Money Management & Market Psychology

eReport By Brian Campbell

© 2004-2005 Infinite Limits Inc.
The information provided in this
report was provided for use with
the Rapid Forex trading
packages. This report provides
valuable information that can be
used to enhance an established
trading system, or as part of the
Rapid Forex education
curriculum. The examples in this
manual refer specifically to
Foreign Exchange (Forex)
trading, but can be applied to any
financial market.

The purpose of this short report is to give helpful hints about how
to maximize any trading strategy for the different capital markets.
Some of these principles may seem like common sense if you are a
seasoned trader. I wanted to emphasize these points so I created
this report rather than trying to fit them into another publication. I
have put these tips together as an added resource for Rapid Forex
traders. I may add to these tips in the future. These tips are not an
attempt to fully cover the presented topics, but rather to give you
some more things to think about implementing in your trading. It is
worthwhile to state these tips and techniques to manage your
money and establish a stable personal market psychology-

Money Management Rules (MMR Rules)

MMR Rule #1: Keep every trade the same size!

If you are investing the minimum trade of $10,000, then make sure
all trades are $10,000 trades. After you have seen your account rise
a minimum of 20%, you can and should increase your trading size.
But once you increase your hade size - stick with it.
The reason for this is simple. Suppose you have 3 successful trades
in a row. You invested $100 per trade. Now you say "I'm on a roll,
I'll invest $300 on this next trade to cash in on this streak of luck",
but statistically you are due for a losing trade at this point. So you
lose $300 on this trade (this wipes out all of the profits you made
on the 3 winning trades). So now you only invest $50 on the next
trade because you don't want to lose as much money as you just
lost. But on this trade you realize a profit but the profit is only 14
of the profit would have if you stuck to the original $100
investment. You continue in this crazy way of thinking for the rest
of your trading career. This kind of warped-irrational psychology
eats up your whole trading account. This is the most important
money management rule.

MMR Rule #2: Paper Trade First

First open a demo account, and get to learn how to place orders
with it. You shouldn't invest real money until you have shown a
profit in a demo account. Many people have losing demo accounts
and still believe that it will be different with real money. When you
open a real account, stick to the systems in the Rapid Forex
publications! You do not even have to think. If you follow the
rules, you should make money. I can not legally guarantee that, but
based on what my research has shown, people who do so should do
very well. It is important that you don't change any of the rules.
MMR Rule #3: Take the Money and Run

If you have a trade that is either abnormally profitable or went up

30-50 pips in a half hour. Take the money and run. If you are
happy with the profit you see in a trade, take it and don't look back.
Please do not confuse this with taking any small profit as soon as
you can. If you have a trade that is 10 pips up, don't cash it in. You
could be sacrificing a big profit. If you took every trade when it
was only 10 pips up, you would never make money. But it is ok to
take a profit when you see a nice sized profit. A good benchmark
for a nice sized profit is a profit that is higher than the average
profit you have made per trade so far. This will increase your
average profit per trade! Especially when something shoots up
extremely fast, because "what goes up fast, must come down fast";
that is my version of Isaac Newton's theory of gravity.
MMR Rule #4: Cut Your Losses

Let's face it, with any trading system you are going to have trades
that lose (hopefully not too many). If you are going to be
successful, you need to know when you are going to get out if
things go wrong. You need to know your exit strategy before you
place the trade. Follow an exit signal to let you know when the
trade should be abandoned. The Advanced Options Strategies
manual outlines the exact entry and exit price targets that you
should place entry orders for and how to adjust these prices
through trade monitoring. Every trading strategy should have a
prescribed exit price that tells you that the trade has failed and you
need to GET OUT NOW!

Each trading strategy will differ on their exit strategies. The most
common strategy is to set a protective stop order to limit the
potential for loss. Setting a protective stop order is usually a good
idea. By setting a stop order, you guarantee that you can only lose
up to a certain amount of money on that trade. When you set a
protective stop order, you must be extremely careful. The main
problem with stop orders is that they can prematurely cause you to
take a loss on an otherwise profitable trade. Some trading
strategies do not set protective stop orders as their primary exit
strategy. It can be advantageous not to set a stop order. If you do
not set a stop order, you need to have some type of criteria to
monitor your trades. The next MMR Rule #5 deals with trade
monitoring.
MMR Rule #5; Monitor Your Trades

There are literally hundreds of variables that affect the prices of

foreign currencies, stocks, options, bonds, futures, etc... Every
trading system should have some type of "monitoring criteria".
This "monitoring criteria" should be able to tell you exactly when
the trade has taken a turn for the worse (or when you should take
the money and run). The "monitoring criteria" is also a way to
maximize profits and limit losses beyond the power of your initial
entry information. It should make sense that you should want to
use all of the information available for the entire duration of the
trade. This is important because as the information changes, so
does your idea about how the trade will move in the future. Forex
Sailing uses a special monitoring technique that allows you to
monitor trades even though you do not set an original stop or limit
order when you enter the trade. The Advanced Options Strategies
publication combines an initial stop and limit order with trade
monitoring.

Market Psychology Tips (WIS Tips)

MS Tip#1: Don't Get Caught in the Moment

The biggest mistake that you can make with any trading system is
to second guess the trading method in the middle of a trade. I am
not sure if this has ever happened to you or not. I shamefully have
to admit that I have fallen prey to getting caught in the moment
myself I fired up my charts, I looked at some technical indicators
and I found a perfect entry signal for a trade. I got into the trade
and sat there and watched the tick-by-tick play of the stock screen.
I anticipated making somewhere in the neighborhood of $1,700 on
this trade. I sat there and watched the price go up, and then down,
and then back up. I thought for sure this was it! But the stock
dropped so my $500 anticipated profit fell to where I was at a $900
loss! I watched the prices and the stock just wouldn't go up for me
to accept a $500 loss. When the stock reached a point where I
would have lost $1,000,1 set an order to take a $750 loss. When I
set that order, the stock had hit the low-point for the day. The stock
climbed for the rest of the day. If I would have waited patiently, I
would have collected up to $1,700! I thought to myself "If only I
weren't watching that screen for the first half of the day." The
main mistake that I made was that I got caught up in the moment. I
allowed the price movement of the stock to influence my actions in
a destructive way. If I would have mechanically adhered to my
hading system and set my stop order for a $1,100 loss, I would
have stayed in the trade and taken my $1,700 profit.

MS Tip#2: Control Your Entry

Yon definitely do not want to get caught in the moment. One easy
way to avoid falling into that trap is to set entry orders exclusively.
Any good trading strategy should show you exactly how to
establish an entry order. Market orders are scary and should be
avoided no matter what. I can not stress this point enough. When
you place a market order, it is the same thing as walking into a
store and saying "I know you charge $25.00 for this shirt today,
but I'll pay any price you decide to charge for the next month."
You do not do this because it would be insane. The market order
gets filled at whatever price the currency pair or stock is trading at
when the order hits the trading floor. This can take a few seconds
or a few minutes. Prices can and do change by drastic amounts
within a few seconds. Even if your trading provider promises
"instant execution" there are no guarantees for getting the price
you want to pay. The only way to guarantee what you pay is to
place an entry order. The only problem with entry orders is that
sometimes they do not get filled. The fact that entry orders do not
get filled sometimes is not really a problem at all. If the price does
not do what you want it to do - your entry order will not get filled.
Most of the time an unfilled entry order prevented an otherwise
losing trade.

MS Tip#3: Don't Re-invent the Wheel

Follow the trading system exactly as prescribed by the system

itself. The purpose of sticking to the trading system is because you
probably paid money to learn how to trade from someone who
knows more about it than you do, or has some knowledge that you
don't have. Whoever designed this system has outlined the steps
necessary for you to succeed at trading according to their research
and experience. It is important to understand the system you are
following, and to stick to it. When you try to change the system
you are only hurting yourself. If you are not following the system,
you are engaging in chaos. Human emotions do control the capital
markets. People who are speculating based on their emotions are
the ones who are giving money away to people who are trading
using calculated trading methods. When you start to trade
seriously, you will learn to love irrational and emotional traders.
These irrational traders are the ones who are providing the gains
that you are taking from your trading system!

MS Tip#4: Change the System Properly

After you have followed the system with exact precision, you can
try to improve the method. You do not need any special credentials
to tweak the system to your own style. If you never see a way to
improve the system, you should not try to change it. Perhaps the
method doesn't deal with a certain scenario or needs improvement.
If you see a change that can be made, you need to come up with a
good idea about how to change the method. After you come up
with your hypothesis, you need to test it against the original
method. If your new idea outperforms the method you started with,
you have just improved the method. You must be careful to only
change one thing at a time. If you change the whole system
(perhaps making 8 changes), you do not know which changes are
effective. It could be the case that you made seven bad changes
and one good change, and then you abandon all of your changes
because you don't see an overall improvement.
MS Tip#5: Go Back To Basics

If you are on a roll, keep doing what you are doing. You may ask
yourself, what should I do if I go into a slump? And how do I
know if I am in slump? Being in a slump can be devastating on
many levels in all areas of life. You need to have a criteria to
establish when you fall into a slump, and what to do once you are
in the slump. If you get into a slump, your subconscious mind will
defeat you. You will start to make small errors and everything will
seem to go wrong. You need to stop trading real money at this
point. You should establish a point at which you identify that you
are in a slump.

You should set a limit on your trading account that if you reach
that limit, you will temporarily stop trading. A good percentage to
do this at is when you lose 10% of your trading account. Ideally
you will want to have an account big enough so that you don't risk
more than 2% of your total account on any given trade. If you are
just getting started, you might be risking 10% of your account per
trade. If this is the case, you do not necessarily have to identify
yourself as being in a slump. You should make an adjustment if
your account is very small. The slump limit should be based on a
reasonable market that shows that you are losing too many trades.
You should not make your slump limit so low that every time you
lose money on an individual trade you hit your slump limit.

Now that you have set your slump limit (I’ll use 10% as an
example), you should go back to paper trading (or demo account
hading) until you recoup your losses. So if you start an account
with $1,000.00 in it and after a few trades, you have a balance of
$900.00 - you realize that you are in a slump. So you go back to
demo trading for a little while. You should pretend that you have
$900.00 in your demo account and wait until you are back up to
$1,000.00 in your demo account. Now you will have confidence
that you are out of the slump. You can go back to trading with real
money.

© 2004-2005 Infinite Limit Inc. - All Rights Reserved

This eBook is licensed to Abundant Freedom LLC for distribution.
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