I
have presented a comprehensive program for profits. It includes all the essential elements for creating massive profits for the rest of your life:rTools and concepts for creating the right psychology for trading success
rSpecific techniques and methods for identifying entry and exit points rRisk management actions to ensure that you are protecting yourself
from loss and maximizing profit
Each element of the program supports the others, so it will be difficult to make money and cut out one of the key elements. They all need to be in place to really make money in the forex market. This is not to say that each element isn’t a stand-alone idea that can improve your current results, but the synergy between them is a massive bonus.
DIVERSIFYING TO REDUCE RISK
One of the critical components of the program is the concept of diversi- fying through time. We all know that diversifying is a way to reduce risk.
But when everyone talks about diversification, they are talking about di- versifying the instruments that you trade. A classic example is to not invest in just five stocks but have at least 30 stocks in your portfolio to diversify 157
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158 HOW TO MAKE A LIVING TRADING FOREIGN EXCHANGE
your risk. And, in fact, the more stocks you have in your portfolio, the less volatility of returns you will have.
However, there are other ways to diversify to lower risk. For example, you can diversify through time. Having different methods trade at differ- ent time periods will reduce the risk in your portfolio even with the same number of instruments. I have given you methods that will trade on short- term time frames as well as longer time frames. For example, trend analy- sis tends to be looking at the market over a several-week time frame while channel breakout looks at 55 days or almost three months. Then add in the short-term methods like inside days and you have a lot of different time frames covered.
You can have one method long and another short. That has the effect of reducing the volatility of returns in your portfolio because sideways mar- kets can get the various methods going in different directions. This partic- ularly happens with the pattern recognition techniques.
It cannot be stressed enough: It is important to execute flawlessly each part of the program, particularly the psychological and risk management rules. A breakdown in discipline will put your equity at risk.
Even though I am telling you that all of these elements fit together, you should still trade each of the entry and exit methods as if the other methods didn’t exist. In other words, you should trade trend analysis with laser precision as if channel breakouts didn’t exist.
USE A MENTAL CHECKLIST
I look at my charts every day and simply go through the mental process of checking for new trades and changes to existing trades method by method.
“Here’s EUR/USD. In a trade already using channel breakout? If yes, do I need to change my stop? If no, do I need to change the entry stop? In a trade using trend analysis? If yes, do I need to change my stop? If no, can I enter a trade? If yes, then put in entry stop. If no, then go on to the next pair.” And so on. At no point do I look at another method to see what it is doing when I’m looking at one method. This constant monitoring can get us all the advantages of diversifying through time.
Note that you can use the multiunit tactic on all methods. I only talked about it briefly in the book, but you can use it on every technique.
Some traders will only have small accounts and not be able to execute every trade of every method even with a mini-account. One suggestion is to pick just one technique and execute that one flawlessly. Pick the one that fits your psychology the best to ensure the highest discipline. Add ad- ditional methods as your bankroll expands. Another possibility is to shift
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Putting It All Together 159
to a micro-account and trade more methods. This is preferred because it helps to diversify the risk.
HOW TO TRADE ONLY ONE METHOD
Which system should you use if you can only trade one? I guess I would pick the channel breakout for the position trading and inside days for the day trading. I think they are the best in terms of keeping risk tight yet hav- ing a large profit potential.
A final comment on tying the various techniques together is what I call the holistic or weight of evidence method. The basic idea is that you trade according to the weight of the evidence. Let’s say you are using Conqueror, channel breakout, and trend analysis. You will go long when the majority of those techniques are bullish and short when the majority are bearish.
You will always use the tightest stop of the three.
Now note that it is possible that you will be flat the market on occasion.
Let’s assume that all systems are flat to start. The trend analysis then gives a buy signal to go long and we enter a buy order that gets filled. We are now long with a stop when the trend analysis tells us to get long. We then get a sell signal from the channel breakout that gets filled before we are stopped out on the trend analysis. You take that trade as well, which gets you flat the market. Technically, you are now long and short with protec- tive stops in the market. Basically, you will get long again when the chan- nel breakout trades get stopped out or get short if the trend analysis gets stopped out.
The market trades along for a while and the Conqueror gets long on the same day that the channel breakout gets stopped out. You are now long three contracts with three different stop losses. You continue doing exactly this method so that your position will vary from three short to three long and everything in between. You will therefore be the longest or the shortest when the market is the strongest or the weakest. And that is exactly what you want to be.
Smaller investors will also find the weight of evidence to be useful. In this method, you don’t go long until, say, all three methods turn bullish. In other words, you would wait until two methods are long and then you put in an order to enter long on the signal for the third method. You then place a protective stop at the point that the closest method would get stopped out. In other words, you may be entering on a trend analysis entry stop but exiting on a Conqueror exit stop. In other words, you will only be trad- ing one contract but you wouldn’t be entering until all three methods are long and are exiting the position when just one of the methods exits. By
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using these techniques, the smaller trader can gain exposure to the market without entering very many trades.
THE BOTTOM LINE
All of the techniques, risk management, and psychology integrate into a to- tal package for making money. It is a powerful combination that can create massive profits for you, and it is best if you use all the techniques because that will reduce the risk the most.
It will also give you the most chances to create profit.
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