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ICT Market Maker Primer Course - 15 - Money Management That Works.srt

Last modified by Drunk Monkey on 2021-06-10 06:17
1 00:00:12,000 --> 00:00:23,580 ICT: Okay, folks, this lesson right here, this lesson, out of every lesson I've ever taught. This is the most important one. Unfortunately, many times it's
2 00:00:23,580 --> 00:00:35,280 viewed by developing traders as the most boring topic. But you need to understand sound money management. And I'm going to give you a perspective on
3 00:00:35,280 --> 00:00:39,000 money management techniques that I view is one of the best.
4 00:00:44,910 --> 00:00:56,520 Okay, let me tackling money management. And what topics are we covering in this module? Is system accuracy important? I don't believe system accuracy is all
5 00:00:56,520 --> 00:01:09,510 that important. I believe that a relatively low accuracy rate could still be profitable. And I'll give you an example that in this specific module, but I
6 00:01:09,510 --> 00:01:20,880 want you to understand that a lot of new traders developing traders and traders that have been unprofitable for a while, tend to believe that it's their system,
7 00:01:21,000 --> 00:01:33,600 and the lack of high accuracy. That is what prevents them from seeing a positive outcome. And that's not it really, isn't it. It's the losses that he rude by the
8 00:01:33,600 --> 00:01:46,470 means of drawdown. Every losing trader, every busted account starts with a single loss. And it compounds. And what generally happens is traders will lose
9 00:01:46,470 --> 00:01:55,980 their mind, because they are not disciplined. They don't have a procedure or protocol in place to deal with a losing trade, or a series of losing trades. So
10 00:01:55,980 --> 00:02:05,580 I think that system accuracy is kind of like a misnomer. Certainly, there's nothing wrong with an accuracy, that's high. But it also goes along with just
11 00:02:05,580 --> 00:02:13,530 because it's been accurate a certain number of times in the past is in no way shape, or form a promise or guarantee that that system is going to deliver the
12 00:02:13,530 --> 00:02:24,990 same going forward, it could fall apart, I could have. Lord knows how many losing trades, I've had systems and developed all kinds of methods over remained
13 00:02:24,990 --> 00:02:33,690 last 25 years, and some of them looked great on paper. But soon as you try to plug them in to live markets and walk forward with them, they didn't hold up.
14 00:02:34,590 --> 00:02:46,950 And they were all based on TradeStation systems. And I was trying to be back in the 90s with the bond and s&p market. But if you're on the fence about having a
15 00:02:47,400 --> 00:02:56,520 dependency on system accuracy, and we're finding it terribly important, I don't think it's something that you should lose sleep over. Alright, so how much
16 00:02:56,550 --> 00:03:09,750 equity should be risked? Well, I don't believe there's a cookie cutter approach to this. Everyone in I've done this in the past uses a standard 2% as a maximum.
17 00:03:10,380 --> 00:03:18,930 And truth be told, you know, what I'm trading, I've risked as much as three and a half percent. And sometimes when I was really being a cowboy, I was risking as
18 00:03:18,930 --> 00:03:31,860 much as five and 7%, they were more or less just working towards an accelerated growth, and also testing what I was able to do as a trader. But generally, my
19 00:03:31,860 --> 00:03:42,120 risk appetite is about 1%, one and a half. If I really want to push it, everything really good. I'll go as high as 3%. Generally, it's about as high as
20 00:03:42,120 --> 00:03:52,770 I'll go. So I think the question really is a matter of personal choice and preference, what I'm willing to assume as risk percent may not be as welcomed as
21 00:03:52,770 --> 00:04:04,320 a percentage for risk. For some of you, for some of you 1% may be extremely too high. For others, it may not be high enough. So everyone's gonna have their
22 00:04:04,320 --> 00:04:16,830 version or comfort zone for risk. And I don't want to be the type of mentor that tells you. This is how much you should risk because I teach in a demo account.
23 00:04:17,250 --> 00:04:30,510 So I think that it's reasonable to assume 1% or less as a risk parameter for your demo account. But I would never tell you what you should do with your Live
24 00:04:30,510 --> 00:04:40,950 account because it's going to be all dependent on what you're willing to assume as risk what you can tolerate. Some of you if you put a trade on even on a demo
25 00:04:40,950 --> 00:04:44,130 account, you'll lose your mind over it because it's can't,
26 00:04:44,640 --> 00:04:55,830 you can't deal with the uncertainty and there's really no money on the line is is that you're so keyed up about being right. And that's going to translate into
27 00:04:56,760 --> 00:05:05,310 problems with your money management because if you need to be right You're not going to trade profitably, should traders always push their edge? I see this a
28 00:05:05,310 --> 00:05:15,840 lot online. And it's one that gets under my skin because, again gets back to the first question is system accuracy important, I don't believe that a trader
29 00:05:15,840 --> 00:05:24,990 should always get in there and push their edge. Because no matter how good you are, or how good your system is, it's going to incur a loss. And you don't know
30 00:05:24,990 --> 00:05:34,020 if it's going to be a single loss, or it's going to be a series of losses, and it could be a string of losses that you were not expecting. And at some point,
31 00:05:34,020 --> 00:05:42,360 you're gonna need to pull the plug and say, Okay, I can't trade any more this day, or this week, or even this month, if it's really bad. The problem with
32 00:05:42,360 --> 00:05:58,500 pushing your edges, you're always going to have a reason or excuse to do so. So I have, over the years, built in kind of like a breaker for my activity and
33 00:05:58,500 --> 00:06:08,280 thresholds. Because if I do not see a turnaround in my losing trades or a string of losses, I can very easily wipe out an account just as well as anyone else
34 00:06:08,280 --> 00:06:19,320 can. So it has to be some kind of a measure in place to help me throttle back when I'm active, and when I'm going to resume again. So while I'm not going to
35 00:06:19,320 --> 00:06:27,690 be talking about that so much. I do talk about that in the mentorship. And I do go into greater detail with money management and specifics with trading plans
36 00:06:28,020 --> 00:06:38,970 that will be taught in 2019. For the members to have gone through the entire core content. But for this teaching, I want you to focus on the importance of
37 00:06:39,210 --> 00:06:55,980 sound money management, and risk control. What causes traders to blow out, I personally believe it's their inability to weather a series of losses. Now
38 00:06:55,980 --> 00:07:05,400 anyone can take a loss or two and it doesn't really make anyone go crazy about it. But what happens is, is if there's a back to back consecutive 567, maybe
39 00:07:05,400 --> 00:07:13,950 even 10 losing trades in a row, as a developing trader, that's normal, you know, if you're trying to avoid that, you're actually hurting and stunting your growth
40 00:07:13,980 --> 00:07:24,870 as a developing trader. So you want to be able to experience that phenomenon of being convinced almost that your trades gonna work out, but then see, not come
41 00:07:24,870 --> 00:07:33,060 to fruition and then having to wrestle with that, because the internal dialogue that takes place in your mind, the emotions that well up after that you need to
42 00:07:33,300 --> 00:07:43,470 wrangle them because they're going to always be there as a traitor. Now, you either can make them allies, or you can view them as enemies, okay, they're
43 00:07:43,470 --> 00:07:51,780 always gonna be plugging your your results. And certainly plugging your your clarity or perspective in the marketplace. And you don't want to give them that
44 00:07:51,780 --> 00:08:03,300 power. Okay, fear and greed, they can be dealt with, but has to be with a process and a clear, developed plan. So every trader blows their account with a
45 00:08:03,300 --> 00:08:13,710 series of losing trades, but it starts with one losing trade, it always starts with one. And what goes on between your ears, okay, inside your mind, is what
46 00:08:13,740 --> 00:08:23,400 manifests in your account. Now, if you take the loss, and you think to yourself, Well, that didn't work out next. And that's your mentality, but you don't think
47 00:08:23,460 --> 00:08:29,700 next I'm going to get it back right now. And I'm gonna overleveraged and go through to Martin Gail procedure, if you just took a loss of 100 bucks, now
48 00:08:29,700 --> 00:08:38,730 you're gonna risk 200 bucks when they ain't gonna risk 400 bucks, and you're gonna risk 800 bucks. That doesn't work, eventually, You're busted. So I've
49 00:08:38,730 --> 00:08:48,510 looked at all kinds of money management approaches I've studied Ralph Vince and Ryan Jones work, which I think is exceptional work. It's really hard to read,
50 00:08:48,540 --> 00:08:59,370 it's rather dry. But if you can tolerate those types of things, it really stimulates the ideas that are potentially there for gaming theory and the Kelley
51 00:08:59,370 --> 00:09:17,280 principle, and if so, if we can see there are measures of controlling risk and money management approaches in gaming. Okay, and for instance, like blackjack,
52 00:09:17,310 --> 00:09:26,160 or roulette, which I admittedly have never been to a casino to, to play either one of those, but I did study the games, and I did study gaming theory. And I've
53 00:09:26,160 --> 00:09:38,040 always been fascinated with the World Poker championships. And I've always been fascinated to see the same faces generally make it to the last table or so. And
54 00:09:38,910 --> 00:09:41,160 I don't believe it's the cards that they're
55 00:09:41,220 --> 00:09:50,610 winning with. I believe it's they know when to push their money and when to cut it back. And if you watch them play, I watched that part of it. I don't watch
56 00:09:51,210 --> 00:09:57,690 what they're doing with their hands because they have no idea what the next cards are going to be. But they do know how much they're going to risk from the
57 00:09:57,690 --> 00:10:11,760 pot. perspective, if you will. How much are they going to ante up? And I've always been fascinated with that. So I've kind of like used those ideas from
58 00:10:11,790 --> 00:10:24,480 professional gamblers, okay and use some of their approaches, and applying it to a money management strategy, which I think you'll find rather interesting. In
59 00:10:24,480 --> 00:10:29,670 this teaching, the takeaway is, I want to teach you how to flatline equity drawdown.
60 00:10:35,460 --> 00:10:44,100 Alright, how to flatline equity drawdown. I said when we start trading, obviously, we're all excited about what we're going to potentially see as a
61 00:10:44,100 --> 00:10:54,060 result, you open your demo account, and you want to start seeing that increase or that that jump up in the demo equity to build your confidence. So eventually,
62 00:10:54,240 --> 00:11:01,230 at some point, in the future, when you make the decision to do if you ever do it, to trade with y funds, you'll be able to have the experience to look back on
63 00:11:01,230 --> 00:11:11,970 as a demonstrator and see that you've done certain things over a consistent length of time, where it warrants by your own decision in your own timing, you
64 00:11:11,970 --> 00:11:19,860 elect to go with life on trading. I never tell anybody when to do that. And I'm certainly not advocating to use life funds with the information I'm sharing
65 00:11:19,860 --> 00:11:29,100 here. This is just informational purposes only. And everything I teach is should be viewed in light of a demo account application only. But if you're practicing
66 00:11:29,100 --> 00:11:38,610 on a demo account, you know, how do we practice money management approaches?  Well, we're going to go into that. Now. Obviously, as I mentioned already, the
67 00:11:38,640 --> 00:11:47,610 every trader is going to have to encounter a losing trade as a new trader, especially if you start with y funds, you're trying to avoid this like the
68 00:11:47,610 --> 00:11:57,420 plague. And generally, it's a good idea to try not to lose money, but you can't avoid it, it's going to happen, it's an absolute, you're going to run into a
69 00:11:57,420 --> 00:12:05,820 brick wall. And money will be withdrawn from your account, whether demo or eventually, if you ever decide to do it, live funds will come at your account,
70 00:12:05,850 --> 00:12:17,820 it's guaranteed, you need to be able to have a frame of mind and a procedure on how you're going to encounter and engage and overcome that obstacle. Equally, so
71 00:12:17,850 --> 00:12:27,510 every trader will experience a series of losing trades. Now this is where that wave of emotion comes in. And you feel regretful you wish you wouldn't have done
72 00:12:27,510 --> 00:12:39,390 certain things. And then certain emotions will trigger a response that may result in anger, you may lash out at your computer, lash out your friends, and
73 00:12:39,420 --> 00:12:52,230 co workers or your family, your spouse or children, your dog, don't do that. The procedures that you need to have in place is what you're going to do to number
74 00:12:52,230 --> 00:13:03,030 one, control the bleeding, okay, you have to slow the bleeding, whether it be a Live account or a demo account. So stop losing money, slow it down, and then
75 00:13:03,090 --> 00:13:14,100 eventually look to mitigate it. But you can't come back from massive losses. If you don't first identify what you're doing wrong. And stop doing that very
76 00:13:14,100 --> 00:13:28,380 thing. Which is over leveraging or keeping risk, any constant. Professional money management concepts are used by the informed speculators to help keep
77 00:13:28,410 --> 00:13:30,060 their equity nice, smooth.
78 00:13:37,050 --> 00:13:51,240 Alright, so we have here a hypothetical random result of 20 trades. And these are not actual trades. They're just hypothetical for the purpose of giving an
79 00:13:51,240 --> 00:14:00,840 illustration here, all of the illustrations here are hypothetical, but they will give us a kind of like a perspective to consider. And it's important for you to
80 00:14:00,840 --> 00:14:10,410 take these as general rules of thumb, go through using a demo account using these applications. And you'd see what you get from it in terms of experience.
81 00:14:11,070 --> 00:14:23,940 But the outcome with these 20 trades here for this particular trader, we'll call it trader a, the trader starts with a $5,000 account. And using a three to one
82 00:14:23,940 --> 00:14:33,150 reward the risk model, they're willing to hold on to a trade three times what they're willing to take as an initial risk for stop loss. And they're using an
83 00:14:33,150 --> 00:14:41,910 aggressive start. That means they're going right in using 2% risk right from the start. And they show no regard for future losing streaks.
84 00:14:43,260 --> 00:14:43,860 The
85 00:14:45,240 --> 00:14:53,970 typical equity hands is what you may have encountered with your demo account when you first started trading. You start seeing a little bit of drawdown and
86 00:14:53,970 --> 00:15:01,800 now sudden you get lucky but something starts to pop up in the equity line starts to increase and it's always feels good Then all sudden starts to drop
87 00:15:01,800 --> 00:15:10,200 down in here and this this part of the movement in your equity line. This is what causes the freakout moment, because when it's a little bit of drawdown,
88 00:15:10,230 --> 00:15:19,200 it's not that big of a deal. But when it starts to be consistently pointing lower, our minds don't like to see that. Okay, we like to see it increasing,
89 00:15:19,380 --> 00:15:29,700 okay? And what'll happen is, is you're going to want to do things more frequently, trade with larger leverage, and do more than you should trade at
90 00:15:29,700 --> 00:15:36,930 times when you shouldn't be trading this, the less active times in a 24 hour time of the market day. You don't want to be doing those types of things. But
91 00:15:37,260 --> 00:15:48,150 invariably, this line, okay, is the biggest indicator, Okay, that makes traders do more things than any other. And it's not an oscillator, even though it does
92 00:15:48,150 --> 00:15:57,870 oscillate many times, it just goes to oversold and most traders, in terms of their equity dropping, but I think that this line, or this cue, that line of our
93 00:15:57,870 --> 00:16:10,770 equity, drives more traders to do the wrong thing than anything else we could put on our chart. I don't believe that indicator should be used on our charts.
94 00:16:11,100 --> 00:16:21,210 But I think everything that you would put on your chart as an oscillator is safer than worrying about this line. Okay, everyone that has the ability to see
95 00:16:21,210 --> 00:16:30,540 what their equity line is our equity curve. As a developing trader, this is the least important thing. Okay, there's so many rules, you gotta apply, before you
96 00:16:30,540 --> 00:16:40,020 would ever get any kind of information or feedback loop from this information, because you don't know what you're doing. There's no system or procedure or
97 00:16:40,050 --> 00:16:49,830 progress that way, you're just starting. So the worst thing you could do is look at your equity curve, and base that on whether or not you're doing well or not,
98 00:16:49,830 --> 00:16:57,600 because initially, you could have luck. And many times, and you probably have done this, open a demo account and done a couple different things over
99 00:16:57,600 --> 00:17:08,190 leveraging. And you think that this was a skill that caused that. And when it was just a coincidence, and coincidences sometimes happen in the marketplace. So
100 00:17:08,220 --> 00:17:17,430 what we're gonna do is we're gonna look at how we can engage trading, and use sound money management concepts to help weather the storm through losing
101 00:17:17,430 --> 00:17:28,200 streaks. So here's a model that's three to one, they were holding the trade are willing to hold the trade three times longer in terms of what they were willing
102 00:17:28,200 --> 00:17:38,130 to take as a risk or stop. And they have a soft start here. That means they didn't go right in at 2%, or the maximum risk, that would be permissible. And
103 00:17:38,370 --> 00:17:48,810 this trader shows a regard for future losses. And I'll explain that in a minute.  And the trader does drop to the lowest unit of leverage after five consecutive
104 00:17:48,810 --> 00:17:59,160 wins. Now, what does that mean? In this little spreadsheet here, this column delineates what the trade idea is going to be, and this is assuming that you get
105 00:17:59,160 --> 00:18:11,490 a full stop at 20 pips, or full target is 60. pips. Now, obviously, these are best case scenarios. And worst case scenarios just going to be a skill, and the
106 00:18:11,490 --> 00:18:23,160 results, obviously, but from a practical standpoint, for illustrative purposes, we're using this as a means of providing the illustration. The set number here
107 00:18:23,610 --> 00:18:34,980 is how many times you have five, winning consecutive trades. When you have five winning consecutive trades as we have here. One, winning trade two winning
108 00:18:34,980 --> 00:18:47,700 trades, three 4/5 winning trade, you have to drop down to your smallest unit of leverage. Okay, so he starts with 25k, or $2.50 per PIP works up to a maximum of
109 00:18:47,700 --> 00:19:01,350 60k. And then after that five consecutive winning, he drops back down to his lowest one bite doing that this trader is actually preparing themselves for the
110 00:19:01,350 --> 00:19:13,170 future loss or losing streak. So this gets back to should the trader always push their edge? No, because you will always push yourself right into drawdown. And
111 00:19:13,170 --> 00:19:26,100 most traders, not everyone, but most traders have an issue with drawdown, they will lose their mind. As soon as they start suffering drawdown or a series of
112 00:19:26,100 --> 00:19:38,310 losing trades. They start panicking, they start freaking out. And what's even more amazing is they feel the symptoms in a demo account. Which is sad, but it's
113 00:19:38,310 --> 00:19:38,790 true.
114 00:19:39,120 --> 00:19:48,360 So maybe some of you have experienced that. You know, you want control and you can't control prices. And if you put the order in, whether it's a demo or Live
115 00:19:48,360 --> 00:19:55,680 account, you've submitted to the marketplace, whether you liked it that or not.  And the market is going to do what it's going to do and you have absolutely no
116 00:19:55,680 --> 00:20:03,570 control over whatsoever. Your control is limited to what you have In terms of where your stop loss is, or how long you stay in a trade without being stopped.
117 00:20:04,740 --> 00:20:17,460 That's it. So we can control the things that are directly related to us. But we can't control price. So we have to have some kind of a shield. So my threshold
118 00:20:17,460 --> 00:20:32,610 is five winning trades. So I have a beginning unit leverage of more, it's not 25k. But for the sake of argument, we'll just say it's 25k. That's my lowest
119 00:20:32,610 --> 00:20:45,570 starting point, okay, $2.50 per Pip. And I'm going to stay with that, okay, until I can get above my equity starting point, which happens here, beginning
120 00:20:45,570 --> 00:20:57,150 balances 5000, when it gets back above 5000, then I can start jumping, I'll go up to the next, you know, leverage, which is doubling to 25k to 50k. Now it's $5
121 00:20:57,150 --> 00:21:13,320 per Pip, I'm risking. If this is a winning trade, I can start now utilizing the 2% rule as a maximum leverage. So 2% of 5350 brings us to 53k or $5.30, per Pip,
122 00:21:13,860 --> 00:21:24,360 if 60 pips is hauled off that trade, that's $318. And this would go on, I would keep adding all the way up to the fifth trade at that moment, if I take it when
123 00:21:24,390 --> 00:21:36,060 on this trade, my next trade does not go 2% of this equity balance, it drops back down to 25k. And then this is what it's meant to do. And eventually you're
124 00:21:36,060 --> 00:21:45,600 gonna get a losing trade. And now you don't have as much leverage on there. And what that does is it flatlines your equity drawdown. See, in here we have
125 00:21:45,600 --> 00:21:56,100 initial drawdown. But we are starting with our lowest level of our leveraging, that we can go lower than this, but I'm just using this as this model, the
126 00:21:56,100 --> 00:22:07,020 lowest one we'll go to is 25k. And we'll stay there until we can come out of that drawdown. This period here is this drop down here, very modest, very low,
127 00:22:07,350 --> 00:22:17,070 then it comes out, we have some growth, which is seen through here. But the fifth trade, it's aware, I want to be getting out of that cycle and preparing
128 00:22:17,070 --> 00:22:26,850 for a measure of drawdown or a potential losing trade, the worst thing you can do is keep building up your leverage and risking the trade and then taking that
129 00:22:26,850 --> 00:22:37,620 biggest loss because your biggest loss is going to come. So I plan and schedule.  And if you want to call it this, I forecast the next losing series of trades.
130 00:22:38,460 --> 00:22:48,450 And to help whether that I build in five winning trades, once I have five winning trades, I cannot up my leverage, I have to drop back down to my lowest
131 00:22:48,450 --> 00:22:59,430 one. And what that does is it will plateau the drawdown so I'll go up, get equity growth, and then I know what's coming. And if I don't get a loss, it
132 00:22:59,430 --> 00:23:07,020 doesn't matter, because it's still not going to show a whole lot of movement in here. And it creates a real nice stair stepping approach to my equity curve. I
133 00:23:07,020 --> 00:23:16,260 don't see a whole lot of peaks and valleys, I don't see, you know, the ski slope, or the you know, the the landslide, if you will, that sometimes plagues
134 00:23:16,290 --> 00:23:30,810 traders equity curves, what I do is, I want to protect what's been made in terms of gains. And there's no better feeling or empowerment, knowing that by doing
135 00:23:30,810 --> 00:23:38,490 something like this, it's such a simple thing. But it takes discipline to do it.  See, it feels good when you're making money you're trading, and it's in that
136 00:23:38,490 --> 00:23:49,380 little voice in your heads gonna say, keep pushing, keep pushing your edge up your leverage, you're on a hot streak, and usually about then that's when your
137 00:23:49,380 --> 00:23:58,050 losing trades are gonna come and they don't come just singular, they'll come in on a wave. And if you don't compensate for that, you can go through a large
138 00:23:58,140 --> 00:24:12,420 degree of drawdown, and it's nothing fun about that at all. So with this approach, contrasting with the previous trader, the drawdown is less with this
139 00:24:12,420 --> 00:24:27,000 trader because they have five winning trades, and they cut their leverage to lowest unit of leverage to anticipate future losing trades, results in $346 more
140 00:24:27,030 --> 00:24:36,360 of preserved gains. So there's a benefit even though we've used random numbers here. The benefit is the equity
141 00:24:36,360 --> 00:24:44,760 curve is preserved and it's starting to plateau versus going up and then starting to go back down. That's what you don't want to do. You want to control
142 00:24:45,180 --> 00:24:54,060 how much it drops. The best way you can do that is forecast and schedule.  drawdown you don't know when they're coming, just like you don't know when and
143 00:24:54,060 --> 00:25:06,930 what the next winning trade is either. But we can plan for and whether drawdown, now we're losing streaks by doing this. Now, if there ever is a losing trade,
144 00:25:08,190 --> 00:25:23,370 the equity is protected also by dropping down to the lowest increment or unit of leverage. Okay, so here is another model, where the trader starts with 25k. So
145 00:25:23,370 --> 00:25:35,550 it's a modest start to start to 25k winner, and x ray goes to 50k. Then from there, a standard 2% risk model is used on the equity. And three to one reward
146 00:25:35,550 --> 00:25:46,530 risk is the idea behind this, the traders willing to hold for moves that are three times what the initial stop loss is. And this trader shows a regard for
147 00:25:46,530 --> 00:26:00,390 losing streaks. And what that means is, when the trader has been making money, and takes a loss here, that trader drops down to its lowest leverage unit 25k
148 00:26:01,230 --> 00:26:12,210 happens to be a winner. So bumps up to the next 150 k takes a loss, it has to drop back down to the lowest one and stays there. Okay, until you get to a win
149 00:26:12,240 --> 00:26:24,270 right here. Now, as long as he's above his beginning balance, he can ante up to 50k. If he was below 5000, here, he had to stay at 25k until he got above
150 00:26:24,330 --> 00:26:38,190 $5,000, or wherever the equity balance starts with. Here, winning trade takes him to 50k. And standard 2% rule applies. Now losing trade comes, then drops
151 00:26:38,190 --> 00:26:48,960 back down to 25k, which is the lowest unit of leverage. And the same procedure starts again 2% model after 50k leverage is used. And keep doing that. Now what
152 00:26:48,960 --> 00:26:59,880 happens here on the fifth winning trade, because you have 12345 winning trades, the very next trade, he's not going to or she's not going to use this type of
153 00:26:59,880 --> 00:27:10,500 leverage here or higher. They'll drop back down to 25k. Because there's been five consecutive winning trades, and you're on to equity high here. So you want
154 00:27:10,500 --> 00:27:23,850 to plan for drawdown. So you get a wave of wins. Plan for a drawdown a wave of wins. Plan for drawdown a wave of wins. And now you want to equity high. If you
155 00:27:23,850 --> 00:27:33,750 ever studied your equity curve, whenever it looks like this, this is where you want to send it on Twitter. Okay, this is where you want to put it on Facebook,
156 00:27:33,990 --> 00:27:44,400 because it looks great. And it's almost like magic. Soon as you do that. You know what happens? Boom. If you don't know what you're doing, the equity just
157 00:27:44,430 --> 00:27:54,360 falls off a cliff. Okay, so the, the way we avoid that and control it is I've built in procedures where after five winning trades. Okay, that completes a
158 00:27:54,420 --> 00:28:06,690 complete windset cycle for me. Okay, so the windset cycle, once this goes through five wins, okay, then I wouldn't be on one cycle or set number two,
159 00:28:07,080 --> 00:28:18,210 okay. But when sets are what we have here an individual trades that are consecutive winning trade. That's one a second winning trade, it's 2345 on the
160 00:28:18,210 --> 00:28:25,740 fifth one, dropped back to the lowest increment unit for leverage, okay, and you're going to determine what those are, I don't want to give you anything here
161 00:28:25,740 --> 00:28:33,660 except for just stimulate the ideas. You can use these as general rules of thumb and play with them, see what you get in terms of results, we're going to look at
162 00:28:33,660 --> 00:28:43,770 some things that help build a management model that will help with this equity curve idea. And also I'll give you some examples of how you can accelerate it
163 00:28:43,770 --> 00:28:59,250 and still keep drawdown at a minimum. Alright, so this is an example of what not to do. Okay, and we're going to see the effects of using a trading approach that
164 00:28:59,250 --> 00:29:12,450 either is, by way of a new trader seeing very marginal gains and being excited or scared to hold on to it and closing at 20 pips, but willing to suffer as much
165 00:29:12,450 --> 00:29:23,550 as 40 pips per trade. So we have a reversal, if you will have that reward to risk. They're only allowing themselves to make 20 pips, but holding on to losers
166 00:29:23,550 --> 00:29:29,760 much longer than they should, and they're averaging around 40 pips. So with a one to two reward the risk model,
167 00:29:30,060 --> 00:29:40,800 and 20 to 40 pips respectively. This trade is using 2% risk. But look what happens with this approach, we can see the drawdown takes us below the starting
168 00:29:40,800 --> 00:29:52,410 equity. So we are starting equity drawdown which is never fun. It's not that bad when you're losing open paper profits. In other words, profits that you have not
169 00:29:52,410 --> 00:30:02,730 taken home and paid income tax on those. Those are a little easier to take a draw down on it's not fun. But it's better to take those than it is losing what
170 00:30:02,730 --> 00:30:14,010 you put into the marketplace yourself. So we suffer starting equity, you're all down at this point here and goes down to the degree of 6.7% of starting equity.
171 00:30:14,280 --> 00:30:23,730 So this is not fun, we don't want to see this. So seeing draw down below the starting equity balance, not good. So we're going to look at how we could use a
172 00:30:24,240 --> 00:30:36,330 money management approach using this reversed. reward the risk model somehow works, we're only allowing ourselves to make 20 pips but suffering a loss of 40
173 00:30:36,330 --> 00:30:49,530 pips, we're gonna see the effects of doing something like that next. Again, risk is twice the potential reward here, you want to avoid this case, now we have a
174 00:30:49,560 --> 00:31:02,130 model using the money management approach, to see same losses in the same location, using 20 pips as their gain and 40 pips they're assuming in terms of
175 00:31:02,130 --> 00:31:14,070 drawdown or being stopped out at 40. pips, when the trader takes a loss, it drops down to its lowest leverage unit, which is 5k, then 5k, drops down to 10,
176 00:31:14,160 --> 00:31:24,870 I'm sorry, moves up to 10k, after when, then another loss comes and then drops down to 5k, and stays there for every loss when it makes money. But we're below
177 00:31:24,870 --> 00:31:33,780 the equity balance, beginning point, which is $5,000. So they have to stay at their lowest unit. Once we get back to the 5000. Then when you start adding,
178 00:31:35,250 --> 00:31:47,280 then we go to 15k, which is $1.50 per PIP losses suffered, they move right back down to the lowest leverage unit, which is 5k. And we have a series of winning
179 00:31:47,280 --> 00:31:57,960 trades after this five winning trades, they would have to go back down to the 5k. Again, to lock in or preserve the gained equity, which isn't much it's only
180 00:31:57,960 --> 00:32:10,920 $116 from starting equity. But you have to do these types of things to keep your open profits. In your account, basically, you want to allow the drawdown to
181 00:32:10,950 --> 00:32:23,760 erode those profits. Now looking at this, you can see the effects of it is marginal. Because the improvement isn't not that appealing. Even though we were
182 00:32:23,760 --> 00:32:35,790 able to get back above the $5,000 starting balance. We dipped down below it twice. And then we see this. So even with this drawdown being recouped. This is
183 00:32:35,790 --> 00:32:47,370 not encouraging at all, because you're still using a model that is going to make it difficult for the effects of sound money management to do its magic. Okay, so
184 00:32:47,370 --> 00:32:56,850 now we're looking at a model where the trader has a one to one reward risk model. So that means the trade is going to be taking 20 pips, or 20 pips risk
185 00:32:57,330 --> 00:33:11,610 and 2% risk. And no money management is applied here. Okay, so when the losses suffered, as we see here, we have a series of losses, this trader sticks to the
186 00:33:11,610 --> 00:33:22,140 2% rule, whatever the previous ending balances 2% of that, by that by 20 pips, that's the leverage they'll use, and five losing trades. in a row, nothing
187 00:33:22,230 --> 00:33:34,530 changed in terms of money management, it just stated static 2% not good. You can see that we had the initial run up, and then we had a nice drop down, okay,
188 00:33:34,590 --> 00:33:46,920 eroding all those gains. And now we're below starting equity balance. Okay, so we have now starting balance, drawdown, not fun, even though it comes out and
189 00:33:46,920 --> 00:33:55,290 has a gain of 12%. This to me is still not good. Because we're not, we're not
190 00:33:55,320 --> 00:34:04,680 handling the losses, we're not dealing with that. So we don't know if this losing streak is gonna end at five losing trades, it could continue on to eight,
191 00:34:04,680 --> 00:34:14,280 maybe even 12. And who knows the emotional impact and psychological impact of losing trade after trade trade on this particular trader, they may cause them to
192 00:34:14,280 --> 00:34:25,980 go in and over leverage even more or take trades that are not as valid based on their rules or procedures. So we don't want to go below that opening equity
193 00:34:25,980 --> 00:34:35,040 balance, if we can avoid it. That's what we're going to try to do. And now we're going to take a look at this same model here. Using reward to risk being equal
194 00:34:35,100 --> 00:34:45,060 again 2% risk. Leverage is never cut the flatline and draw down on this example.  But now we're gonna take a look at another trader. same scenario, same losing
195 00:34:45,060 --> 00:34:57,060 trades exactly where they would be. But this time the trader goes from using 2% risk. We take a loss, they dropped down to 10k or $1 per PIP that's their low
196 00:34:57,060 --> 00:35:09,810 end lowest leverage unit. Considering a winning trade, got one leverage unit to 20k or $2 per pit, it suffered a loss, they drop back down to 10k, which is
197 00:35:09,810 --> 00:35:17,820 their lowest leverage unit. And they stay there for every losing trade. And then they make a profit. And they can start bumping up, because they're above the
198 00:35:17,820 --> 00:35:25,560 beginning equity balance of $5,000, which is what we started with on this particular case study. demo, there's a losing trade here, they dropped back down
199 00:35:25,560 --> 00:35:38,760 to 10k $1 per pit, and have five winning trades. The next trade that is not in this list, they would trade back at one Mini, which is 10k or $1, per Pip, and
200 00:35:38,760 --> 00:35:48,060 it would start building that model again, look at the difference between this equity curve. Even though it was relatively the same ending balance, but the
201 00:35:48,060 --> 00:35:59,880 drawdown, we never went below the beginning equity balance, we stayed above it the entire time. The reward, the risk is given equal with 2% risk. The leverage
202 00:35:59,910 --> 00:36:10,170 is cut to flatline to draw down in this example here. And let's take a look at contrasting opinion because the results are less drawdown and more equity not by
203 00:36:10,170 --> 00:36:20,700 much, but it's a little bit more, but let's look at it side by side, which one of these equity curves Would you rather have? The one on the left is without
204 00:36:20,700 --> 00:36:36,900 money management. And the one on the right is with money management. So we see a much more severe decline. And we go below with what we started with $5,000. So
205 00:36:37,590 --> 00:36:50,880 we had increase in equity, same degree. But then, the severe drawdown that was seen by sticking with just a standard 2% risk, expecting every trade to be a
206 00:36:50,880 --> 00:37:01,560 winner like a knockin novice trader, or a gambler will they're always holding out for that next series of winning streak trades, a sound money manager with
207 00:37:01,560 --> 00:37:12,540 their equity, they will see the loss and adjust to quickly keep losses at a minimum. And then when we start making money, then we can start increasing the
208 00:37:12,540 --> 00:37:22,200 leverage, we take a loss to keep leverage low again until we take a win. And when you start ramping it up again. But we stop at five winning trades. Now, you
209 00:37:22,200 --> 00:37:31,380 can increase this to say seven or 10 winning trades where it'll really allow your account to grow. But you still have to be aggressive about when you take
210 00:37:31,380 --> 00:37:41,820 that losing trade, you had to go back down to your lowest leverage unit. So all these things are customizable. But I want to take a look at a another example
211 00:37:42,000 --> 00:37:56,370 where we can show the benefits of using this with really good opportunities.  Okay, so we have a opportunity of using three to one reward the risk. And we
212 00:37:56,370 --> 00:38:07,080 started with $5,000. And this is a beautiful equity curve here. This is what three to one reward risk and flatlining drawdown looks like after taking a loss
213 00:38:07,260 --> 00:38:17,100 and using a soft start. So what we mean by that? Well, we have $5,000, but we're starting with 50 cents per Pip, and going to $1 per PIP going $1.50 per Pip,
214 00:38:17,820 --> 00:38:18,240 then
215 00:38:18,540 --> 00:38:29,340 back down, after we take a loss to 50 cents per pit, then up to $1, up to $1.50, then we take a loss back down to 50 cents, up to $1, up to $1.50 up to $2 per
216 00:38:29,340 --> 00:38:36,840 PIP up to $2.50 per PIP and then we're at five winning trades. So if it dropped back down to 50 cents per Pip, we take a loss, not a big deal, did another loss,
217 00:38:36,870 --> 00:38:45,030 it's not a big deal. We take a win. Now we can start adding back building it up and then we take a loss at Dollar 50 profit, we drop back down to our lowest end
218 00:38:45,300 --> 00:38:54,960 and look at the look at the benefits of that. Now granted, we're not making a ton of money here. Okay, it's not a huge astronomical amount of money. Okay, but
219 00:38:54,990 --> 00:39:04,200 so you had 13 winning trades at a 20 with losing trades sprinkled in there and a random location just to show the effects of what it would look like, but still
220 00:39:04,200 --> 00:39:10,860 having a series of five winning trades in a row so you can have a win set cycle of five winning trades. Do you see the benefits of it and then when taking a
221 00:39:10,860 --> 00:39:20,610 loss, we dropped down to the lowest leverage unit the equity curve is Stein This is beautiful. Now if a trader uses this type of model, three to one allowing a
222 00:39:20,610 --> 00:39:29,550 trade to be three times what they're willing to take as a loss. Okay? Now once they have a limited amount of pips, they will not let it go beyond 20 pips. So
223 00:39:29,550 --> 00:39:38,250 that model was 20 pips risk, and we're aiming for 60 pips. As a day trader, you can do this a couple times a week. Now, not every day, but you can do it a
224 00:39:38,250 --> 00:39:46,200 couple times a week. So if you figure out how many times you could realistically do that per week, let's just say you can do it two times a week. That means
225 00:39:46,200 --> 00:39:54,600 about approximately 10 weeks you could see a 12% gain on your account. I think that's reasonable. I don't think it's astronomical or too high end of the
226 00:39:55,050 --> 00:40:06,450 objective or goal. But if you're a developing trader, there's certainly nothing wrong with this. Now we're gonna take a look at something that you can do. This
227 00:40:06,450 --> 00:40:19,230 is a model that shows same starting balance of $5,000, we're gonna be using a slightly different approach here, there is the reward model is three to one,
228 00:40:20,580 --> 00:40:30,450 leverage is still 2%. With an aggressive start, that means we're starting right at 2% of equity on our first trade. And after five consecutive wins, our
229 00:40:30,450 --> 00:40:40,380 leverage has to be cut to our lowest leverage unit. And we can see that here we have five winning trades, then we dropped back down to the beginning of 50k, or
230 00:40:40,380 --> 00:40:47,700 basically five hours per Pip. And we take a loss there, it's not a big deal, now I lost not a big deal, we have a win. So now we can start adding up to 2%.
231 00:40:47,700 --> 00:41:02,910 Again. So we dropped down after five winning trades. And here's the thing, if we take a single loss, we do not cut our leverage, we're allowing for that 2% rule
232 00:41:02,910 --> 00:41:13,470 to be there, you'll see a little bit more drawdown sometimes on this model here.  But the benefits are, you'll let your growth in these five winning trades. This
233 00:41:13,470 --> 00:41:23,610 is where you'll gain a lot of ground. Okay, so when this five, winning set of profitable trades come, it really accelerates and takes you high. But you can
234 00:41:23,610 --> 00:41:33,690 change this and you can tailor this yourself to whatever appetite of risk, you want to assume. This is obviously a contest type model, where you're willing to
235 00:41:33,690 --> 00:41:40,650 take a loss once in a while, if you have a really good high hit rate for what you're trading, if you're like, if you're a day trader and you know what you're
236 00:41:40,650 --> 00:41:49,020 looking for. It doesn't mean you're always right it as a day trader, I'm more apt to be accurate in that model versus say like I'm trading on a long term
237 00:41:49,020 --> 00:41:58,170 position or swing trade, I might have to get in that entry point, another time, I may get stopped out, or I may not be able to get the leverage I wanted to put
238 00:41:58,170 --> 00:42:06,480 on because it had already moved and it's changed my risk reward model when I first started looking for it, it's changed now it's skewed and it's a little bit
239 00:42:06,690 --> 00:42:18,990 less favorable. So to me day trading is it's perfect. And scalping can be done too. If we use the model of say we do a 10 PIP stop with a 30 PIP objective,
240 00:42:19,290 --> 00:42:25,650 intraday, you can find one of those every single trading day, if you know you're looking forward and you have the experience. So this same model here even though
241 00:42:25,650 --> 00:42:34,890 we're using 20, pips at risk, and 60 pips of the game, at three to one model can still be applied to scalping with 10 PIP stops and 30 PIP objectives, and you
242 00:42:34,890 --> 00:42:38,970 would still get similar results like here using the same money management approach.
243 00:42:44,730 --> 00:42:50,820 Hope you enjoyed this presentation. If you'd like to find more, you can visit my website at the inner circle trader.com