ULTIMATE Money & Risk Management Strategy Revealed By A $4M Forex Trader

Summary

This video script emphasizes the importance of proper performance measurement in Forex trading. It debunks the common 1% risk rule, suggesting that it's not a one-size-fits-all approach and may lead to slow financial bleeding. Instead, the script advocates for a fixed dollar risk model, which allows traders to risk an amount comfortable for them, regardless of their account size. The speaker also highlights the significance of trading psychology, solid methods, and the ability to manage emotions effectively. The video encourages viewers to practice with a demo account to build confidence and discretion, ultimately aiming to help traders advance in their trading careers by adopting a realistic and personalized risk management strategy.

Takeaways

• 📊 **Measuring Performance**: Forex traders should measure their profits in percentages, risk to reward ratios, or Pips, focusing on the actual money won or lost rather than abstract metrics like Pips.
• 🚫 **Avoiding Common Pitfalls**: Many traders take the wrong approach to gauging gains and losses, often due to misleading information from various sources.
• 💰 **Risk Management**: Traders should predefine a specific percentage of their trading account to risk per trade, typically 1-2%, but this should be adjusted based on individual circumstances.
• 📉 **Account Size Flexibility**: The size of a trading account is arbitrary and does not necessarily reflect the trader's overall net worth or income potential.
• 🔢 **Fixed Dollar Risk**: Instead of a fixed percentage, traders should consider a fixed dollar amount for risk, which is more adaptable to personal financial situations.
• 🚫 **Debunking Myths**: The 1% money management rule, which suggests increasing position size exponentially, is a myth that does not account for withdrawals and is not favored by professional traders.
• 🔄 **Compounding Confusion**: Compounding is more suitable for long-term investment accounts, not for actively managed trading accounts where withdrawals are common.
• 💸 **Risk Affordability**: The amount risked per trade should be something a trader is comfortable with potentially losing, without causing financial distress or sleepless nights.
• 🛑 **Loss Buffer**: A trader should be able to withstand at least 10 consecutive losses without going broke, ensuring emotional and financial stability.
• 📈 **Growth with Withdrawals**: As trading accounts grow, position sizes should increase, but withdrawals should be managed to maintain consistent risk levels.
• 🎯 **Psychology and Method**: Successful trading involves not just money management, but also solid trading psychology and a reliable trading method.
• 📚 **Education and Practice**: Before going live, traders should practice with a demo account to build confidence in their skills and decision-making abilities.

Q & A

What is the primary focus when measuring Forex trading performance?

The primary focus should be on the money gained or lost, not on Pips or points, as trading is about managing financial risk and reward.

What does the 1% method involve in Forex trading?

The 1% method involves risking a specific percentage, typically 1 or 2%, of the trading account on each trade, regardless of the trader's individual financial circumstances.

Why is focusing on Pips not recommended for measuring trading performance?

Focusing on Pips is not recommended because trading is fundamentally about monetary gains and losses, not the number of Pips or points.

What is the fixed dollar risk method and how does it differ from the 1% method?

The fixed dollar risk method involves traders predefining the maximum amount they are comfortable losing on each trade, and then risking the same fixed amount on all trades. It differs from the 1% method as it takes into account the trader's unique financial situation and risk profile, rather than applying a universal percentage.

Why might professional Forex traders withdraw profits from their trading accounts?

Professional Forex traders often withdraw profits to maintain a baseline account level, which helps in managing risk and prevents over-reliance on the 1% rule for position sizing.

How does the fixed dollar risk model benefit traders?

The fixed dollar risk model benefits traders by keeping their risk consistent and smooth, regardless of account withdrawals, providing a more stable approach to risk management.

What is the significance of compounding in trading accounts?

Compounding is suitable for long-term growth accounts where the goal is to let money grow over time without withdrawals. However, for trading accounts where withdrawals are common, compounding can impact the overall strategy and is less beneficial.

How should a trader determine the amount to risk per trade?

A trader should determine the risk amount based on personal comfort, ensuring they can sleep soundly without worrying about trades, and can handle at least 10 consecutive losses without going broke or feeling downcast.

Why is it important for traders to have a solid trading psychology?

A solid trading psychology is crucial as it helps traders manage their emotions, maintain discipline, and make rational decisions, which are key to long-term success in trading.

What is the role of discretion and judgment in Forex trading?

Discretion and judgment are vital as they allow traders to make informed decisions based on experience and practice, setting them apart from less successful traders.

Why is it advised to practice with a demo account before live trading?

Practicing with a demo account helps traders to build confidence in their skills, strategies, and risk management without the financial risks associated with live trading.

What is the myth surrounding the 1% rule in actively managed trading accounts?

The myth is that the 1% rule helps traders exponentially increase their position size. However, professional traders often withdraw profits, which resets the account balance and doesn't allow for continuous compounding of position size.

Outlines

00:00

📊 Measuring Forex Trading Performance

This paragraph discusses the importance of accurately measuring a trader's performance in Forex trading. It emphasizes that profit cannot be expected without proper measurement and introduces different methods for assessing profits, such as percentages, risk-to-reward ratios, or Pips. The speaker criticizes the common misconceptions and unprofessional advice found online regarding trading performance and risk management. The paragraph outlines three basic methods for measuring profits: the 1% method, Pips, and fixed dollar risk. It also touches on the personalization of risk management based on individual financial situations and the arbitrariness of the 1% rule, advocating for a more tailored approach.

05:01

💹 Forex Trading Risk Management

The second paragraph delves into the specifics of Forex trading risk management. It explains the 1% rule's limitations and why professional traders often withdraw profits, which affects the rule's effectiveness. The paragraph contrasts the 1% rule with the fixed dollar risk approach, highlighting the latter's consistency and suitability for those treating trading as a business. It also discusses the myth of compounding in trading and emphasizes the importance of risk management in relation to one's financial situation. The speaker provides advice on determining the right amount to risk per trade, suggesting that it should be an amount that allows for peace of mind and the ability to withstand a series of losses without significant financial impact.

10:02

🚀 Advancing Your Trading Career

In the final paragraph, the speaker encourages viewers to advance their trading careers by adopting a practical method for measuring trading performance and profits, recommending the fixed risk model over the 1% rule. The paragraph stresses the importance of only risking what one can afford to lose and adjusting the risk level if it causes sleepless nights. It also touches on the significance of guts and discretion in Forex trading, advising new traders to practice with a demo account before going live. The speaker concludes with a reminder that successful trading involves more than just money management, including solid trading psychology and a reliable trading method, and ends with an invitation to subscribe for more trading industry insights.

Keywords

💡Profit measurement

Profit measurement refers to the process of quantifying the financial gains made from trading activities. In the context of the video, it emphasizes the importance of accurately measuring profits in Forex trading, which can be done through percentages, risk to reward ratios, or pips. This concept is central to the video's theme as it discusses the various methods traders use to gauge their gains and losses.

💡Risk management

Risk management is the practice of identifying, assessing, and prioritizing potential risks to minimize or avoid negative impacts of decisions. The video stresses the significance of correct risk management in Forex trading, highlighting how traders can manage risk through fixed dollar risk, percentage risk, or pip-based measurements. It is a key component of the video's message on ensuring traders maintain control over their emotions and financial stability.

💡1% rule

The 1% rule is a money management strategy where traders risk 1% of their trading account on each trade. The video critiques this approach as being too simplistic and not personalized to individual financial situations. It is presented as a method that might lead to slow financial loss if not adapted to the trader's unique circumstances.

💡Pips

Pips are the smallest price movements in the foreign exchange market, typically the fourth decimal place in a currency quote. The video mentions pips as a method of measuring profit but dismisses it as less relevant because trading is fundamentally about monetary gains rather than pip counts. Pips are used in the script to illustrate an alternative, yet less favored, method of tracking trading performance.

💡Fixed dollar risk

Fixed dollar risk is a strategy where traders predetermine a maximum dollar amount they are willing to lose on each trade. This approach is advocated in the video as it allows for consistency and adaptability to individual risk profiles. It is portrayed as a more sensible method than the 1% rule, especially for serious traders looking to advance their careers.

💡Position sizing

Position sizing is the process of determining the number of units of a financial instrument a trader should buy or sell based on their account size and risk tolerance. The video discusses how position sizing should increase with a trading account's growth and how it is affected by withdrawals. It is integral to the video's argument for personalized risk management strategies.

💡Leverage

Leverage in trading refers to the ability to control a large position with a relatively small amount of capital. The video contrasts the leverage available in Forex trading with that in stock trading, highlighting that a smaller deposit is needed in Forex to control a large amount of currency due to the higher leverage. Leverage is a key concept that influences the risk and potential profit in Forex trading.

💡Compounding

Compounding is the process where earnings are reinvested to generate returns on returns, leading to exponential growth over time. The video debunks the myth of compounding in actively managed trading accounts, explaining that professional traders often withdraw profits, which resets the account balance and affects position sizing. Compounding is presented as more suitable for long-term investment accounts rather than trading.

💡Trading psychology

Trading psychology involves the emotional and psychological factors that impact trading decisions and behaviors. The video touches on the importance of having a solid trading psychology alongside money management skills. It suggests that emotional control and confidence are crucial for successful trading, which is why practicing with a demo account is recommended.

💡Demo account

A demo account is a simulated trading account that allows traders to practice trading with virtual money. The video advises new traders to use a demo account to build confidence and refine their skills without risking real money. It is presented as a valuable tool for developing the 'guts and discretion' needed for professional trading.

💡Money management

Money management in trading involves strategies to manage the amount of capital at risk and ensure financial stability. The video emphasizes the importance of money management as a key factor in determining the success of a trading career. It is closely tied to the video's theme of measuring and managing risk effectively in Forex trading.

Highlights

Forex traders should measure their profits in percentages, risk to reward ratios, or Pips.

Many traders take the wrong approach to gauging gains and losses due to misleading information from pros or YouTube gurus.

The 1% method involves risking a specific percentage of the trading account per trade, typically 1 or 2%.

The Pips method is considered less practical as trading focuses on money won or lost, not Pips.

Fixed dollar risk method involves predefining the maximum loss on each trade and is represented as 'R'.

Risk and rewards are measured as multiples of the risk taken, such as 1R, 2R, etc.

The risk taken per trade should be personal and based on financial position and risk profile.

Different traders may have different risk profiles, making the 1% rule less universally applicable.

Professional traders often withdraw profits, which can reset account levels and affect position sizing.

The fixed dollar risk approach is more consistent and suitable for managing risk in trading.

Compounding is more suitable for retirement or wealth accounts, not for actively managed trading accounts.

The recommended approach is to risk an amount that can be comfortably afforded to lose per trade.

Choosing the right risk amount involves ensuring peace of mind and the ability to handle consecutive losses.

The fixed risk model is recommended for measuring trading performance over the 1% rule.

Guts and discretion in Forex trading are crucial, relying on experience and judgment.

Demo account trading is advised to build confidence and skills before live trading.

Successful trading requires solid money management, a strong trading psychology, and an effective trading method.

Transcripts

you cannot expect to make profit if you

cannot measure your own performance

properly by the end of this video you

will know how should Forex Traders

measure their profits in percentages

risk to reward ratios or Pips you may

think it's too obvious but many Traders

actually take the wrong approach when it

comes to gauging their gains and losses

but it's not their fault entirely the

truth is the information out there

whether from procos or YouTube Trader

gurus isn't always as professional as it

seems when it comes to measuring trading

performance and managing risk that's why

today I'm sharing a more practical

realistic lesson on the correct way to

measure risk management and trading

performance I guarantee you this is

something you haven't come across ever

this will determine if you're serious

about advancing your trading career or

not so pay close attention to everything

I cover in this video and watch till the

end before we dive into measuring risk

and reward while trading let's quickly

go over the three basic methods of

measuring profits let's dive into the

three basic ways to measure your profits

while trading Forex first up the 1%

method with this approach Traders choose

a specific percentage of their trading

account to risk per trade typically 1 or

2% the idea here is to stick to this

percentage no matter what happens if you

win your position size gradually

increases in relation to your trading

account size however it's often the case

that Traders end up losing for various

reasons as a result they find themselves

stuck with smaller position sizes making

it harder for them to make money or even

get back to the entry points next we

have measuring Pips now this method

focuses on Pips gained or lost in each

trade to be honest this method is a bit

ridiculous and I won't spend too much

time on it trading is all about winning

or losing money not Pips or points so

it's essential to keep your central

focus on your money whether it's pounds

Yen dollars or any other currency this

way you'll have complete control over

your emotions last but not least we have

measuring based on r or fixed dollar

risk with this method Traders predefine

the maximum amount they are comfortable

losing on each trade they then risk the

same fixed amount on all their trades

until they decide to make a change

the money at risk is represented as R

where R stands for risk rewards are

measured as multiples of the risk taken

for example to R means the reward should

be double the risk this method requires

a fair amount of discretion but what

sets winners apart from losers is their

unmatched guts and judgment fact Size

Doesn't Matter the risk you take P trade

is not something you should rush into it

requires careful and thoughtful

execution it's all personal based and

depends on your financial position

circumstances and overall risk profile

as a Trader let's take an example to

understand this better imagine Trader a

and Trader B both have a $10,000 trading

account they both risk just 1% of their

account for trade now here's the catch

even though they take the same

percentage of risk their life

circumstances financial situation

and profile are completely different

considering the 1% rule it's sort of

puing right I mean why would two

different people risk the same

percentage of their accounts when the

actual dollar value they risk might not

make sense based on their unique

circumstances it just doesn't add up

does it honestly the whole 1% rule was

designed to make things simpler for

beginners but I don't think any

professional Trader would want to stick

to it it unless they're willing to lose

money slowly you see it's just like a

death by a Thousand Cuts that's why the

dollar risk method makes so much more

sense with this method Forex Traders

have different risk profiles and their

individual situations can play a

significant role in determining how much

they can comfortable risk per trade the

1% method on the other hand is just a

random number which may or may not make

sense when you consider unique Financial

situations and circumstances by the way

when it comes to trading Forex or cfds

the size of your account is actually

arbitrary your trading account in simple

terms is just a marginal account that

holds your deposits for leverage

positions and professional traders who

truly understand this don't put all

their trading funds in their trading

account there are many reasons for that

including the fact that it's often more

profitable to keep that money elsewhere

where however it's important to note

that the amount you fund your trading

account with doesn't determine your

overall net worth or the income you can

generates through trading but then you

need also to know that in stock trading

you need to have more money in a deposit

simply because stock trading doesn't

have so much leverage available for

Traders so this means that if you want

to take control of stocks worth

$100,000 then you need to have up to$

100,000 in your account too but Forex is

better leveraged in Forex to control

that set 100K just a standard lot you

need roughly 2,000 to $3,000 in your

account and you're good to go the myth

of compounding and the 1% rule in

actively managed trading accounts you

might have come across the popular 1%

money management rule that supposedly

helps you exponentially increases your

position size well let me tell you

that's just a myth time to break it down

here's the Real Deal professional Forex

Traders often withdraw profits from

their trading accounts every couple of

months which brings their accounts back

to a baseline level so relying on the 1%

rule won't actually lead to increasing

your position size forever let's face it

we all need to make withdrawals

eventually right if your goal is to make

real money from Trading then the fix

dollar risk approach is your best bet

why because if trading is a business

that generates Revenue Vue for you to

withraw and spend then compounding isn't

what it seems in fact it dramatically

impacts your overall strategy here's a

piece of advice for you don't believe

everything you hear or read on the

internet now let's talk about the

benefits of using either percentage r or

1% rule these approaches ensure that as

your trading account grows your position

size grows with it however there's a

catch once you make a withdrawal boom

your position size takes a hit and

you're back to trading with smaller

amounts that's where the fixed dollar

risk model comes in handy it keeps

everything consistent and smooth now

let's be clear compounding is suitable

for retirement or wealth accounts where

you trade and invest for long-term

growth in those cases you let your money

grow over time without touching it

that's when you truly benefit from

compounding interest are you now

wondering how much you should risk per

trade well let me tell you it's not as

complicated as it may seem the key is to

find the dollar amount that you're

comfortable with even if you end up

losing the trade stick to that amount

until your account doubles or even

triples now let me break it down for you

when choosing the right amount there are

few things to consider first you should

be able to sleep soundly at night

without worrying about your trades or

constantly checking your devices second

you don't want to be clued to your

computer screen getting emotional with

every little movement for or against

your position give yourself some peace

of mind here's a tip choose an amount

that allows you to forget about your

trade for at least a day when you

finally check on it you shouldn't be

surprised by the outcome remember set it

and forget it that's the safer route to

take lastly as a buffer make sure you

can handle at least 10 consecutive

losses without not going financially

broke or feeling downcast it's important

to stay strong and keep your emotions in

check so keep these points in mind when

deciding how much to risk per trade you

got this so here's the deal when it

comes to measuring your trading

performance or profits there's a

practical method that I highly recommend

the fixed risk or r model forget about

the 1% rule but remember this only risk

an amount that you can comfortably

afford to lose trust me nobody knows for

sure which trade will win or lose so

it's not wise to go all in on just one

trade because you feel confident if the

amount you're risking keeps you up at

night it's too much tone it down now

let's talk about the importance of guts

and discretion in Forex Trading

professional Traders understand this

concept very well they rely on their

experience and practice gains through

spending hours in front of the screen so

my advice to you is to take your time

and hone your skills by trading with a

demo account before going live this way

you'll build confidence in your own guts

and discretion oh and don't forget

successful trading isn't just about

money management you also need to have a

solid trading psychology and a killer

trading method so there you have it

follow these tips and you'll be one step

closer to becoming the 1% top Trader if

you like this video I'm sure you like my

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trading see you in the next video