ICT Forex - Money Management That Works

Name: ICT Forex - Money Management That Works
Uploaded: 2017-12-12T23:30:31.000Z
Duration: 1 h 24 min 53 s

Introduction

In this lesson, the speaker emphasizes the importance of sound money management techniques and provides a perspective on money management.

The lesson covers topics such as system accuracy, risk management, and pushing one's edge.

System Accuracy

System accuracy is not as important as many traders believe.

A relatively low accuracy rate can still be profitable.

Traders often blame their lack of high accuracy for their losses, but it is actually the losses that erode their accounts through drawdowns.

Risk Management

There is no cookie-cutter approach to how much equity should be risked.

Personal choice and preference determine how much risk one should assume.

Generally, a risk appetite of about 1% to 3% is reasonable.

The question of how much to risk depends on what one can tolerate.

Pushing One's Edge

Traders should not always push their edge because even the best systems will incur losses.

It is impossible to know if a loss will be a single loss or a series of losses.

Importance of Sound Money Management and Risk Control

In this section, the speaker emphasizes the importance of sound money management and risk control in trading. He explains that traders blow out due to their inability to weather a series of losses.

The Importance of Throttling Back

Traders need to have a measure in place that helps them throttle back when they are active and when they are going to resume again.

It is important for traders to focus on the importance of sound money management and risk control.

Traders need to experience consecutive losing trades as it is normal for developing traders. Avoiding it can hurt and stunt growth as a developing trader.

Fear and greed can be dealt with but it has to be with a process and a clear developed plan.

Money Management Approaches

There are measures of controlling risk and money management approaches in gaming such as blackjack or roulette.

The speaker used ideas from professional gamblers' approaches and applied them to a money management strategy which he thinks will be interesting for listeners.

The takeaway is that the speaker will teach listeners how to flatline equity drawdown.

Conclusion

The speaker emphasizes that every trader loses an account with a series of losing trades, but it starts with one losing trade. What goes on between your ears inside your mind is what manifests in your account. Therefore, having sound money management strategies is crucial for success in trading.

Trading with Live Funds vs Demo Accounts

The speaker discusses the importance of having a frame of mind and procedure when encountering losing trades, and emphasizes the need to control losses in both demo and live accounts.

Practicing Money Management Approaches

Every trader will encounter losing trades, so it's important to have a plan for how to handle them.

When encountering a losing streak, it's important to control losses by slowing down or stopping trading.

Over-leveraging or keeping risk at a constant can lead to massive losses.

Professional Money Management Concepts

Informed speculators use professional money management concepts to keep their equity base smooth.

A hypothetical example is given of 20 trades using a $5000 account with 3:1 reward-to-risk ratio and aggressive start using 2% risk from the start. The typical equity line shows drawdown followed by an increase before dropping again, causing traders to panic and make poor decisions.

Managing Emotions During Losing Streaks

Traders may experience regret, anger, or frustration during losing streaks. It's important not to lash out at others or engage in impulsive behavior.

Having procedures in place for controlling losses can help mitigate emotional responses during losing streaks.

Importance of Equity Line

The cumulative line of equity is an important indicator that drives traders' decisions more than anything else on their charts. It oscillates between oversold and overbought levels but consistently pointing lower can cause traders to panic and make poor decisions.

Introduction to Trading and Money Management

The speaker discusses the importance of having a system or procedure in place before trading. They caution against relying on luck and equity curves to determine success. Instead, they suggest using sound money management concepts to weather losing streaks.

Rules for Engaging in Trading

Before engaging in trading, it is important to have a system or procedure in place.

Use sound money management concepts to help weather the storm through losing streaks.

Drop down to your smallest unit of leverage after five consecutive wins.

Prepare yourself for future losses or losing streaks by dropping down to your lowest unit of leverage.

Controlling Drawdown

Most traders have an issue with drawdown and will lose their mind as soon as they start suffering from a series of losing trades.

Control is limited to where your stop-loss is or how long you stay in a trade without being stopped.

Use a threshold of five winning trades before increasing leverage. If you get above your equity starting point, you can start jumping up to the next unit leverage.

Conclusion

Trading requires discipline and preparation. By following sound money management concepts, traders can prepare themselves for future losses and avoid pushing themselves into drawdown.

Drawdown and Leverage

In this section, the speaker discusses the importance of managing drawdown and leverage in trading to preserve gains and avoid large losses.

Managing Drawdown

The speaker plans for potential losing trades by building in five winning trades before dropping back down to their lowest unit of leverage.

This approach helps plateau drawdown and creates a stair-stepping approach to equity growth.

By forecasting and scheduling drawdown, traders can control how much their equity drops during losing streaks.

Managing Leverage

The speaker emphasizes the importance of not increasing leverage after a winning streak, as it can lead to larger losses during a losing streak.

Traders should drop back down to their lowest unit of leverage after five consecutive winning trades to plan for future drawdown.

Using a 2% Risk Model

In this section, the speaker discusses using a 2% risk model with three-to-one reward risk ratio in trading.

Starting with Modest Capital

The trader starts with $25k and increases leverage after each winning trade until they reach $50k.

If the trader takes a loss, they drop back down to their lowest unit of leverage until they have another winning trade above their starting balance.

Managing Losing Streaks

After five consecutive winning trades, traders should drop back down to their lowest unit of leverage to plan for future drawdown during losing streaks.

The trader shows regard for losing streaks by dropping back down to their lowest unit of leverage after a loss.

Managing Equity and Drawdown

In this section, the speaker discusses how to avoid equity falling off a cliff and control it by building in procedures. The speaker explains the concept of win set cycles and how to determine leverage units.

Win Set Cycles

After five winning trades, a complete win set cycle is completed.

A win set cycle helps avoid equity falling off a cliff.

Determine leverage units based on personal preference.

Reversed Reward-to-Risk Model

Using a trading approach that only allows for 20 pips gain but willing to suffer as much as 40 pips per trade can lead to drawdown below starting equity balance.

Drawdown below starting equity balance is not good.

Money management approach using reversed reward-to-risk model can help avoid drawdown below starting equity balance.

One-to-One Reward-to-Risk Model

Trader takes 20 pips or 20 pips risk with no money management plan in place.

Stick to 2% risk even when losses are suffered.

Money Management Strategies

In this section, the speaker discusses the importance of money management strategies in trading and how it can help traders avoid significant losses.

The Risks of Not Using Money Management

Traders who do not use money management strategies risk losing their entire account balance.

Emotional and psychological impacts of losing trades can cause traders to over-leverage or take invalid trades.

It is essential to avoid going below the opening equity balance.

Using Different Leverage Units

A trader who uses different leverage units can minimize drawdowns and avoid going below the opening equity balance.

By dropping down to a lower leverage unit after a loss, traders can stay above the beginning equity balance.

After making a profit, traders can start increasing leverage again but should drop back down to their lowest leverage unit after taking a loss.

Customizable Money Management Strategies

Sound money managers adjust quickly when they see losses and keep them at a minimum while increasing leverage when making profits.

Traders can customize their money management strategies by adjusting the number of winning trades before increasing leverage or dropping down to their lowest leverage unit after taking a loss.

Soft Start Strategy

The soft start strategy involves starting with low pip values and gradually increasing them after each win until reaching five winning trades.

After five winning trades, traders should drop back down to their lowest pip value if they take a loss.

This strategy allows for three-to-one reward risk ratios while minimizing drawdowns.

Trading Model for Day Traders

In this section, the speaker discusses a trading model for day traders that involves taking limited risks and aiming for consistent gains.

Winning Trades and Limited Losses

The model involves having 13 winning trades out of 20 with losing trades sprinkled in between.

A series of five winning trades in a row is aimed for.

The trader limits their losses to 20 pips while aiming for 60 pips as a day trader.

This can be done a couple of times per week, leading to approximately a 12% gain on the account over ten weeks.

Another Trading Model

This model also starts with $5,000 and uses a reward model of 3:2:1.

After five consecutive wins, leverage is cut to the lowest unit.

A single loss does not result in cutting leverage; instead, the trader allows the 2% rule to remain in place.

Day trading and scalping can both use this same money management approach.

Conclusion

The presented models are suitable for developing traders who want to take limited risks while aiming for consistent gains. These models can be tailored according to individual risk appetites.

Visit the inner circle trader website for more information.