Tuesday, 25 November 2008

Hi Trader,

Welcome to the Learn To Trade Markets Mini Course - Day #4.

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The most important part of trading is…

Money management (MM) addresses the preservation of your trading capital. It makes the difference between successful and unsuccessful trading. It is possible to take a trading system which loses more often that it wins and make it a winner over all by using good MM. It is difficult to make a good trading system work well if you have no defined MM systems in place.

There will always be times when trades go wrong and if you have over-committed yourself you could find yourself seriously hurt financially. Risk and MM are without doubt the most critical elements of any successful trading approach.

The goal of MM is simple: to allow you to survive after a bad trade, a bad day or a series of successive losses. Learning to keep losses smaller than winners is crucial to your success. While in theory this sounds simple, most traders find it a hard thing to do.

I know with absolute certainty that everybody, including myself will be consistent losers throughout their trading career (because they will always place trades which lose) and all will continue to lose for as long as they are trading. However only the bad traders (and this accounts for the majority of traders) allow this consistent losing to reduce their trading capital.

As you begin to see losses and risk with a different mindset, you begin to see that losses are a business expense and they are part of the trading game.

In this game you need to control your actions, instead of your emotions controlling you. Going beyond the psychological aspects of risk there are some very compelling mathematical reasons that make cutting a loss an absolute necessity. Once you truly understand this you will never look at a loss the same way again.

Cutting a loss short, in line with a pre-determined stop should be seen as a positive action in preserving your trading capital enabling you to go in search of the next high probability trade. You will begin to understand what a precious commodity your trading capital really is.

How to improve your trading

Most traders believe that to improve their trading they need to call the market correctly more often. While to some extent this remains a fact, in reality it is MM which is the key to improving your trading results in the most efficient and effective way.

You do not need to be an outstanding trader to enjoy the success generated by better MM. MM requires knowledge and understanding of the way losses impact on trading capital. Applying MM requires discipline and this is what is difficult for most beginning traders to develop. In part this is what keeps them from becoming successful traders. It’s not the lack of charting or analysis skill, it’s the lack of discipline required to implement MM strategies.

Contrary to popular belief, the consistent winners in trading are not those who make the most dollars, pounds or euros, they are the ones who lose the least. People who have a low tolerance for risk usually make better traders because they do not place themselves in a position where significant losses can occur.

The danger of drawdown

When we trade, the odds of success are stacked against us. Statistics suggest that the longer we stay in the game, the closer we get to that freakish trading period where we lose big time or even wipe-out our funds completely.

The trick to trading is to make the probability of this event occurring as freakish as possible. But no matter how freakish you make it, the chance of it happening (no matter how minuscule) will always be there. You need to be acutely aware of this fact and ensure you never trade with funds which would adversely affect your lifestyle if you were to lose it all.

When these inevitable losing streaks occur they are called ‘drawdown periods’. Make no mistake about it Trader, if these periods are not managed, you could cut short your illustrious career as a trader. The good news is that it can be managed and it’s impact controlled so your trading career can pick up where it left off.

In Part 4 of Learn To Trade Markets I reveal the MM strategy I personally use in all my trading. I reveal the exact percentage of your capital to risk on every trade and the maximum percentage you should have at risk at any one time. These are the most critical pieces of information you can ever possess and give value which you will reap for the rest of your career as a trader. I also show you how to develop laser-focussed discipline so you always follow the rules you have set for yourself.

I also show you exactly how to manage periods of drawdown so you can come back fighting again and how you can keep a level perspective about what is going on without feeling like the earth is caving in around you. Armed with these tools and techniques you can steadily grow your equity and it’s virtually impossible for you to wipe out your account.

This is perhaps the most important and powerful section in the whole course.

Tomorrow I will be talking about YOU. And you’re in for a shock…

Trader, until tomorrow…

Sincerely Karl Richards www.Learn-Market-Trading.com

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