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Many will find the explanation of three price driven trading techniques described in the second half of Avi Frister's "The Forex Trading Machine" the most absorbing part of his book.
However, chapter 6 provides crucial advice that, if ignored, can break even a seemingly successful trader. The chapter is entitled: Money Management - The Key To Successful Trading and the first main heading is: "The Monster of Trading - The Drawdown".
This observation hits the nail right on the head: "Dealing with those sometimes large drawdown's that every system or trading method has is probably the hardest part of being a trader." Amen!
A Typical Scenario
A trader may have built up a good record of successful trades, his account growing steadily, and his confidence growing along with it. Then all of a sudden the trader gets a few losing trades in a row. With confidence a little shaken he continues as before only to get another batch of losing trades one after another. If he started his account with $ 20,000 and built it up to $ 30,000 but now is looking at a balance of $ 25,000 he has just experienced a dreaded drawdown, in this example, $ 5,000.
Many traders are now tempted into a self-destructive pattern of behavior. They begin to think their system is wrong! So they start to tweak it, experiment with it, perhaps even abandon it in favor of another system. Such reactions to a dreaded drawdown will probably only ensure the trader's remaining fragment of confidence is swept away too.
How to handle such a scenario? This ebook provides sage advice. Simply hold onto your seat and keep trading the way you did when you had the run of successful trades. Do not be tempted to think there is something wrong with the system or strategy you are using. Most successful strategies build profits over time. Patience is needed.
Money Management Recommendations
In addition to this rigid mental attitude, a calculated money management system needs to be in place. Avi Frister spells out the specifics which in my opinion are very reasonable and provide a strong foundation for safe trading.
His recommendation is not to risk more than 1.5% of your account on any one trade. In a regular 20K account, this means a stop loss no greater than 30 pips. This means you could have a losing run of 7-10 trades in a row and still your capital is preserved. Of course, with each losing trade you would consider cutting back on the number of positions you trade.
Once your account rises above pre-determined levels again, the number of lots or positions can be increased. This really provides a fail-safe method which avoids having an account wiped out through wild trading behaviors such as desperately trying a wide variety of new and different methods or placing a large number of lots on one trade far out of proportion to your equity.
The Power Of Compounding
Compounding is the way to build capital. Small consistent gains, compounded over time, can yield amazing results. If strict money management principles are followed and as long as the trader is mentally prepared for the dreaded drawdown, which will come at some time, he will survive to see another day and probably go on to enjoy exceptional profits.
The money management system detailed in chapter 6 of this book, therefore makes for essential reading. True, similar concepts are covered in other books dealing with the forex, but the way Avi Frister explains it here just seems to click and hit home.
Title: Forex Trading Machine
Author: Avi Frister
Format: Digital - PDF
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Source by Michael A Jones
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