Day Trading Forex Live was founded by the two traders, Sterling and Chad, with the aim of informing traders about the forex market and its internal workings. Through this site, you will able to learn some strategies and gain specific knowledge that will serve as your ideal foundation in forex trading and help you how to trade well.
Forex Bank Trading Strategy Explained (Updated 2018)
Who is Smart Money?
What is the Forex Bank Trading Strategy?
Why is Tracking ‘Smart Money’ Critical to Successful Trading
Step 1: Accumulation
Step 2: Manipulation
Step 3: Distribution/Market Trend
Who is ‘Smart Money?’
Throughout this article, you will read the term ‘smart money.’ I use this term to define the largest market participants; those who move massive volume so large that their position cannot be opened and closed in a single order without spiking the market.
This includes the largest banks, prop firms, massive global companies, insurance companies, Hedge Funds, as well as speculative traders in every variety from around the globe.
It is important to understand that although the banks might control the majority of the daily volume, the VAST majority of that volume is those banks acting as a market maker for the other types of traders mentioned above.
Yes, banks do take speculative positions, but the vast majority of the volume they transact on a daily basis is for the purpose of market making, not speculation.
This is critical information, as it tells us 1 very important clue. If banks are primarily market makers then they will by default drive the market to and from areas of supply and demand which is the foundation in how we track them.
What is the Forex Bank Trading Strategy?
Definition: The Forex Bank Trading Strategy is a trading setup designed to identify where large market participants are likely to enter or exit their position based on likely areas of supply and demand, or manipulation points as we term them.
As you can see in the chart above, the top 10 banks control well over 60% of the daily forex market volume.
What if you could determine where they were likely buying or selling?
Do you think this information would be profitable?
Tracking smart money is at the very foundation of the bank day trading strategy. If we can consistently reveal where the smart money is entering, and the direction they are trading, then we have all the information we need to make a profitable trading decision.
We must remember that this is the banks market, and not ours! Retail traders are figurative flies on the wall. Keeping that in mind, why then do most retail forex traders out there attempt to invent or learn forex trading strategies that have been created to try and fit a market we do not control?
It is our strong conviction at Day Trading Forex Live that success in the forex market is only possible when we stop trying to fit different rules to a market we don’t control, but rather learn the trading strategy of the banks! This is their business, and they have a business model (aka forex trading strategy) that we must learn to follow to achieve consistent results!
We do this through the repeatable 3 step process described below. If we learn to trade forex by following their model we will have a much greater chance of success; after all the banks are the ones moving the market!
3 Steps To Success
In any market, there must be a counterparty to every transaction. If you are looking to buy the market someone must be willing to sell to you. Conversely, if you are looking to sell then someone needs to be willing to buy your current position from you.
Knowing that, how can we use this information to track where the smart money is likely to be buying or selling?
If Bank XYZ desires to buy a large position in the EUR/USD, using the principal discussed above they must find an equal amount of selling pressure. As their positions are so large, they are always entered over time so as to not reveal their hand. This leads us to the first step in the process, accumulation of a position.
Step #1 – Accumulation: As discussed above there is a counterparty to every transaction in any market including the forex market. Therefore when a bank or group of banks has the desire to enter a position they must do so by accumulating it over time. Unlike you and I, because of the sheer volume banks push they must enter positions during times most people would term as consolidation or range bound markets.
These periods of consolidation are what we call accumulation as they are areas where smart money enters or ‘accumulates’ their desired position over time.
By doing this through a tight range bound period, banks are able to not only keep what they are accumulating secret to the rest of the market, but they are also able to get a much better average entry.
This is the foundation of how the banks enter positions over time.
Money is made by accumulating a long position they will later sell off at a higher price, or accumulating a short position they will later cover at a lower price.
Our single goal should be to track when the banks are entering the market and what position they are entering. As discussed above banks are the ones moving this market, and therefore if you can identify the position they are accumulating, then you can identify which direction the market will move next with a high degree of accuracy. What comes after this period of accumulation?
Step #2 -Manipulation: Over the last decade of educating traders I’ve heard many forex traders say that it feels as if they are entering the market at exactly the wrong time. Many traders feel as if the market is just waiting for them to enter before it instantly turns the opposite direction. Not only is that true, but this crucial step we term as ‘market manipulation’ is critical to tracking banking activity in the forex market.
The first point I want to mention is that we use the term ‘market manipulation’ but you could just as accurately be described as a searching for liquidity, a trapping move, stop hunt, etc. Regardless of the cause, the manipulation or ‘false push’ that comes at the end of the accumulation phase, is the most important factor in tracking smart money.
A stop run or false push beyond the high of an accumulation period likely means that smart money has been SELLING into the market, and a short-term trend in that direction is likely to start.
A stop run or false push beyond the low of an accumulation period likely means that smart money has been BUYING into the market, and a short-term trend in that direction is likely to start.
Because the mega-banks positions are so large they must essentially create their own market and induce buying pressure they can sell into or selling pressure they can buy into. How is this short-term manipulation carried out?
Reactive Vs. Predictive Trading Strategies
It starts by understanding that virtually all retail trading strategies are ‘reactive’ in nature. This means that as the market rises the strategies, software, or EA will begin to produce buy signals/trades, and a falling market will produce sell signals.
I term these as reactive trading strategies as they ‘react’ to the market rather than predict based on what smart money is doing. Therefore, a rising market will induce buying pressure and a falling market will induce selling pressure.
Do you see how easily smart money could consistently induce large portions of the retail market into buying right before a large drop and selling right before the huge rally?
If the strategies you are trading are reactive (which they all are), then smart money knows how to get you to buy, and they know how to get you to sell. This is precisely why traders so often say they feel like the market “turns against them as soon as they enter.”
The unfortunate part about this is the fact that this information is actually the most powerful thing the banks give us, but only if we open our eyes to it. The short-term manipulation of price tells us what position they have likely been accumulating, and thus, the direction they intend to drive the price.
I urge you to look back at all large market moves. Before the vast majority of large moves, you will see a tight range bound period (accumulation) followed by a false push (manipulation) in the opposite direction of the trend.
Step #3 – Distribution/Market Trend: After they have accumulated a position through a standard tight ranging market, banks will often create a false push we term as market manipulation. This false push is an extension of the accumulation period as it allows them to finish entering the rest of the position they had been through the previous range.
This as we just discussed is the reason so many forex traders enter the market at exactly the wrong time. If however, we know the tricks they use, we can avoid being a pawn of the bank’s manipulation, and instead profit from it!
If we have correctly identified which direction they have manipulated the market we can then understand which direction they intend to push the price. This is called the distribution phase of the market and is seen visually as a market trend.
Again this market trend comes only after the banks have finished accumulating their position, often seen as tight range-bound price action ending in a false push/stop hunt/search for liquidity.
Hands down this is the easiest area for us to profit from but only if we can properly identify the first 2 steps in the process. Throughout this article, I have marked out this 3 step process on a series of charts. New concepts can be hard to understand with only words and therefore I believe the charts should serve you well in the learning process. As you examine these charts you should be identifying the 3 stages of the bank day trading strategy.
Putting Forex In Perspective
No doubt this strategy is very different from anything you have been using. Realizing the chart is a false manipulation of prices and learning to read the intention behind the moves will take practice.
Anything in life that is new takes time to learn and this will be no exception.
If you are using a forex trading strategy used by the masses I strongly urge you to give some serious thought as to why you feel the outcome will be different for you?
At some point, we all need to realize that maybe it’s not the tens of thousands of retail forex traders that are failing, but maybe it’s the strategies that are flawed, as they don’t factor in the largest market participant, smart money!
What do you do next?
The first thing I would recommend is evaluating your trading strategy to determine whether it is reactive or predictive.
If the trading strategy you’re using is predictive, then stick with it for at least 6 months to determine if it the right strategy for you.
If you find that like most (95% or more) your strategy is reactive, then you need to move on to something else if you ever want a chance of becoming a successful forex trader.
For those looking to learn to trade the official forex bank trading strategy of Day Trading Forex Live then I would recommend the actual Bank Trading Course.
Day Trader picks entry point 4 hours in advance AND explains strategy... - YouTube
One of the most underrated aspects of this strategy is its ability to plan an exact entry point hours in advance. This is extremely useful for most of you reading this as you have limited time to trade each day. For those who are learning to trade forex with a full-time job, not being stuck to the screen all day is a basic requirement.
As you’ll see in this video, the level from which I was looking to trade was selected literally 4 hours in advance. Once someone understands the rules, and with the use of limit orders (what I recommend anyway!), you can day trade with limited screen time. In fact, I would encourage it!
In my experience, there is ALWAYS an inverse correlation between the number of trades someone takes and the probability of them being successful. Therefore, if I can reduce the amount of time you spend in front of your screen, your trade quantity will likely go down as well. Doing so will improve your chances of success as you will have to plan every trade in advance with a clear stop loss and take profit.
The video wraps up with a quick breakdown of how I will be looking to trade the Sterling/Yen tomorrow. This trade analysis breaks down the exact manipulation points I will be looking to trade from the following day. If you’d like this type of video every day, you can check out our lifetime membership by clicking here.
Part of the Lifetime Membership is the Daily Market Preview video. Each day I break down 2 pairs, the current cycle/directional bias/trend of the pair, as well as the EXACT manipulation points I will be looking to trade from. I’m a firm believer that a course is great, but seeing something done each day is essential for learning to apply the rules of the course to the live market. That is what the Daily Market Preview is designed to do.
I hope you enjoyed the video. Be sure to leave me a comment below of the type of content you’d like to see or aspects of your trading you’re struggling with!
How to Profit From Short-Term Market Manipulation: GBP/JPY Live Trade Example - YouTube
This video breaks down the principle of ‘seeing through’ the chart to better interpret what smart money is doing. Knowing the directional bias of the largest market participants gives us as short-term day traders, the ability to pick high probability reversal points in the forex market that also offer a reward to risk ratio of 2/1 or better.
If you want to learn to trade the bank trading strategies we teach then you can join us in the member’s area by clicking here.
Day Trading Short Term Market Manipulation: Live Trade Examples - YouTube
Our primary method of tracking and trading forex market manipulation is the confirmation entry along with pre-selected manipulation points. The nice part about this strategy is that it gives traders a mechanic rule set from which they can judge each setup.
This video walks through the more discretionary side of market manipulation, outside of the confirmation entry.
The first setup we cover is the AUD/USD which went on to yield well over a 5/1 reward to risk ratio.
PSYCHOLOGY OF HIGH ACHIEVERS - Motivational Video - YouTube
You can give two traders the same strategy, yet 1 will fail, and 1 will succeed. The fact is, the trading strategy you use is only a portion of what will make you successful or cause you to fail. I would argue that how a trader thinks is key to becoming a successful trader, even more so than the trading strategy he/she chooses to use.
There are no shortcuts
Success really isn’t a secret; it’s just everything we don’t want it to be. The best way I can illustrate this is by thinking about someone who is overweight and searching for ways to lose weight. Is losing weight a mystery of science that the brightest minds are still in search of the cure? Obviously not! If we know that eating healthy and exercise (in an otherwise healthy person) will result in weight loss then why are roughly 35% of Americans (depending on the statistics you want to use) overweight? They’re overweight because knowing what to do and actually doing it are two very different things.
Just like losing weight requires eating healthy and working out, becoming a successful trader requires things like patience, discipline, dedication, perseverance in the face of repeated defeat, a willingness to do whatever it takes to reach their goal, and always a love for what you’re doing.
It’s no different with traders…
In trading, people want the results, but they don’t want the work that goes along with it. The trouble is you see successful people, and you want the results, but you don’t realize they spent ten years getting to that point. This is why I think it’s so important to really think about whether you want this because without complete obsession you’re very unlikely to be a successful trader. Knowing this and doing an honest examination can save you a lot of time and money if you realize it isn’t for you. If it is, then this is the time to reflect on how you’ve been going about the learning process.
Are you taking it seriously or are you jumping system to system after only a few losses? Are you sticking to your trading plan? Do you have a trading plan? Do you understand proper money management, reward/risk ratios, risk aversion, etc? If you don’t then now is the time to really buckle down and get an education. If you wanted to learn anything in life, you would search out an education (someone you know, youtube, etc.), and learning to trade forex is no different.
Time is your most valuable asset
I think sometimes people forget that their most valuable asset is their time. Regardless of whether or not you could learn to trade on your own, the fact is learning from those who came before you can speed up the process significantly, and for some, as it was for it, it can be a turning point.
Once you find a strategy, you believe in you need to commit to it for at least 3-6 months. So many times people start to learn a new trading strategy, they take a few losses, and then instead of figuring out what went wrong they blame the system and go to the next one. You cannot evaluate something that quickly, as it is a process that takes a few months at the very least. Find who you want to learn from, and then stick to that setup only!
Anyway, I’ll quit rambling now, and I hope you enjoy the video and get your butt motivated to learn!
REMINDER: For the rest of the month you can get the Bank Trading Course, Live Training Room, Members Forum, Daily Market Previews, and Lifetime Support at a special discount by Clicking Here.
What the New ESMA Leverage Rules Mean for European Traders - YouTube
One of the biggest changes to forex trading in the Eurozone just took place. What is that change? Simply put, the ESMA (European Securities & Markets Authority) passed a new regulation that would limit the leverage any European forex broker would be allowed to offer their clients. The new regulation, if implemented, would bring the max leverage down to 30:1 for major and 20:1 for minor pairs.
One email I got said something to the effect of ‘Sterling, is this the end of forex trading for us in the Eurozone.’ After I had a good laugh, I realized there were probably a lot of questions on how the new leverage rules will affect you in the real world. This training video walks through how to calculate the leverage required to hold a certain position, once the new regulations go live. The illustration in this videos shows how you can still achieve the proper leverage with the new regulations very easily. In fact, even with this major reduction in leverage, you will still be able to over-leverage!
P.S – If you have a small account and you’re discouraged by the new regulations then I would highly recommend checking out a video I posted a few weeks back titled 4 Pivotal Rules to Trading Success.
This video walks through the 4 most important aspects to profitable trading as well as how quickly an account can be compounded. If you haven’t seen it, check it out after going through this video as the two go together nicely!
REMINDER: For the rest of the month you can get the Bank Trading Course, Live Training Room, Members Forum, Daily Market Previews, and Lifetime Support at a special discount by Clicking Here.
Today’s Forex Beginners Guide breaks down the 4 most important aspects to becoming a profitable forex trader. Over the last 13 years of trading, I’ve run had the opportunity to talk to well over 15,000 traders, 5,000 members of DTFL alone. Through the years I’ve also met many profitable traders, most of which traded different strategies. What I always found interesting is that while they all traded different strategies, they all stuck to these 4 rules.
Enjoy and please leave any questions or comments you have below.
REMINDER: For the rest of the month you can get the Bank Trading Course, Live Training Room, Members Forum, Daily Market Previews, and Lifetime Support at a 30% discount by Clicking Here.
Video Transcription Below:
Hello, everyone, it is Sterling here from Day Trading Forex Live and in this video, I’m going to show you what I believe to be the four most pivotal aspects to becoming a profitable trader. Now I term this as a Forex beginners guide. I started trading at 17 I’ll be 31 shortly, so a little over 13 years. If I could take all that information and boil it down to the most important aspects, what would I teach myself at the beginning? What would I teach myself to help me expedite the learning process? Because for me, it took me about three and a half years before I was consistently profitable, and it wasn’t until my mentor personally taught me these four aspects and really ingrained into my mind the importance of these aspects.
What has been unique over the last 13 years of my trading, is that after I implemented these in my trading, that was literally the turning point for me in my trading, and it had nothing to do with strategy, that’s the other aspect. What was unique about it is that every single profitable trader I have met in that period of time has followed these four rules to a tee. I mean they might make slight variations to it, but they follow the sentiment of these four rules.
So what I’m telling you is if you are struggling right now, you’re new to the market, or maybe you’ve been around the market for multiple years. It’s not just a beginner’s guide for those that are new to the market, but also a beginner’s guide for anyone that’s not yet profitable. If you’re not profitable, then the fact is you have to make some changes. If you want different results, you have to perform different actions. What I’m going to show you today is the four crucial rules to turning your trading around. Before we get into that, let me just state that I worked on shortening this video, but the fact is guys, I don’t want to shorten this video just to appease those that don’t have an attention span. So what I’ve decided to do is to make it as long as I need to, and quite frankly if somebody doesn’t have the time to stick around you’re probably not going to have the patience to be a profitable trader.
The first thing I want to cover is why mindset is so important, because these four rules, although not strictly mindset related, they go back to mindset. The reason they’re so important is really illustrated in a guy named Roger Bannister. It’s probably a guy that many of you have never heard of, but he was the first guy to run the four-minute mile. Now you might be thinking, what does the four-minute mile have to do with learning to trade Forex? Well, what’s interesting about the four-minute mile is that up until Roger Bannister ran the four-minute mile in I believe 1956 or 1953. Up to that point, no one had successfully run a sub 4: 00-minute mile. What’s unique about that, is that within the same year he ran the 4-minute mile, some 16 or 17 other runners were also able to break the 4:00-minute mile barrier.
So what was it about him running the four-minute mile that suddenly allowed all these other runners to do it as well? The point I’m making is that it wasn’t their training or anything else that changed, it was the simple fact that they now believed with 100% confidence that their goal was achievable because they saw somebody do it. They saw Roger run that four-minute mile so they knew for a fact it was possible. Because they knew it was possible in their mind, that was what facilitated the physical action. Now I’m not telling you that positive mental attitude is the key to trading success and anybody that’s telling you that is just blatantly lying to you as that’s not the case. What I can tell you is a negative mental attitude, whether knowingly or unknowingly can hurt you. I’m also going to explain how it can be that you have this negative attitude affecting your trading unknowingly.
Whether you know it or not, a negative mental attitude has a dramatic impact on your trading. To illustrate, I want you to think about any time you’ve achieved some level of success in trading. Maybe that’s a couple weeks of profitable trading, or maybe that’s five, six, or seven trades in a row that were profitable. What inevitably creeps into the back of your mind? Now I’m no different than you, so if this crept into my mind at that time then I know it did yours as well as human nature rarely deviates. What crept into my mind was, “I wonder when this winning streak is going to come to an end?” Or, “I wonder when I’m going to blow up this account?” You could have also just had an uneasy feeling about those five profitable trades, or about that two weeks of profitable trading, or whatever it may be.
You had an uneasy feeling because you have a history of failing prior to that success. The subconscious mind has seen this numerous other times, and the longer you’ve been trading the more baggage there is. So what the subconscious mind is seeing, is limited periods of success and then a blow-up, success and then a blow-up. So what happens when you have that success? Inevitably your mind goes, “I’ve seen this before, and I’ve also seen what comes next!” That’s when those negative trades start coming in. That’s when you start revenge trading, overtrading, and all the other aspects that come along with a mental failure or a mental breakdown.
What I want to do is to change what you perceive to be the keys to success, as the longer you’ve been trading the more baggage you have, and thus the more important this is for you. Changing that perception of success gives your mind a new goal. If your mind has a new goal of what it takes to be successful you don’t have all the other mental baggage. At the very least it’s pushed off to the side in the most effective way we can. Changing your perception of success is what I’m going to show you today. I’m also going to show you the four keys to successful trading. When you see them, you’re going think that they are much lower than what you would have shot for prior to seeing this video. Because they’re much lower than what you shoot for right now your mind is automatically going to put you in a state where you think, “yeah I believe that’s possible!” The importance of that positive belief is going to make sense shortly. Having said that, just because you believe something’s possible you have to also know that it’s extremely profitable as well. Otherwise, as far as trading is concerned, what’s the point?
I’m also going to show you the four rules that you should use to guide your trading. Because you’re gonna think these are much lower than average I’m going to run the numbers on exactly how it would grow an account. Let’s get right into it!
What are the four aspects of turning around your trading? Number one is the win-loss ratio. I’m going to break all these down one at a time, and then I’m going to run through the numbers. Anyway, the first point is win-loss ratios. I want you to change what that perception of success is or what you perceive to be the key win-loss ratio to success, and I want you to change it to a 50/50 hit rate. Again, I don’t claim to know what’s in your mind, but over the last decade of educating traders on the way that I trade, 80-90 percent of them shoot for a number higher than this. I’m not saying that they are wrong or right, I’m just saying they do, and that’s having spoken to 15 or 20,000 traders over the last decade, 5000 of which are members of Day Trading Forex Live alone. A 50/50 win/loss ratio is statistically way on the low side, as most people are shooting for a number much higher than that.
The 2nd rule of the 4 pivotal rules to trading successes is the only number of the four that is going to be statistically higher than what most traders aim for, and that is a two-to-one reward to risk ratio. All that means is that if you’re risking 20 pips, you’re looking to gain 40. If you’re risking a hundred pips, you’re looking to gain 200 at least. We’re talking about a 2 to 1 reward to risk ratios, or you could think about that in terms of percentage gain or loss which I will explain in a second. So if you’re risking 2% of your account value, then you would be looking to gain 4% as your take profit. A positive reward to risk ratio allows for a 50/50 win/loss ratio. A 50/50 hit rate is extremely important, let me illustrate. If I went to you and I said: “your life depends on you winning 70% of your trades this month and you have to take at least 12 trades.” So imagine that your life literally depends on you winning 70% of your trades. Now I go to you, and I say, “option number two requires you
to win 50% of your trades.” Which one are you going to take? Obviously, you’re going to choose option #1. That is a very simple way of illustrating that your mind instantly believes option #1 is much more achievable.
What this exercise should do is change your mindset going into the trading day. Now that you believe it is possible to win 50% of your trades, you have to also see how profitable it is once you achieve a 50/50 hit rate. Then you’re gonna go into the day with not only the belief that it’s possible to hit your goal of winning 50% of your trades, but also the knowledge that it’s hugely profitable.
Number 3, limit the number of trades you have per week to 3 trades. You can increase this number down the road, but in the beginning stick with 3 trades as your max number of trades in a given week. There is an inverse correlation for certain between the number of trades somebody takes and their probability of success. The more trades somebody takes, the lower the probability they are a successful trader. Again you may be the anomaly, but I can tell you that after dealing with close to 20,000 traders over the last decade that is a statistical fact which consistently holds true. I know a lot of people that own brokerages, as well as those that are major parts in brokerages. Speaking with them this number is consistent among many more than just the 20,000 traders I’ve spoken to over the years.
Number four is risk per trade. Again these two numbers are going to be lower than what most people shoot for. Two percent risk per trade means if you have a thousand dollar account you’re going to risk no more than $20 per trade. If you have a ten thousand dollar account, which is what I’m going to run all the figures on here in a second, you would risk no more than $200 on any one given trade. So these are the four pivotal rules to trading success. Now, this might seem overblown or overstated, but let me show you what this does over the course of time, and you can decide how powerful it is for yourself. Now I’m starting with a $10,000 account balance here, and we’ll get to that in a second. First I’m going to illustrate how you can get to the point where you have an account balance that you have the ability to grow. In other words, if you don’t have any money how do you get money? I’m gonna cover that as well here in a second. To begin with, let’s go over those numbers I just showed you, those four crucial aspects to success and illustrate what it would produce in a month. We have to know what they produce in a month to then compound it month after month for one year two year three years.
Three trades per week equals twelve trades in a month, right? If you win 50% of them and you lose 50% of them, you’re gonna lose fifty-six year twelve trades, and you’re gonna win six of your twelve trades. We’re risking 2% per trade, so six losers times negative 2% equals negative 12 percent. You’re gonna lose 12% on the six losing trades out of the twelve. On the six winning trades out of the twelve trades total, you’re going to make plus four percent on each trade. Remember two to one reward to risk ratio, so if you’re risking 2%, then you’re looking to gain four percent. Four percent times six trades equals plus 24 percent. Plus 24 percent on your winners, minus negative twelve percent on your losers results in a plus twelve percent monthly gain. On those figures, I just showed you it’s a plus twelve percent monthly gain. Now what I’m going to do is I’m even going to shoot lower because I’m gonna walk through three different examples of compounding over the course of time using even lower numbers. What I did on this slide here is break down what the results would be if you won only five out of your twelve trades. That means you lose seven trades and you win five out of the twelve. That’s a win-loss ratio just a little bit under 42%. In that case, you’re not much over a 40% win-loss ratio! Let’s do the math and see the results! Again, seven losing trades at two percent risk per trade equals negative 14 percent (7 Trades X -2% P/Trade = -14%) on your on your seven losing trades. On your five winning trades, you’re making four percent each trade. Four percent profit per trade times five trades equals plus twenty percent (5 Trades X +4% P/Trade = +20%). Plus twenty percent minus negative 14 percent from your losers results in a combined total of plus six percent that month.
Now I ran the numbers on plus twelve percent, plus nine percent, and +6%. You’ve seen the numbers on +12% and +6%, but a way you could get to +9% using this exact figure here, is if you just changed the risk from two percent per trade to 3 percent per trade. I don’t highly recommend that but if somebody were to do that using a 41.6% hit rate as I’ve Illustrated here, this would be the result. Seven trades at 3% risk would instead be a 21 percent loss. Then five trades times +6% would equal +30%. Plus thirty percent minus negative twenty-one percent would come out to plus nine percent monthly profit. This is just another figure you could run with a slight variation of the numbers that I’m illustrating. That’s why I said at the beginning, ‘while every profitable trader I know follows these rules, they don’t follow these rules to an exact tee.’ They may make slight variations, normally even more conservative through the numbers I showed you, not more aggressive.
Now I’m going to change over to the next slide here, and this is where I’ve actually broken down the numbers. This is where again, it’s important to understand why all those other rules are in place. For example, it’s important to understand the win-loss ratio we Illustrated and why that affects your mindset going into the day. Next, the reward to risk is really the key to profitability as a 50/50 hit rate and a one to one reward to risk ratio is break-even at best. Likely you’re actually losing money because of the spread. Therefore, your two to one is is to offset your lower win-loss ratio. Then you have the two percent risk per trade rule. That’s there so that you’re not so mentally tied to any one trade. You can be disciplined you can be patient, all things many retail traders lack. Finally, limiting yourself to 3 trades is crucial as it reduces the chances of you revenge trading, over trading or boredom trading. If you know you only have a limited amount of trades per week you’re going to be more disciplined and patient as you wait for those correct setups.
We then did the math on those numbers, and we found out that on a fifty-fifty hit rate with a two-to-one reward to risk ratio, taking only twelve trades per month, and risking 2% on each and every individual trade, it would result in a twelve percent growth per month. Now we’re going to take twelve percent per month, and we’re going to compound that month after month after month to see what it would equal after one year, two years, and three years. We’re also going to do that on the twelve percent per month figure, the nine percent per month figure, and the six percent per month figure on a 10k starting balance.
I’m gonna start off by saying that might look at that 10K starting balance and say, “well I don’t have a hundred dollars!” Use whatever number you have in these calculations. Maybe it’s a hundred thousand; maybe it’s a hundred dollars. The other point that I would make is that everybody looks at this as an insurmountable number, meaning getting a starting balance to trade with. I can promise you that learning to trade profitably is the much more difficult part. If you are a profitable trader and you just don’t have the money to start trading just shoot me an email, and we will get that taken care of! Getting money to trade with is the easy part. Quite frankly, getting you money to trade is not even a small problem, the problem is becoming profitable!
Going back to our compounding example, how much does the account grow over the course of a year if you compound a $10,000 account by +12 percent per month. For 12 months and it would come out to over $38,000. If you compound it over the course of two years at 12 percent per month, it will grow to over a hundred and fifty-one thousand dollars. At the end of the third year, it compounds to just shy of $600,000. Now think about that for a second, what does the thirty-seventh month produce? Well, at ten percent growth it would be fifty-nine thousand dollars, so twelve percent would be at least 10 to 12 grand on top of that! So seventy one thousand or seventy thousand, somewhere in that region. The point is that it’s a huge monthly number! Once you’re crossing six figures, you’re probably going to be dropping your percentage risk down lower to one and a half percent or one percent risk per trade. Even on half of that monthly profit, you can see what I’m talking about with compounding an account over the course of time. That’s why Albert Einstein called ‘compound interest eight to wonder of the world.’
You can’t make the type of money for your account that steady consistent compounded growth can make you. What I mean by that is you can’t take a hundred thousand dollar account and just start making fifty, sixty, or seventy percent per month. You might be able to do that for a month, but you’re not gonna do it for a year. The best traders in the world and the best hedge funds in the world don’t run those type of numbers. Nobody does, and again anybody that’s selling those type of numbers is being naive at best and more likely deceitful. You probably bought into a few of them as I did myself. It shouldn’t be a shock to you that every single time they come up short!
We also did the figures on nine percent. It’s important to remember this was with a 42 percent hit rate with everything the same except for three percent risk per trade. At the end of three years, that equals two hundred and four thousand. No one should think I’m saying that this is easy as that’s not what I’m trying to illustrate. I’m not trying to illustrate that you should expect this either. I’m not trying to illustrate that anybody can do this, but what I’m saying is that your best chance of success is following the four rules I Illustrated at the beginning and then concentrating on steady compounding over time.
Using the final numbers let’s see what six percent per month grows to at the end of three years. Again using a $10,000 account balance, if you compounded it by six percent every month for three years, it comes out to eighty-one thousand. So what would your thirty-seventh month look like? We’re dealing with six percent growth which would result in a monthly profit just over $4,800.
It’s important to put this timeline in perspective because the comment I always get and what you’re probably thinking as is, “Well god, I had a much much shorter time horizon when I came into this market. I thought I could take my hundred dollars or my thousand dollars and turn it into a hundred thousand in a matter of weeks or in a matter of months. But a matter of years, that wasn’t what I was after!” It probably wasn’t what you’re after, but up to this point you’ve probably seen that the get-rich-quick idea is just not working! The fact is, 36 months is going to come whether you like it or not. If you’re anywhere above the age of 30 you probably understand how fast time accelerates. I’m only thirty years old, and it amazes me how fast time accelerates the older I get. So the time is going to pass, it’s just a matter of where you’re at once this time passes. If you continue down the same path you’re on then it’s going to lead to the same results.
My recommendation is that you sit down with a pen, a piece of paper, a calculator you write out your starting balance. Then you write down month by month growth, all the way through five years. In doing so, you’ll see just how quickly an account grows.
So what are the four points I want you to take away from this video? Again, I don’t care what strategy what time frame you trade. Your trading strategy does play a small part which I’ll talk about shortly, but let’s first cover the four main points and then I’ll detail number five.
#1 – Accept a 50/50 hit rate. It is far easier to have a low win/loss high risk/reward strategy, versus a higher win/loss lower reward/risk strategy, and my opinion it is also more profitable! If you want to prove this to yourself, do the math on a 70% win-loss ratio and a one to one reward to risk ratio compared to a 50/50 win-loss ratio and a two to one reward to risk. What you’ll find is that the 50/50 hit rate with a two-to-one reward to risk, is far more profitable than the trader that won 70% of their trades on a one-to-one reward to risk ratio.
After hearing that, the initial thought for many of you will be, ‘what about winning seventy percent of your trades and having a two-to-one reward risk ratio?’ To that, I say good luck! I would love to have a trading strategy with a reward to risk and win/loss ratio that high, but the fact is it doesn’t work out that way! When you increase one, you will minimize the other. By increasing the reward to risk ratio you’re going to decrease your win/loss ratio, that’s just the way it works. What I want you to shoot for is a 50/50 win/loss ratio because it’s far easier to be a successful trader that way.
#2 – Number two is a positive reward to risk ratio of two to one as a minimum.
#3 – Limit the number of trades you’re going to take a month to 12. There is an inverse correlation between the number of trades you take and your probability of being a successful trader. That is a statistical fact that I have found true over the last decade of educating traders, dealing with at least 15,000
and probably closer to 20,000 traders.
#4 – The fourth point that I covered was using a safe risk per trade of 2% of your total account balance. If you want to go a touch higher to around..
In this video, I break down all of our trades from February 2017. Any members of DTFL, you are welcome to go through the daily market previews if you would like current month results. For all those on the free side of the site. I should be getting caught up with the month end reviews by the end of the year. I’m in the process of re-designing the course to make it more user-friendly and that is taking all of my free time.