True Money Management

Tim Trush & Julie LavrinIntroducing True Money Management Your guide to financial freedom. © Tim Trush, Julie Lavrin, T&J Profit Club, 2!, "ll rights reserved ###.truemone$management.com Table Of Contents Chapter I: Why do traders fail? I.1. A shocing e!periment""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""# %al&h 'ince is a #ell (no#n financial investor. )e &erformed a ver$ famous e*&eriment (no#n as the %al&h 'ince e*&eriment. +nl$ t#o students out of , #ere able to ma(e mone$, the other -. failed to succeed. /h$01 I.$. %o& a good strategy 'fails("""""""""""""""""""""""""""""""""""""""""""""""""""""""") /e #ant to give $ou a clear ans#er as to #h$ it is that most traders fail even if the$ have a #inning strateg$. Chapter II: The secrets II.1. *sychology secrets"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""+ " ver$ small &ro&ortion of all traders reall$ understand #hat distinguishes good traders from bad traders. You are &robabl$ bombarded #ith guaranteed mone$ ma(ing methods all the time. /hen someone can2t succeed, he thin(s that the methods don2t #or( or s&ecificall$ don2t #or( for him or her. II.$. Money secrets"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""", 3u&&osing...You (no# #hen to enter the mar(et and #hen to e*it. 4ut something is missing... the strateg$ doesn2t tell $ou ho& much money $ou have to ris( on an$ one trade. The #orld2s to& traders are trading in a counter5intuitive fashion. The$ are behaving differentl$ from 6normal7 &eo&le. The$ behave in fact li(e a mone$ ma(ing machine. Chapter III: Achie-e e!ponential earnings and ne-er fail III.$. Achie-e e!ponential earnings""""""""""""""""""""""""""""""""""""""""""""""""""""". 4asic and advanced mone$ management. This is the heart of this boo(. 8et rich 9uic(1 This is the #a$ that ne# multimillionaires are born. III.1. /e-er fail""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""10 3uccessful traders are &re&ared for the #orst &ossible situation. :nsuccessful traders ho&e it #ill not ha&&en. " math formula that #ill shoc( $ou. ###.truemone$management.com 2 Chapter I: Why do traders fail? I.1. A shocing e!periment %al&h 'ince is a #ell (no#n financial investor. )e &erformed a ver$ famous e*&eriment (no#n as the %al&h 'ince e*&eriment. )e too( , Ph;. students and set them u& to trade #ith a com&uter game. <o#, these fort$ &eo&le all had doctorates, but =r. 'ince made sure that none of their doctorates involved an$ sort of bac(ground in mathematical statistics or trading. In the game, the$ #ere given >?, and ? trades, #ith a @A #inning &ercentage. The rules #ere sim&le. /hen the$ #on, the$ #on the amount of mone$ the$ ris(ed. /hen the$ lost, the$ lost the amount of mone$ the$ ris(ed. 3o, after all , students had com&leted their ? trades, ho# man$ do $ou thin( made mone$0 +nl$ t#o students out of , #ere able to ma(e mone$, the other -. failed to succeed. %ecallB the$ had @A #inning &ercentage. I means that the$ #on @ trades from ? in average. The odds #ere in their favour, so #h$ the$ lost mone$0 /h$ onl$ t#o students out of fort$ #ere able to #in0 It doesn2t ma(e an$ sense1 ###.truemone$management.com - I.$. %o& a good strategy 'fails( It is not the strateg$ C it is the trader #ho fails. That2s the truth. The e*&eriment sho#s that most traders fail even if the$ are trading a #inning trading s$stem. Dor that reason #e had to #rite this boo(. /e #ant to give $ou a clear ans#er as to #h$ most &eo&le fail to ma(e mone$ consistentl$. Imagine $ou are one of the students. You bet >? and #in >?. You bet another >? and #in another >?... and $ou feel rich... "nd then suddenl$ $ou lose >?. You are still laughingB >? loss is not so big, $ou are thin(ing that $ou #ill #in ne*t time and recover that small loss. 4ut $ou lose another >?. You become uncertain and since $ou #ant to recover $our t#o losses as 9uic(l$ as &ossible Eit is a normal human behaviour called greedF, $ou bet >2 to get >2. You are &ra$ing to #in. 4ut #hat ha&&ens if $ou lose again0 You become ver$ angr$ and $ou #ant $our mone$ bac( immediatel$1 This is the #orst situation C $ou let $our emotions gain control of $our trading decisions. Drom that &oint on, $ou #ill &robabl$ never recover $our mone$ bac( and the chances are that $ou #ill blo# out the #hole account. You #ill bet more and more in the ho&e of #inning bac( all that $ou have lost in one single trade. If that luc($ trade ma(es $ou rich, then good luc(1 4ut &lease realiGe that $ou cannot ma(e a living from trading if $ou act li(e a s&read gambler. You need to follo# strict mone$ management rules to succeed as a trader. Remember: Unsuccessful traders are risking more money in the hope of recovering losses quickly. uccessful traders are doing !ust the opposite. "reed is your #orst enemy. You #ill get enlightened after reading the &aragra&h II.$. Money 1ecrets. ###.truemone$management.com , Chapter II: The secrets II.1. *sychology secrets /e named this cha&ter 6secrets7 because a ver$ small &ro&ortion of all traders reall$ understand #hat distinguishes good traders from bad traders. You are &robabl$ bombarded #ith guaranteed mone$ ma(ing methods all the time. /hen someone can2t succeed, he thin(s that the methods don2t #or( or s&ecificall$ don2t #or( for him or her. These traders are loc(ed in a vicious circle. "nd unfortunatel$, the$ leave one method and go loo(ing for another one. The$ are #asting time and energ$ in searching for the )ol$ 8rail that #ill ma(e them rich. The$ thin( that ma(ing a huge amount of mone$ is ver$ hard. /hat a Ho(e1 If $ou understand the basic &s$cholog$ of trading, $ou #ill be light $ears ahead of the losing traders. The shortest &ath to becoming successful is to stud$ $our o#n &s$cholog$. /e and our students often sa$ that trading is the easiest #a$ to ma(e mone$. =ost &eo&le sim&l$ can2t believe this. If trading #ere so eas$, #h$ are there so man$ traders not ma(ing mone$0 The$ are stud$ing hard, reading all the ne#s&a&ers and magaGines about trading, the$ are discussing trading techni9ues on the forums but still the$ are not ma(ing mone$. The$ are all ma(ing the same mista(e1 3ome of them are e*tremel$ stubborn and the$ #on2t acce&t that it is &s$cholog$, disci&line and &ro&er mone$ management that distinguishes good traders from bad traders. /ot economic education or the amount of effort &ut into trading. =ost of our students succeed in Hust a fe# months stud$ing our methods. These #ho succeed have read this boo( several times. Dinall$, the$ have been able to fulfil their dreams. 3o #hat2s the &roblem that is causing some traders not to ma(e mone$0 ● They !ust #on$t admit that trading is easy% Their a&&roach is too com&licated because the$ thin( that if trading #ere so eas$, there #ould be more multimillionaires around. 4ut the real multimillionaires have alread$ realised that trading is eas$. ● "reed. /e tal(ed about greed in &aragra&h I.2. and #e #ill tal( of it again in the ne*t &aragra&h. 8reed is $our #orst enem$, and it lies in $our head. Dight it1 ● ome people trust financial advisers for their trading methods. =ost financial advisers give false &romises that the$ #ill ma(e $ou rich. The$ do it for mone$. The real traders share ideas #ith $ou Hust for fun. ● &ost people follo# the cro#d. The$ are selling dollars because all the traders in the forums are shoutingB 63ILL T)I ;+LL"%17 The$ log on to their &latform immediatel$ and sell the dollar. "void this1 4e $ourself1 Remember: The main reason #hy traders fail is human psychology. 'nother reason is improper money management. ###.truemone$management.com J II.$. Money secrets /hat is in realit$ a trading strateg$0 " strateg$ gives $ou entr$ and e*it &oints based on some sort of information Echarts, indicators, fundamentals, etc.F. You (no# #hen to enter the mar(et and #hen to e*it. 4ut something is missing here... the strateg$ doesn2t tell $ou ho& much money $ou have to ris( on an$ one trade. You need to (no# ho# man$ minilots, lots or contracts to o&en ever$ time. This is in fact the most im&ortant &art of a successful trading strateg$. To ma(e things clear, let2s tal( about 8ambler 8eorge and Trader Tim. It is im&ortant to understand the difference bet#een them, so read carefull$. 8eorge is trading because he has heard some#here that he can ma(e a large amount of mone$ 9uic(l$. /hen 8eorge is #inning, he sta$s calm and bets the same amount of mone$ on ever$ trade. /hen he feels rich, he is afraid of losing his hard earned mone$. 3o he bets a smaller amount of mone$ on the ne*t trade. /hen he is losing, he becomes angr$. )e bets a larger amount of mone$ to recover the losses 9uic(l$. 8eorge ris(s less #hen he is #inning and ris(s more #hen he is losing. Tim is a serious trader. )e ma(es e*actl$ the o&&osite decisions. /hen he is #inning, he bets more. /hen he is losing, he bets less. It sounds reall$ strange and counter5intuitive, so #h$ is he doing this0 4ecause his mone$ management tells him so. )e doesn2t let his emotions control him and his decisions. )e doesn2t &la$ li(e ever$man. )e acts li(e a mone$ ma(ing machine. Remember: The #orld$s top traders are trading in this counter(intuitive fashion. They are behaving differently from )normal* people. They are making money consistently and making a nice living. " #inning strateg$ "ccount result 8eorge is trading... 8eorge lost. Tim is trading... Tim made a &rofit. ...the$ both trade the same strateg$1 ###.truemone$management.com @ Chapter III: Achie-e e!ponential earnings and ne-er fail III.1. Achie-e e!ponential earnings In the last t#o &aragra&hs #e #ill discuss the secret formula to achieve e*&onential gro#th and com&letel$ avoid the ris( of $our account falling to Gero. This is the heart of this boo(. This is the #a$ that millionaires trade. a2 The basic money management is to ris a constant amount of money. It is recommended to choose +3 of initial account for beginners. I*am&leB 4u$ 84PK:3; at 2. )o# big &osition should I o&en0 I*am&le targets Egiven b$ a strateg$FB Ta(e &rofitB TP L 2.? %e#ard is ? &i&s. %is( is J &i&s. 3to&lossB 3L L ?.MMJ Initial "ccountB >J You #ant to ris( JA >2J )o# man$ minilots should I o&en0 If $ou o&en ? minilotB one &i& L >? J &i&s L >J You #ould ris( onl$ >J. The re#ard #ould be onl$ >?. You need to o&en J minilotsB one &i& L >J J &i&s L >2J You #ill ris( e*actl$ >2J. The re#ard #ill be >J. That2s #hat $ou #anted. "ns#erB 4u$ J minilots of 84PK:3;. The formula isB Minilots 4 5+3 Account2 6 57is in pips2 Tip: 8se the Money Management Calculator9 www.truemoneymanagement.com/calculator ###.truemone$management.com ! :!ample a2 Imagine $ou are trading a strateg$ #ith a @A #inning &ercentage and let the re#ard be t#o times more than the ris(. This means that $ou set u& $our &rofit target t#o times bigger than the sto&loss. Dor e*am&le, if $ou bet >?, $ou #ill either get >2, or lose >?. "nother e*am&leB if $ou bet >2J, $ou #ill either get >J, or lose >2J. Imagine $ou are a disci&lined trader starting #ith >J and ris(ing >2J on ever$ single trade. The histor$ of t#ent$ trades should loo( li(e thisB Trade <o. "ccount %is( /+<KL+3T "ccount ? >J >2J /+< >J >JJ 2 >JJ >2J /+< >J >@ - >@ >2J L+3T >52J >J!J , >J!J >2J /+< >J >@2J J >@2J >2J L+3T >52J >@ @ >@ >2J /+< >J >@J ! >@J >2J /+< >J >! . >! >2J L+3T >52J >@!J M >@!J >2J /+< >J >!2J ? >!2J >2J L+3T >52J >! ?? >! >2J /+< >J >!J ?2 >!J >2J /+< >J >. ?- >. >2J L+3T >52J >!!J ?, >!!J >2J /+< >J >.2J ?J >.2J >2J L+3T >52J >. ?@ >. >2J /+< >J >.J ?! >.J >2J /+< >J >M ?. >M >2J L+3T >52J >.!J ?M >.!J >2J /+< >J >M2J 2 >M2J >2J L+3T >52J >M Your account reached >M so $ou earned >, after t#ent$ trades. This (ind of mone$ management is #idel$ used b$ disci&lined traders but it has t#o disadvantagesB ● It #ill not ma(e $ou rich. You #ill earn a constant sum of mone$ each month. That2s the same as being em&lo$ed. Nuite ineffective. ● "fter ten consecutive losses, $ou #ill #i&e out a half of $our initial account E>2JF. "fter t#ent$ losses $ou #ill #i&e out the #hole account E>JF. ###.truemone$management.com . b2 Imagine you are trading the same strategy but using another money management system. The ad-anced money management system is to ris a constant percentage of your current account e-ery time. It is recommended to choose +3 for beginners. :!ample b2 The histor$ of the same t#ent$ trades #ould loo( li(e thisB Trade <o. "ccount %is( JA /+<KL+3T "ccount ? >J >2J /+< >J >JJ 2 >JJ >2!J /+< >JJ >@J - >@J >-2.J L+3T >5-2.J >J!,!.J , >J!,!.J >2.!.-. /+< >J!,.!J >@-22.2J J >@-22.2J >-?@.?? L+3T >5-?@.?? >@@.?, @ >@@.?, >-.-? /+< >@.@? >@@@.!J ! >@@@.!J >--.-, /+< >@@.@. >!2@!.,- . >!2@!.,- >[email protected]! L+3T >[email protected]! >@M,.@ M >@M,.@ >-,J.2 /+< >@M.,? >!JM,.,@ ? >!JM,.,@ >-!M.!2 L+3T >5-!M.!2 >!2?,.!, ?? >!2?,.!, >-@.!, /+< >!2?.,! >[email protected]? ?2 >[email protected]? >-M@..? /+< >!M-.@2 >.!2M..- ?- >.!2M..- >,-@.,M L+3T >5,-@.,M >.2M-.-, ?, >.2M-.-, >,?,.@! /+< >.2M.-- >M?22.@! ?J >M?22.@! >,J@.?- L+3T >5,J@.?- >.@@@.J, ?@ >.@@@.J, >,--.-- /+< >.@@.@J >MJ--.2 ?! >MJ--.2 >,!@.@@ /+< >MJ-.-2 >?,[email protected]? ?. >?,[email protected]? >J2,.-- L+3T >5J2,.-- >MM@2.?M ?M >MM@2.?M >,M..?? /+< >[email protected] >?MJ..,? 2 >?MJ..,? >J,!.M2 L+3T >5J,!.M2 >?,?.,M ###.truemone$management.com M There are several advantagesB ● The first thing that $ou #ill have noticed is $ou have earned more. In the &revious e*am&le $ou made >M, no# $ou have made >?,,?. ● You are in fact acting li(e Trader Tim. The smaller the account, the less $ou ris(. ● "s $our ca&ital gro#s, $ou can o&en larger &ositions. This leads to e*&onential gro#th of $our account. "s $our account reaches >?,, $ou ris( t#o times more than >2J Ebecause JA of >?, L >JF. "s $our account reaches >2,, $ou ris( four times more Ebecause JA of >2, L >?F. It is e*tremel$ good to see that ma(ing >?, dollars costs the same time as ma(ing >J dollars before. You can double $our mone$ ever$ fe# months. This is the #a$ that ne# multimillionaires are born1 ● The &robabilit$ of #i&ing out the #hole account tends do#n to Gero. /e #ill cover this to&ic in the ne*t &aragra&h. III.$. /e-er fail "n e*am&le is #orth more than ? #ords. Trade <o. "ccount %is( JA /+<KL+3T "ccount ? >J >2J L+3T >52J >,!J 2 >,!J >2-!.J L+3T >52-!.J >,J?2.J - >,J?2.J >22J.@- L+3T >522J.@- >,2.@... , >,2.@... >2?,.-, L+3T >52?,.-, >,!2.J- J >,!2.J- >2-.@- L+3T >52-.@- >[email protected] @ >[email protected] >?M-.,J L+3T >5?M-.,J >-@!J.,@ ! >-@!J.,@ >?.-.!! L+3T >5?.-.!! >-,M?.@M . >-,M?.@M >?!,.J. L+3T >5?!,.J. >--?!.? M >--?!.? >?@J..@ L+3T >5?@J..@ >-?J?.2J ? >-?J?.2J >?J!.J@ L+3T >5?J!.J@ >2MM-.@. ?? >2MM-.@. >?,M.@. L+3T >5?,M.@. >2.,, ?2 >2.,, >?,2.2 L+3T >5?,2.2 >2!?.. ?- >2!?.. >?-J.M L+3T >5?-J.M >2J@@.!? ?, >2J@@.!? >?2..-, L+3T >5?2..-, >2,-..-! ?J >2,-..-! >?2?.M2 L+3T >5?2?.M2 >2-?@.,@ ?@ >2-?@.,@ >??J..2 L+3T >5??J..2 >22.@- ?! >22.@- >??.- L+3T >5??.- >2M.@ ?. >2M.@ >?,.J- L+3T >5?,.J- >?M.@.! ?M >?M.@.! >MM.- L+3T >5MM.- >?..@.!! 2 >?..@.!! >M,.-, L+3T >5M,.-, >?!M2.,- ###.truemone$management.com ? Imagine the &orst possible situation. Ten or t#ent$ consecutive losses in a ro#. " horrible &eriod of bad luc( or &oor trading. Ten consecutive losses #ould &robabl$ ruin ever$ beginner. 4ut loo( #hat ha&&ened to $our account using this s$stem. "ctuall$, $ou have lost less than a half of $our account. Loo( #hat ha&&ened after t#ent$ consecutive losses in a ro# Ean e*tremel$ unli(el$ coincidenceF. You are still alive1 If $ou used the basic mone$ management described in &aragra&h III.?. aF, $our account #ould definitel$ fall to Gero Ebecause JA * 2 losses L ?A accountF. The math formula holds goodB <o# $ou can easil$ com&ute #hat ha&&ens after n consecutive losses if $ou start #ith account value '. I*am&lesB p L J, n L ? J O E? C .JF ? L J O .MJ ? L 2MM-.@. )ere #e got the same results as in the table above. p L J, n L 2 J O E? C .JF 2 L J O .MJ 2 L ?!M2.,- p L ?, n L ? J O E? C .?F ? L J O .M ? L ?!,-.-M The last e*am&le sho#s us #hat ha&&ened after ten losses if $ou ris(ed ?A instead of JA. You are still alive. 3ome ver$ advanced traders ris( ?A or far more. 3ince the$ ris( more and get more, the$ achieve amaGing results in the trading com&etitions Ee. g. /orld Cu& Cham&ionshi& P F. This is their secret. Remember: uccessful traders are prepared for the #orst possible situation. Unsuccessful traders hope it #ill never happen. ###.truemone$management.com ?? Licensed to +appy Trading% %is( disclaimerB Trading foreign e*change on margin carries a high level of ris(, and ma$ not be suitable for all investors. The high degree of leverage can #or( against $ou as #ell as for $ou. 4efore deciding to invest in foreign e*change $ou should carefull$ consider $our investment obHectives, level of e*&erience, and ris( a&&etite. The &ossibilit$ e*ists that $ou could sustain a loss of some or all of $our initial investment and therefore $ou should not invest mone$ that $ou cannot afford to lose. CDTC %:LI ,.,? 5 )$&othetical &erformance results have man$ inherent limitations. <o re&resentation is being made that an$ account #ill or is li(el$ to achieve &rofits or losses similar to those sho#n. In fact, there are fre9uentl$ shar& differences bet#een h$&othetical &erformance results and the actual results subse9uentl$ achieved b$ an$ &articular trading &rogram. +ne of the limitations of h$&othetical &erformance results is that the$ are generall$ &re&ared #ith the benefit of hindsight. In addition, h$&othetical trading does not involve financial ris(. 'ariables such as the abilit$ to adhere to a &articular trading &rogram in s&ite of trading losses as #ell as maintaining ade9uate li9uidit$ are material &oints #hich can adversel$ affect actual real trading results. ###.truemone$management.com ?2