss

units

closed

1.31100 5 5000

1.31200 5 2500

1.31300 7.5 2500

1.31400 -1.31500 -


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1.31600

Total= $17.50

In the table above, you can see that as price is rising, we are booking losses in our subaccount#1 at a faster rate than we had booked profits in our primary

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