Trader's Corner - An Interview With A Success

Trader's Corner - An Interview With A Success By Matt Blackman | August 17, 2004


When asked how he likes to trade, Dan Zanger responds using a race car analogy.

"I like to go 180 mph just inches from the wall. That means being margined 2 to 1 and either long or short a stock that is highly volatile and getting ready to make a big move," he says.

Zanger puts his money where his mouth is. He holds the unofficial record in trading stocks by turning $11,000 into more than $18 million in 18 months in 1999-2000. He grew that to an incredible $42 million in less than two years and has the tax receipts to prove it.

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Figure 1 – Imclone (IMCL) chart showing a major melt down in progress and comments by Zanger above the chart. Chart provided by www.chartpattern.com.
First introduced to stock markets in 1976, Zanger dabbled for a few years while working his full-time pool contracting business. His two biggest mentors during his formative years as a trader were Gene Morgan and William O'Neil. He learned everything he could about chart patterns and important fundamentals, but the style he developed is very much his own. He got really serious in 1989 and spent the next 10 years honing his craft.

How Does He Do It?
"I use absolutely no indicators whatsoever," he said in an interview with me last year. "I simply rely on chart patterns, price and volume. Who has the time to look at so many indicators when you're scrolling through 400 stocks a night?"

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Figure 2 – Novellus Systems (NVLS) chart and comments from Dan Zanger\'s www.chartpattern.com newsletter.
The type of set ups Zanger looks for is exemplified in figure 1. After a strong trend up from March through June, Imclone started to break down. After breaking the trend line, it put in one of his favorite chart patterns, the bear flag. If the lower trend line of the flag is broken it means a potential short. If it is broken on high volume, as it was on July 21, Zanger jumps in with both feet, rides the move until the excitement dies down a little, and then exits.

Novellus Systems exhibits an example of another good short trade. Zanger identified the bear box in figure 2 when the stock was trading at $27 to $28. Four days later it was trading in the $25 range.

"I don't really use stop losses in the classical sense," says Zanger. "When it takes an increasing amount of volume to drive a stock and the pattern starts to lose steam, it's time to start feathering out. I want to get in near the beginning of the move and out when it begins to peter out. Why wait until it runs out of gas and goes against you? That approach can be quite costly," he says.

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Figure 3 – Semiconductor Index (SOX) in July 2003. Provided by www.chartpattern.com.
Volume plays a very important part in Zanger's trading approach, but interestingly enough he doesn't use volume indicators like Mark Chaikin's Money Flow Index. "I have not found a way to make it work effectively. I have seen it fail so many times and in no way will this indicator highlight or pinpoint the big movers in the market," he explains.

Markets have changed dramatically since the first article highlighting Zanger's incredible achievement - entitled "My Stocks Are Up 10,000%!" - appeared in Fortune Magazine in December 2000.


"For much of the 90s, we were in a huge bull market. That is when I learned to trade. My mistakes during that time can be traced in a large part to a belief that stocks could go no way but up. No matter how good the earnings were, they would only continue to get better. But then the stock would drop 30% and on 2 to 1 margin, I'd lose most of my money. When you begin to believe that a stock can only go in one direction, that is when you will have your head handed to you."

Throughout the 1990s, Zanger made and lost it "three or four times." He was able to recognize market bottoms, cycles, important time frames and could see when stocks were taking off, but he had a harder time seeing when they were getting ready to tank.

That changed during the Asian financial crises that caused the market meltdown in 1997.

"Oil and oil drilling stocks were leading the market at the time. Oil at times moves up toward the end of a bull market and leads a recession," he comments. It helped him recognize the market top, which before he had a hard time seeing. He says it was a defining moment in his career.

Unfortunately he got caught in a stock that was collapsing so fast he couldn't get out. It almost wiped him out, but he bounced back. More importantly, his education had come full circle.

But Zanger was still not immune to large losses. He remembers one day in October 2000 very vividly. After the big bubble run up, he "had so much cash that it was mind-boggling." But, he was in "just about every hot fiber stock at the time … with that mind-boggling money leveraged at 2-to-1 margin," when sector leader Nortel Networks (NT) warned of a revenue shortfall after the close of trading. He considers himself lucky to have walked away after losing more than 30% of his portfolio the next day.

It is lessons like this that have helped shape the trading strategies Zanger uses today. He combines technicals with fundamentals he learned from stock guru William J. O'Neil, discussed in his book "How To Make Money In Stocks" in a method he calls CANSLIM.

Zanger has read the book countless times and continues to reference it regularly today. He is a CANSLIM convert looking for stocks that have a global reach, that are leaders in their industry and that have earnings that demonstrate continuous improvement. He says that combining technicals AND fundamentals greatly increases his chances for success. He likes stocks that are under-known and under-owned.

It is also important to find timely market leaders by sector, industry and company. In the early 1990s during the first Gulf War it was biotechs that were huge market leaders. Later in the decade it was Internet stocks such as Amazon.com. In 2000, it was the fiber optics stocks. Find the sector that is in favor and then find the company that leads it. When the leader begins to trend down it's time to move on. Zanger is interested only in stocks that are "frisky."

"You have to know what's hot and follow that group or stock … and stay with the winners. Why own a stock that is making a $2 gain per day when you can play one that makes a $5 move?"

How Does He Find Stock Candidates?
Of the 1,400 stocks he scans nightly, Zanger may choose 50 to 60 to watch on his quote screen during the following day. He focuses on those that show building volume and potentially profitable patterns. When a pattern breaks out or breaks down on volume he makes his move.

He Still Prefers Bull Markets
"You can make 300 to 400% on your money in a bull market, but the most a stock can move down is 100% and that's if it goes to zero. That doesn't happen very often. You play the bear market just to hang around so that when the big move finally does come, you're there," he says.

It is why he is a big believer in cash during a bear market. He wants to be ready for the next rally.

Zanger also did well in the 2003 rally. His newsletter, The Zanger Report at chartpattern.com, identified a descending channel breakout in the Semiconductor Index (SOX) in July 03, when it hit 368 (figure 3). By December, it was trading at 560.

So how has Zanger done since the first article about him in Fortune Magazine?

In 2003 his portfolio gained 150% while the S&P 500 Index (SPX) gained 36%. When we spoke to him in August 2004, his 2004 portfolio was up more than 100% on top of the 2003. This compared to a loss of 3% for the SPX from the first trading day of January to mid-August.

One thing he didn't mention during our interviews is that, while he prefers bull markets, his system also works extremely well during trading range markets when most investors and traders are sidelined. As long as even a few volatile stocks he refers to as his "frisky buddies" are breaking up or down, he can make money.

When does he go on vacation?

"Not very often. I have a large motor yacht and a home on both coasts but stocks are my life. If markets are open I have to be there. There is nothing more exciting and enjoyable. I'm so blessed to be doing what I want to do and get paid to do it. When I'm on vacation I can't wait to get back to the market where all the action is," he exclaimed.

"I just can't wait for very high-speed satellite and a reasonable rate to come around so I can trade from my yacht from anywhere in the world."

With that kind of passion and commitment, it's not hard to see why Dan Zanger has been so successful.


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How To Grow Your Account Fast Without Increasing Your Risk

How To Grow Your Account Fast Without Increasing Your Risk

I’m sure you probably have heard that compounding can help grow your account geometrically. But the normal way of compounding can take some time to grow your account. My method of using compounding takes it to the extreme to grow your account much faster without increasing your risk greatly.

Here, I would like to share a strategy which, if used properly, can help you grow your account pretty quickly. It introduces compounding into your money management strategy. 

First, let me show you the power of compounding through the normal way by a hypothetical example below:
If you have $10,000 invested and it gives you a rate of return 20% every year, you will have $380,000 at the end of 20 years by re-investing the profits (i.e. compounding),while you will only have $50,000 at the end of 20 years without compounding. You can see that compounding increase our total account by more than 6 times. 

Okay, let me move on to talk about using compounding in Forex Trading. 

But, first let me digress a bit. For those who are not familiar with R-multiple concept, let me explain a bit on that. It was introduced by Dr Van Tharp. 'R' is simply the dollar risk per trade. It’s nothing but a reward-to-risk ratio. Let say you risk $100 dollar per trade to make $500. Your risk to reward ratio is 1 :5. Your risk is 1R and your reward is 5R. Another example, you are risking $1000 dollar per trade to make $500. Your risk reward ratio is 2:1. Your risk is 1R and your reward in this case is 0.5R. We always take our risk as 1R and calculate your reward in terms of R-multiple. 

Let's get back to compounding. Let say our 1R is set to be $10( meaning we risk $10 per trade). We increase our dollar risk per trade(the dollar value of 1R) by our previous winning after each winning trade. Please take note that we are NOT compounding after each and every trade. We only compound after we had a winning trade with the expectation that we will have a winning streak( based on our testing data). If you hit a losing streak, your risk would be the same amount regardless whether you are using compounding or not.

So, let us see the results for 4 consecutive winning trades:

For a risk reward ratio of 1:2:
$10 --> $30 --> $90 --> $270 --> $810
(For our first winning trade, we risk $10 per trade,and with a risk reward ratio of 1:2, we make $20 in profit and have a total of $30 now. We then can risk $30 for our second winning trade, we make $60 in profit and have a total of $90 now. The same goes for the third and the fourth winning trade. At the end of fourth winning trade, we will have $810 in total which is a whopping 8100% return over our initial risk.)

For a risk reward ratio of 1:3:
$10 --> $40 --> $160 --> $640 --> $2,560
(At the end of fourth winning trade, we will have $810 in total which is a whopping 25600% return over our initial risk.)

For a risk reward ratio of 1:4:
$10 --> $50 --> $250 --> $1250 --> $6,250
(At the end of fourth winning trade, we will have $810 in total which is a whopping 62500% return over our initial risk.)

For a risk reward ratio of 1
$10 --> $60 --> $360 --> $2,160 --> $12,960
(At the end of fourth winning trade, we will have $810 in total which is a whopping 129600% return over our initial risk.)

We will take a look at another scenario where we risk $50 per trade:

For a risk reward ratio of 1:2:
$50 --> $150 --> $450 --> $1,350 --> $4,050

For a risk reward ratio of 1:3:
$50 --> $200 --> $800 --> $3,200 --> $12,800

For a risk reward ratio of 1:4:
$50 --> $250 --> $1,250 --> $6,250 --> $31,250

For a risk reward ratio of 1
$50 --> $300 --> $1,800 --> $10,800 --> $64,800

As you can see the huge potential comes with incorporating compounding into your money management strategy. You are simply 'reinvesting' your previous profits into your next trade and expotentially increase your profits for the next trade when you are on a winning streak. The higher the risk reward ratio and the higher the initial dollar risk per trade, the greater effect compounding has on your overall profits of a winning streak.

What kind of trading strategies can compounding strategy be useful for?

it is suitable for trading strategies that are:

(1) have a risk reward ratio higher than 1:1
(2) frequency of having winning streak of 2 and above is considerably high

Take Note: Compounding Strategy is not used to turn a losing trading system into a profitable trading system. It is used to increase your profits and grow your account faster for a profitable trading system. 

Let me illustrate by a few hypothetical examples:
Example 1: Trading Strategy A with a Risk Reward Ratio of 1:4 and Win ratio of 35%. It frequently has 3 winning trades in a row. Our starting trading capital is $1000. Our risk per trade(1R) is $20.

Sample Trading Data : 



Example 2: This is just a hypothetical scenario where winning trades and losing trades alternate. Our starting trading capital is $1000. Our risk per trade(1R) is $20.

Sample Trading Data : 




With a compounding strategy, an originally winning trading system turned into a losing trading system because it doesn't fulfill one of the two important prerequisite which is high occurrence of consecutive winning trades. 

Win Rate Needed To Be Profitable Based On Risk Reward Ratio



As you can see, the higher the initial risk reward ratio brings you a much higher overall r-multiple win with more consecutive winning streaks. For example, if you risked 1:5 and aim to get one set of 3 consecutive win streak, all you need is just 1 winning set in 216 trades to be profitable (roughly a win rate of 0.005%).

Try out in your own trading and let me know how it goes!

Read more: http://forums.babypips.com/risk-management-and-trading-plan/69189-how-grow-your-account-fast-without-increasing-your-risk.html#ixzz3v7dAcD3P

Stop Order

I think the reason why most beginners lose at this is because they start out with the wrong mentality. I was there too.

When we get to forex, we want to make some serious money, and we think that the more we trade the more we can earn! So naturally we aim for the shorter time frames where swings happen by the minute or even seconds.

However the problem with that is that it is extremely hard to trade a short time frame and be profitable. Here's why:

1) You need to be very good at reading price action to succeed at short term trading.
2) You need to be able to change bias constantly.
3) You need to set wider stops because you need to give the trade space to play out.
4) You need to calculate RR constantly and the orders are relatively fast paced - a small mistake can kill your MM.
5) You are taking more trades so you are more prone to getting emotional.

etc.

And I think many of us are guilty of increasing our risk beyond what our account can handle and what we can handle emotionally.

AND sometimes we move out stops back hoping the market will come back - sure it does at times, but you need to have a plan for moving stops (such as seeing some sort of price action that CONFIRMS your trade but you realise the trade needs more breathing space) etc. and you cannot do it more than once. 

All these are not easy to accomplish for more human beings like you and I...

But I am sure if you start out with longer term trading, and find a working strategy (there are MANY out there) and you be satisfied with a small win every week - you will be able to make it in the long term... But it is tough emotionally and tough mentally.

No one said it was easy.

Oh by the way, do you guys know what is the holy grail of trading? 

It is called stop orders. Reason being: if you enter with momentum you are seldom wrong and you will seldom suffer a drawdown, and if you happen to be wrong, you can usually get out on a pullback.

Read more: http://forums.babypips.com/newbie-island/12-does-anyone-really-make-money-off-forex-7.html#ixzz3v32gPEFA

Leverage

Leverage don't mean shoot; it's position size that matters, if my risk calculations say I can afford £0.22/pip then that's it, leverage is irrelevant, incidently I'm at 50:1, suits me just fine. And about the matter really under discussion; I've just started, in the last month or so, to grow my equity an average of 2% per day, and for the last 2 weeks - 4.3% per day!(and that includes weekends) Ka-Chingg! And that's by completly cutting off doing stupid things like chasing price and overtrading. Letting some trades run for a couple of days if I think I'm in a good position has definetly helped put money in the bank, only putting in orders at levels of confluence, using bigger stops, taking 50% profits off at first targets, etc etc. I first heard of forex and opened a demo account in November 2011, I've been trading live since Feb this year and lost £900 out of my initial £1200 before I began to sort myself out, or I should say the wise teachings of our very own fx sensei ICT sorted me out! 

Read more: http://forums.babypips.com/newbie-island/12-does-anyone-really-make-money-off-forex-7.html#ixzz3v2jwedyW

It takes hard work

It takes hard work, I can't even tell you how many hours I spent glancing over charts...because I stopped counting. And that's after 5 years of business, real estate, economics, and finance for my BSc, and another year for my MSc in Real Estate. I probably spend more hours on learning about forex than for my MSc. 

Like anything in life it takes effort, discipline, and dedication. 

The thing about forex is that there is a TON of wrong information on the web. People who believe they can walk into a library and buy a book about heart surgery and then successfully do such an operation are called CRAZY. Yet somehow there's this perception that by simply copying a system or reading some forex book you will somehow turn into a millionaire overnight. That's simply nuts!! 

To someone who's good at it, it might seem easy...but he/she had to put in a lot of effort. 99.99999% aren't born great traders. Read "Hedge Fund Market Wizards" and you'll realise that every single one of the "great traders" were massive failures when they started out. I mean, you have guys who did all the usual mistakes when they started out...overleveraging their trades blowing massive sums. Yet the one trait they all have in common is they NEVER GAVE UP. And that goes for pretty much everything in life. 

I loved that one story where one of those now-great fund managers started out by getting fired from one trading job over and over and over and over again. When the interviewer (Schwager) asked him if he ever thought about giving up the answer was "no". THAT'S what will make you successful. 

Start slowly, read the Babypips school, open a demo account, try different systems until you find one that works FOR YOU. Then back and forward test it for a few weeks/months on a demo account. Only once it's proven to be profitable for a few months take it live by starting a small real money account. Trade that for a few weeks/months to get used to the psychological stress...and not matter how calm you are, stress does play an important role. I lead negotiations for multi-million $ sales of upscale hotels and that almost never stresses me out, yet the first time a trade I was really sure of didn't work out it freaked me out 

Slowly build up that live account and as confidence grows (because of good results...and ONLY then), seed it with some money from your regular business. Don't dump it on there all at once, add a bit every month and only during months where you're profitable. Work up your bankroll. 

On a side note, don't buy into signal services or EAs...if you want to be a TRADER you have to fully understand WHY you are taking a trade...otherwise you're just a (blind) investor who isn't in control. 

Cliff notes: Yes, it's worth it...but as with everything in life, it takes hard work.

Read more: http://forums.babypips.com/forextown/4783-reality-making-money-trading-forex.html#ixzz3v2Xcjo00

The reality of making money in trading Forex

The reality of making money in trading Forex.

Alright, I haven�t put much time and effort into this whole thing at all yet. But before I go any further I need to understand if this is a worthy venture.

After talking to my father about trading Forex and asking whether I should get into it, he told me this� (ill admit that he is an engineer and has never been any sort of risk taker at all)

�remember when your step son wanted to be a professional basketball player? You told him that the odds of becoming a professional sports star were 1000�s to 1, very slim, and that his efforts should be placed somewhere with a greater possibility of return. Well this is just like that!�

Now I am all for �living the dream� and believing in ones self. But I�m also a realist. I don�t live in the clouds, I know there are no get rich quick schemes and that there are some things that even though they may be attainable, have a margin for unatainability, and therefore are a great risk.

This venture into pipland will require much TIME, EFFORT, AND MONEY! I have a family of 6 and I owe it to them to not invest in anything that is not a fairly sure thing.

Read more: http://forums.babypips.com/forextown/4783-reality-making-money-trading-forex.html#ixzz3v2VdCz4T

Trading to Go Pro

When the potential is given to the average guy that he can possibly replace his existing income with profits from Forex, it becomes an easy aspiration to want to trade for a living.

Simply because you might have had a few good months, don't be so quick to tell your boss to piss off. There's a lot to consider before you do so.

First, let's think long term. Right now you most likely have a job. It's not likely you plan to work until you die. There is a point where you would want to be able to retire. For most, that age is on their mid to late sixties. You will need a big pile of money to support your retirement lifestyle. Do you really plan to stay glued to your charts your entire life? Of course not.

To secure your retirement you will need to consider the amount of money you will need to be financially independent. If at a minimum you are satisfied with your existing lifestyle, then take your gross income, subtract taxes, all current liabilities, and existing amount you currently save. What's left is your current lifestyle.

For simplicity let's say you currently gross $60,000, but after taxes and other expenses your existing lifestyle requires 30k a year. If you plan to retire and live for 30 years in your retirement you would need to accumulate $2.6 million dollars. The assumption being that you planning to retire in 30 years, are obtaining a minimum of a 5% return on your investment, and battling a 3% inflation rate. You would need to set aside over $600,000 today if you wanted to secure such a retirement.

There are other elements to consider. And that pertains to your risk management. It's likely you are getting your health, life, long term care, and disability insurances provided by for your employer. If not, then you should add another 25% to your existing lifestyle because when you are trading for a living you have to take care of those expenses on your own and it does not come cheap. This can be considerably costly if you or an existing family member are unhealthy or uninsured. If that is the case you will need to set aside a considerable sum of money to absorb such risks.

And I don't want to hear how your spouse has these insurances covered through his/her employment. Don't be a d*ck. Retire your spouse first or retire together. Don't be the @sshole that gets to chill out at home when you send your spouse out to support your nonsense.

This is your life and it is serious business. Don't be a fool. You are already nuts because you trade currency, but for the love of all that is holy, don't don't put your family at jeopardy. Even if you are single don't be stupid. It's not worth the risk, even for yourself.

Therefore, do not trade for a living until you have amassed a bankroll that allows you to set aside the net present value of your retirement. Thereafter, have two years of lifestyle income set aside at a rate that would include taxes and your insurance expenses. And finally, you can take a dump on your boss' desk when the monthly withdrawal rate from your account can cover your lifestyle expenses making sure you leave in enough gains to allow the account and your withdrawal size to keep up with a 3% inflation rate and whatever amount you want your bankroll to further grow on an annual basis.

Trading can be stressful enough. And that stress only exponentially compounds when your ability to financially survive is taken into consideration.

If you are interested in knowing what it personally takes for you to go pro, feel free to message me or reply below. I can help to work out the numbers for you so you know what you're up against in this crazy game we play.

#priceactionhero

Read more: http://forums.babypips.com/newbie-island/49894-trading-living-when-go-pro.html#ixzz3v26HXbxu

Managing Profit

Managing Profit

In a world where everyone is obsessed with preparing for the worst, there seems to be little time dedicated to the subject of preparing for success. Of course we need to protect against capital loss and financial failure, but once we have appropriate measures in place to limit risk and to exit a trade quickly if price action moves against us, it is time to focus on what to do with profit.

And let’s be totally honest and open about this. Yes, there are plenty of traders out there making regular profits, but that does not automatically guarantee success. Profit is one thing. What you do with profit is something else. 

After spending 16 years building and operating my own companies, and interacting with countless others, I can assure you that profitable businesses regularly go belly-up for much the same reason as those that make trading losses. That is, a lack of financial management.

All the profit in the world is useless if it is tied up in stock and debtors, and not available to meet financial obligations as and when those obligations fall due. Likewise, a business has no chance of growing and realizing its full potential if its owners drain it of cash and neglect to accumulate capital to fund future growth.

If you are a reasonably successful trader with a solid history of profitable trades, but you don’t seem to be making progress financially, it is almost certain that you lack a clear and precise plan for managing profits. If you cannot answer the following questions you don’t have a money management plan:

· When should you begin making profit withdrawals from your trading account? 
· How do you continue to grow your capital base whilst enjoying the fruits of success along the way? 
· How much capital is enough to sustain you long-term? 
· How much do you need to earn from your trading activities to become financially independent?
· Do you even know where financial independence is for you? Do you know when you have arrived?

WHEN TO BEGIN PROFIT WITHDRAWALS

In order to build up future income potential it is important to accumulate profits and grow your initial start-up capital. So don’t be impatient. Allow sufficient time to grow your capital to the point where it is able to sustain your lifestyle and meet your financial objectives.

But it is also important to take rewards along the way, and to enjoy the fruits of success. This requires finding a balance between capital growth and withdrawal of profits. Personally, I achieve this by following a simple and easy to apply management plan that I have outlined below.

Your first goal is to take back your initial investment, thus reducing risk to zero. If you start with, say, $500 capital, let it grow to $1,000 and then withdraw your $500 start-up capital. You now have your initial $500 back in your pocket, you are 100% risk free, and you have made a 100% gain to date.

From this point forward, every time you triple your account balance, you withdraw one-third. So, $500 triples to $1,500 and a $500 withdrawal is made. You now have $1,000 in your account and another $500 in your pocket. Your $1,000 triples to $3,000 and a $1,000 withdrawal is made. You now have $2,000 in your account and another $1,000 in your pocket. This triples to $6,000 and a $2,000 withdrawal is made, so you now have $4,000 in your account, and you have put another $2,000 in your pocket.

With each cycle you increase your capital, which in turn accelerates future earnings. The timeframe between each cycle is therefore reduced, whilst the returns from each cycle are increased. Repeating the above cycle just three more times will result in $48,000 capital, and a $16,000 withdrawal.

You see? Nothing complicated about this simple money management plan, and you can begin applying it today without any formal training whatsoever.

WHEN TO CEASE CAPITAL ACCUMULATION

Somewhere along the way you are going to have to thoroughly explore your current living expenses, your discretionary spending on things like entertainment, travel, and the other vocational activities that make up your lifestyle, and consider your long-term financial objectives.

A practical and realistic starting point is the current household budget. You must identify each expenditure that must be met, like rent/mortgage, utility bills, telephone, food, insurances, vehicle operating costs, school fees, health, and all those other items that must be met in order to simply maintain your current living standards. It is important to include even the basics like your daily bread, milk, and newspaper, so that an accurate cost base can be established.

Repeat this process with discretionary items. Remember, it is important to capture everything, so please give this adequate time to build a complete picture. This exercise is not about cutting corners, but rather, it is about maintaining your chosen lifestyle.

Finally, give due consideration to your current financial objectives. This might include paying off the mortgage early, clearing credit card debt, building a share portfolio, property investment, or simply building a cash reserve on which to fall back on in the event of crisis. You need to convert this into a weekly sum that is set aside to meet your financial objectives. Whatever your financial objectives, keep to what you already have in mind. That is, do not increase your existing expectations at this point in time. Remember, we are simply trying to establish exactly where you are up to right now in terms of what you have, and what you plan for the future.

Combining your household budget, discretionary spending, and financial objectives, will provide you with a benchmark. This benchmark represents the income you need each week, month, or year, to meet household expenditure, discretionary spending, and financial objectives. You are currently covering these items through the income you earn from employment, but our goal is to cover these items through income derived from trading. When we reach this point and sustain it, you are financially independent.

So how much income do you need each month to become financially independent? What is the monthly combined total of household expenditures, discretionary spending, and contributions towards your financial objectives?

Let’s assume for demonstration purposes that you need $10,000 each month. And let’s further assume that your trading activities are producing an average 20% monthly return on capital. Based on this, how much capital must you accumulate in order to meet your $10,000 per month income objective?

$10,000 / 20 x 100 = $50,000

By simply dividing monthly income by monthly return, and multiplying the result by 100, we have determined that $50,000 capital is required to earn $10,000 per month. You can apply this simple formula if you know: (1) Monthly income needs, and (2) average monthly return from trading.

You can easily calculate your monthly income needs, and you can determine the average monthly return on trading activities by reviewing your past trading results, or looking at the results of a Trade Mirror service such as myfxpt.com.

With this information you can easily determine at which point you have accumulated sufficient capital to meet your needs, and at which point you can cease the capital accumulation phase.

WHERE TO FROM HERE?

Here comes the fun part. For every $1,000 you accumulate beyond your $50,000 minimum required capital, you will earn $200 per month. Add $10,000 to your capital, and you add $2,000 extra income per month. Add $20,000 and you earn an extra $4,000 per month.

You are now in a position to get serious about your future income. For example, simply delaying drawings for two months will add $22,000 to your capital base, which in turn adds $4,400 to future monthly income. Or, take a part drawing of $5,000 per month for four months, and you will still add around $22,000 to your capital base. Or, take no drawings for four months, and add over $40,000 to capital…giving you the potential to earn an extra $8,000 per month. You are now in full control of future potential income.

PASSIVE INCOME

There is much talk about passive income. That is, income you earn without doing anything in return. For example, interest earnings, share dividends, rental income, capital appreciation on shares and property, even affiliate programs and MLM systems, all fall into the category of passive income.

None of the above, however, can take you to financial independence as quickly as a leveraged trading arena can do, and with so little effort in return.

There is high risk, of course, and that is why you must withdraw your start-up capital as soon as possible. In addition, it is important to regularly withdraw rewards along the way to provide a liquid net return on capital. But it is also crucial to build your capital base to ensure ever-increasing future income potential.

This profit management strategy achieves these objectives. It returns original start-up capital to you, whilst retaining an equivalent amount of capital in your trading account. It then allows capital to triple, whilst providing for a one-third reward along the way. And finally, it gives you the opportunity and the means to reach the optimum capital required to meet your ongoing financial objectives both present, and future.

Read more: http://forums.babypips.com/newbie-island/44729-managing-profit.html#ixzz3v1xv2VEd

Stop Loss

OK...

So let me take two comments from my post

1. "for the most part a stop should be implemented."
2. "In general a stop should generally be used."

I clearly fully advocate using a stop loss. period. Especially if you are at the beginnings of your trading career.

However... and I will quite happily repeat myself here... There are certain times when a stop loss is not ideal.. please note that I am not necessarily saying that you should not have a stop loss I'm saying that it can, on occasion, be a disadvantage.

Now lets tackle your points in your post.

1. Not being responsible - As reiterated above I advocate using stop losses. If you are learning to trade then use them 100% of the time. However there are times when you have other options open to you if you employ the right strategy.

2. No consideration to R:R - Again you need to expand your horizons somewhat here. do you realise that mathematically having a risk:reward ratio of 1:2 with 50% winners is as profitable as having a risk:reward of 8:1 with 90% winners? most traders who are learning simply try and have their take profit level twice as far away from entry as their stop level and claim that they have a r:r of 2:1 however this 2:1 number means absolutely nothing unless you have the winning % to back it up. I have a massive view on r:r but I also have a massive focus on trade success probability as well. and that is where a lot of traders lack the understanding of r:r. I'm not saying to just let your losing trades run. That is a sure fire way to blow up an account. However there are ways where you can trade without a stop loss being implemented.

In my opinion having an emergency stop loss (to use your words) is idiotic. A stop loss should only be placed at a price level where if price gets to a certain point it proves that the reason for entering the trade in the first place was incorrect. Just having a stop loss placed at a random point as an emergency is, in my opinion a waste of money should it be hit.

As an investor I have many vehicles that I can use to trade. I can trade spot, short term futures, longer term futures, call options, put options, and I can also combine investment vehicles to create synthetic positions of the above and I can use these vehicles to either speculate or hedge current positions.

Here is an example: I am long EUR/USD I do not have a stop in place. Price is moving against me. What do I do? 

(1) I can close out the position which I don't want to do because I am happy with the price that I got and believe that it will go in my favour. 

(2) I can enter a stop and risk getting stopped out and losing my position. 

(3) I could do nothing and risk exposing myself to large downside.

(4) I could buy a put option which combined with my long position would create a synthetic call. Which in effect would allow me to keep my long position and profit from any upward movement in price while limiting my downside for as long as the option is held or until the option expiry.

(5) If I thought that there was a discrepancy between the current interest rates in the countries pairs and the price of the futures contract of the pair and that the cost of carry was overpriced (the difference between the spot price and the futures price) I could sell the future thus creating an intramarket spread trade which would hedge my long position and also, depending at what price the spot was when I sold the future I could make a profit based on to the narrowing of the spread as the future nears it's expiration date.

(6)If I notice a discrepancy in put/call parity (call premium - put premium = spot price - strike price) if the c-p was greater than the s-k then there may be an opportunity to carry out an arbitrage trade by keeping my long spot position and the selling a call and buying a put. this creates a synthetic short position in the market using options and thus hedges my long position but allows a profit to be made over time from the discrepancy in the parity formula. As the options approach expiry this return will be realised.

Now I have got a little technical above however my main point is there is. In essence, more than one way to skin a cat. And for you to naively say that it is idiotic to not always have a stop loss shows a lack of understanding on your part and I would urge you to educate yourself some more in the markets and the instruments available to you.

And before anyone says that babypips is all about trading spot then I would suggest that in actual fact this website is about learning to trade forex and as such your learning should not stop with learning about a few indicators or learning to trade price action. You should always continue to develop your knowledge and skills and this should go beyond just the spot markets. Believe me the big boys don't only trade spot alone but have a view on all the options available to them.

I would also suggest that perhaps next time you see a post that you don't agree with, instead of questioning the responsibility and calling them an idiot you perhaps enter a more constructive conversation with them as to why they have an opinion or view on something that is different to yours. You never know, what they come up with may just be the edge that you have been looking for.

DT.

Read more: http://forums.babypips.com/forextown/12094-how-much-does-average-forex-trader-make-3.html#ixzz3v1nXjzPy

Money can be made in FX but to become successful you have to master money management and expectation much more that of when to pull the trigger on a trade.

In the beginning, I didn't really place much emphasis on the importance of money management as I thought mastering the prediction of price movement was the first challenge. I took it for granted that the application of money management would be a fore gone conclusion as I have a degree in maths.

My 'light bulb' moment came for me when I realised that you cannot predict price movement. All you can do is to have faith and believe that when your criteria has been met for entry into a trade. The chances are that if you where to make the same trade 100 times expect 50 of them will fail. But understand that with the correct money management you can make money from this scenario.

I also started making money when I stopped being influenced by the opinions of others of when and when not to trade along with what and what not to trade. As a famous trader once said "A man must believe in himself and his judgement if he expects to make a living at this game."

It's well documented that you shouldn't trade news or trade on a Friday or a Monday or scaling in/scaling out. Why? Again, many will talk about closing positions because of whipsaws and lack of volatility but some of my most successful days in a week have been a Friday or a Monday and some of my bigger trade successes have been on a news event. To find your own edge you need to free your mind of others opinions.

There are so many threads on here on trading systems that chase pips. I NEVER chase pips. I couldn't even tell you how many pips I make in a week because it is completely irrelevant. Why? you may ask.
It's very, very simple. I chase a percentage of my main account. I enter a trade and whether the SL be 10 pips or 70 pips, it makes no difference because it will still be the same %age of my account. I never trade more that 1% and this leads onto the next important thing. R:R (Risk Reward) is more important to me than the success of a trade. I never take a trade less than 1:1.

The last and most important aspect to become successful is to manage expectation. I am happy if I hit 10% return on my account at the end of a month. Or lets break it down. 2.5% a week !!! Doing the maths on this means that I only need 3 good trades a week at 1% of your main account and at an R:R of 1:1 to be making a healthy profit.

Read more: http://forums.babypips.com/forextown/12094-how-much-does-average-forex-trader-make-2.html#ixzz3v1gdCIwX