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Okay so welcome back to the
desk. Uh we're going to move on
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now to the next section of the
video series having discipline
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or risk management. In having
discipline one, risk management
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one. Uh we're going to be
primarily looking at the
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principles behind risk
management and why we have risk
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management in the first place.
And it's very very important to
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pick up these principles along
the way. The the first
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principle you're going to pick
up is the principle that if
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we've been through the whole
idea generation process we've
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created our fundamental biases
through the fundamental data
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towards currency pairs and then
we've been through the
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gatekeeping process and try to
time those fundamental ideas
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better we now get to a point
where we're about to take a
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position or we've now started
to take positions and we're now
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actually looking to risk manage
our trades and have an
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actionable trading plan now the
first principle we're going to
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pick up in risk management here
is that you need to make an
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assumption in trading always.
You need to make the assumption
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that there's nothing that you
know that the market doesn't
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already know. That's very
important. We're going to pick
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that up as we go the basics of
risk management and the
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principles underpinning as to
why we have risk management.
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The next principle and
underpinning that we need to
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understand is actually the
psychology behind risk
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management and really this is
about understanding human
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psychology and when
understanding human psychology
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being able to step outside
yourself and be able to
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critically analyse weaknesses
of humans from a
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psychologically from a
psychological perspective and
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then being able to seek to do
the opposite. We're going to
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pick up that principle as we go
through as well and this
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underpins why we have stop
losses and targets which we've
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mentioned briefly in the video
series prior to risk management
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but now we're really going to
start to understand how to
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construct trades and actually
how to risk manage trades
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properly. Uh we're also in this
video going to go back to ATR
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and we're going to start using
the ATR assessment that we made
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earlier on in the video series
not only to assess opportunity
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but also to assess risk. So,
we'll be going on the computer
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screen and we're going to be
using Euro dollar as an example
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so we're now going to be
dropping Aussie dollar US
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dollar as our example because
we've used Aussie dollar US
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dollar throughout the video
series we've got to the point
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where we have a fundamental
predisposition or buyers to be
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short Aussie dollar US dollar
exchange rate we've been
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through the gatekeeping process
and realize that our timing is
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off so we're now going to sit
back and wait for opportunities
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for Aussie dollar US dollar to
short into rally. So that
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served as a great example to
this point. The assumption
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we're going to make here now is
that you're actually running
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your watch list. You have a
whole bunch of ideas on your
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watch list and one of the ideas
you want to pursue is short
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Euro dollar. So now we're going
to drop the Aussie dollar US
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dollar as an example and use
Euro dollar US dollar as an
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example as we've got this point
it's on our watch list and we
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actually want to go ahead and
short it. So we're now
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deploying capital to this
trade. So first of all we're
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going to go through all of the
basics of risk management in
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risk management to having
discipline one and then we're
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going to move on to more and
further risk parameters in risk
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management having discipline
two and actually look at an
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actionable trading plan for an
overall portfolio later and
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we're also be we'll be looking
at further risk parameters that
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we can have in our portfolio to
become a lot more of an
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efficient trader managing risk
going forward so let's go over
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to the computer screen and
start looking at all of the
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reasons why we have risk
management in the first place
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that's a very crucial step to
understand because longer term
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it means if you pick these
things up you'll respect risk
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management a lot more and have
a lot more discipline than the
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average retail trader and we'll
also go and have a look at Euro
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dollar as an example of how we
actually go about looking to
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construct a trade deploying
capital and looking to manage
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the risk on that trade and I'll
see you at the end of the
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videos at the end of the video
for a recap okay so now we're
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going to move on to the next
section of the overall process
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we're going to move on to
having discipline and having
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risk management processes in
place. So before we actually
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move on to an example of risk
management application to
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currency trades. It's really
important to understand why we
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have these risk management
practices in the first place.
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Now you have to understand that
risk management practices are
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not an accident. You know we
don't apply risk management to
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our portfolios for no reason.
They're not processes that
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people just dream out of thin
air. Uh they have a real
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rooting in psychology and in
order to really understand risk
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management. What we have to
first really understand is
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trading psychology and getting
our trading psychology sharp
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and correct. So, as a reminder,
where does this fit into the
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overall process? Well, our main
phase here was our idea
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generation phase. This is how
we come up with trade ideas
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that are to come or to become
potential trades as in
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potential real positions. Then,
we have our gatekeeping process
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which is our commitment of
traders reports, technical
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analysis price action
indicators to essentially
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cleanse our ideas and have a
process to stop ourselves doing
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something stupid in terms of
deploying capital to our ideas
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now if we make the assumption
here that we've generated a
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whole bunch of ideas that are
to become potential trades so a
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whole bunch of currency pair
ideas and to go long or short
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for currency pairs. We've been
through the gatekeeping process
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and we now think that
everything lines up in terms of
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our fundamental idea plus our
timing to get into the trade.
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We're now going to deploy
capital and we're going to end
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up with a real position in our
portfolio in our retail trader
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accounts. What we're going to
look at here first of all is
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the having discipline section
where we'll be looking at
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trading psychology why we have
risk management principles or
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risk management practices in
place within our trading
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accounts and looking at how we
actually apply it with some of
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the resources that we've had
previously in the video series
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so the will be having
discipline one, risk management
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one. Then we're going to move
on to applying some sensible
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common sense risk management
practices to our overall
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portfolio and then later we'll
be going on to working out our
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self-awareness statistics as
traders. So in the overall
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process this is where risk
management or having discipline
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fits in. It comes in when we
actually have deployed capital
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and we have real live
positions. Now, in the PTM
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video series, we specifically
looked at risk management
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examples in stocks. So, how you
manage the risk of a stock only
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portfolio. And the
underpinnings or foundations of
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why we use risk management are
exactly the same in currencies.
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However, the application is
just slightly different. So, if
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you've already accomplished
completing the PTM video series
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as long as you fully understand
those principles that we showed
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you in the PTM video series of
trading psychology and why we
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have it you'll have a very good
idea of how to apply this in
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currencies anyway but you may
choose to skip or skip this
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part or complete it in order to
just refresh your memory you
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know there's no harm in going
back and revisiting this area.
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Uh in fact, you should always
revisit this stuff as as much
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as you can. Um if you've not
completed the PTM video series,
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we'll provide you with the
basic underpinnings of trading
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psychology and the principles
as to why we have risk
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management in the first place.
But in the PFTM video series,
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we're going to apply this only
to currencies. If you want to
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understand the application of
trading psychology for other
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asset classes, so stock sectors
so sector ETFs in the stock
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market indices and for real
life examples on how trading
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psychology applies to all areas
of your life so career business
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relationships family etcetera
this is only covered in the PTM
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video series and it's not
going to be covered in the PFTM
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video series so in the PT video
series will give you a much
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wider application of risk
management but in the PFTM
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video series we're going to be
only concentrating on
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currencies but having exactly
the same principles underlying
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the theory behind trading
psychology and in the PTM video
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series the overall application
has improved a lot of guys
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lives so people who have come
through the institute it's
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definitely strongly recommended
if you can get yourself on the
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PTM course you're specifically
only interested in learning the
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basics of trading psychology
and applying that only to
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currencies then the PFTM will
cover that but if you want to
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apply this to a much wider
remit then strongly recommended
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that you take the PTM video
series as well. So let's get
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started on risk management and
there's a little secret that
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you need to know which is there
is nothing you know that the
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market does Doesn't already
know. Now that's a very strong
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statement to make and it's one
of the main reasons why we have
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risk management practices in
the first place. So even if
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you've been through the whole
idea generation phase and the
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gatekeeping process and this
all lines up and you're ready
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to take a position. This is an
assumption that you need to
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make and you need to manage
risk and also the opportunity
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in order to make sure that
you're not entering trades
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where your idea and the timing
looks good but you don't do
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anything if positions go wrong
and positions even go right.
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Because there's no doubt about
it. You're going to have
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volatility in your positions
and your overall portfolio. Now
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all the information that we've
been through in the idea
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generation phase and also in
the gatekeeping process this is
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all actually publicly available
information we're obviously
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doing a hell of a lot more work
than most people do especially
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in the retail trader market but
you need to make this
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assumption. So let's go through
it again. There is nothing you
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know that the market doesn't
already know. You have to make
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this assumption because there's
no way of you knowing that the
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market doesn't know it. So by
making this assumption it's
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necessary therefore to have
sensible common sense risk
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management parameters overlaid
onto your portfolio on all of
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your positions and your
portfolio in its entirety to
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ensure that you don't blow up
or you don't consistently lose
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money. So this is one of the
main reasons why we have risk
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management in the first place
is that if you go into a
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position where you've generated
the idea as part of an overall
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large amount of ideas that are
coming through your idea
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generation process then you
look to time these trades and
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everything seems to line up
nicely or the timing looks
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pretty good it's always
difficult to find ideas where
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everything lines up in perfect
order but if the timing looks
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pretty good from a common sense
perspective you can then still
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put a position on and
potentially lose money because
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Everybody in the market is now
putting on the position or
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thinking of the same thing. So
being slightly ahead of the
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game is what we always want to
be. We always want to be
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looking forward. We always want
to be increasing the odds in
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our favour by being smart,
looking at the right things,
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doing more work in a lot less
time, getting the right
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answers, predicting what's
going to happen in the future,
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timing our as close to
perfectly as possible. We're
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never going to be perfect and
then admit that we can still
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get it wrong. Because there's
nothing you know that the
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market doesn't already know. If
you make this assumption then
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you're going you're going to
have discipline. If you're
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wrong you're going to look to
manage risk correctly. If
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you're right you're going to
look to manage risk in that
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scenario correctly as well. And
this is what we're going to
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move on to now. Uh we're going
to actually play a game. And
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this game highlights trading
and human psychology very very
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00:16:24,943 --> 00:16:29,743
well and gives a lot of clarity
as to why we even have risk
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management processes in the
first place. So let's start
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this game and see how we get
on. So what we're going to be
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doing is we're going to be
trading marbles. So you'll see
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00:16:46,003 --> 00:16:53,763
in front of you two boxes and
in this scenario you are
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getting paid. So what you're
doing is you're actually
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trading marbles against me. And
in this scenario you're getting
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paid. So if you win the game I
have to pay you. If you lose
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00:17:13,103 --> 00:17:18,583
the game you have to pay me.
But in this scenario you can
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00:17:18,583 --> 00:17:23,703
only get paid. You're winning.
So what you'll see in front of
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you is two boxes. Box A and box
B. In box A there's three blue
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marbles and one red marble. So
four marbles in total. In box B
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there's one marble and that
marble is green now you've got
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00:17:49,723 --> 00:17:56,043
to put your hand in the box to
pick the marble you only get
225
00:17:56,043 --> 00:18:01,123
one shot in this game so you're
allowed to pick from either box
226
00:18:01,123 --> 00:18:08,123
and pick one marble so if you
put your hand in box A and you
227
00:18:08,123 --> 00:18:15,763
pull a blue marble I have to
pay you 1000 pounds. If you put
228
00:18:15,763 --> 00:18:21,723
your hands in box A and pull a
red marble so the only red
229
00:18:21,723 --> 00:18:27,163
marble that's in the box if you
pull the red marble I pay you
230
00:18:27,163 --> 00:18:34,663
nothing if you put your hand in
box B if you choose to do that
231
00:18:34,663 --> 00:18:39,223
well there's only one marble
there so you'll have a feel
232
00:18:39,223 --> 00:18:45,003
around in the box and you'll
pull out the green marble if
233
00:18:45,003 --> 00:18:48,803
you pull out the green marble,
so if you put your hand in box
234
00:18:48,803 --> 00:18:56,163
B, I have to pay you 700
pounds. So think about this for
235
00:18:56,163 --> 00:19:00,723
a moment. You only get one
shot. Which box do you put your
236
00:19:00,723 --> 00:19:08,223
hand in? Box A or box B? I'll
give you a minute to think
237
00:19:08,223 --> 00:19:10,623
about it.
238
00:19:38,003 --> 00:19:45,343
Box A or box B. If you put your
hand in box A you pull a blue
239
00:19:45,343 --> 00:19:51,143
marble I pay you a thousand
pounds. If you pull the red
240
00:19:51,143 --> 00:19:57,223
marble I pay you nothing. If
you put your hand in box B you
241
00:19:57,223 --> 00:20:03,863
obviously pull the green marble
I have to pay you 700 pounds.
242
00:20:03,863 --> 00:20:08,903
I'll give you another 20
seconds to decide.
243
00:20:34,583 --> 00:20:39,923
Okay so have you made your
decision? Have you put your
244
00:20:39,923 --> 00:20:45,363
hand in box A? Or have you put
your hand in box B? Remember
245
00:20:45,363 --> 00:20:51,263
I'm having to pay you in this
scenario. Write it down on a
246
00:20:51,263 --> 00:21:00,423
piece of paper. Write down
either box A or box B under the
247
00:21:00,423 --> 00:21:06,623
title getting paid on a piece
of paper. So write down the box
248
00:21:06,623 --> 00:21:15,343
that you chose. So getting paid
and then underneath write A or
249
00:21:15,343 --> 00:21:22,543
B box A or box B write down
your choice on the paper
250
00:21:24,763 --> 00:21:30,223
Okay, done that. Perfect. Now,
let's move on to the next
251
00:21:30,223 --> 00:21:38,503
scenario. In the next scenario,
scenario two, This is called
252
00:21:38,503 --> 00:21:47,083
paying out. So in the scenario
paying out the roles are
253
00:21:47,083 --> 00:21:57,683
reversed in that you are now
paying me. So you still have to
254
00:21:57,683 --> 00:22:04,443
put your hand inside one of the
boxes. But now you are paying
255
00:22:04,443 --> 00:22:13,823
me. So if you put your hand in
box A and you pull a blue
256
00:22:13,823 --> 00:22:21,143
marble you have to pay me a
thousand pounds. If you put
257
00:22:21,143 --> 00:22:27,823
your hand in box A and you take
out the red marble you pay me
258
00:22:27,823 --> 00:22:34,783
nothing if you choose to put
your hand in box B well there's
259
00:22:34,783 --> 00:22:40,343
only one marble in there the
green marble if you put your
260
00:22:40,343 --> 00:22:44,823
hand in box B you will pull the
green marble and you'll have to
261
00:22:44,823 --> 00:22:53,783
pay me 700 pounds So paying out
you are paying me but now
262
00:22:53,783 --> 00:22:58,423
you're still putting your hand
in the box. So it's not me
263
00:22:58,423 --> 00:23:04,743
putting my hand in the box.
You're still doing it. And
264
00:23:04,743 --> 00:23:13,183
you're paying me so you pull a
blue in box A you pay to me
265
00:23:13,183 --> 00:23:21,183
1000 pounds If you pull a red
from box A, you pay me nothing.
266
00:23:21,183 --> 00:23:26,783
If you put your hand in B, you
have to pay me 700.
267
00:23:27,303 --> 00:23:33,683
Which box do you choose? Grab
your pen and paper. I'll give
268
00:23:33,683 --> 00:23:40,523
you 30 seconds. Write down
scenario two paying out and
269
00:23:40,523 --> 00:23:48,243
then underneath the title,
write box A or box B. I'll give
270
00:23:48,243 --> 00:23:53,523
you 30 seconds to make your
decision from now.
271
00:24:18,843 --> 00:24:24,383
So, blue marble, you pay me a
thousand. Red marble, you pay
272
00:24:24,383 --> 00:24:31,503
me nothing. Green marble, you
have to pay me 700.
273
00:24:45,683 --> 00:24:50,663
Okay so hopefully by now you've
got your answer to scenario two
274
00:24:50,663 --> 00:24:56,303
paying out. So we looked at two
scenarios. Getting paid when
275
00:24:56,303 --> 00:25:01,983
you get paid. So I have to pay
you. And the second scenario
276
00:25:01,983 --> 00:25:06,623
paying out where you still put
your hand in the box but the
277
00:25:06,623 --> 00:25:12,943
outcome is you're paying me
let's go through the psychology
278
00:25:12,943 --> 00:25:18,943
of what we just did there so in
scenario one have a look at
279
00:25:18,943 --> 00:25:25,423
your paper have a look what you
wrote down in scenario one the
280
00:25:25,423 --> 00:25:33,183
outcome was you were getting
paid so So we can classify this
281
00:25:33,183 --> 00:25:40,663
as you facing a positive
outcome numerically. So you're
282
00:25:40,663 --> 00:25:44,463
winning, you're winning the
game, you're making money. You
283
00:25:44,463 --> 00:25:46,983
get paid.
284
00:25:47,963 --> 00:25:51,983
And when we look at the two
boxes what they can be
285
00:25:51,983 --> 00:25:56,903
described as in actually both
scenarios because the boxes
286
00:25:56,903 --> 00:26:04,623
stay the same boxes A and B can
be described as risk and
287
00:26:04,623 --> 00:26:11,263
certainty respectively. So box
A is risk and box B is
288
00:26:11,263 --> 00:26:18,223
certainty. And when human
beings are faced with a
289
00:26:18,223 --> 00:26:24,703
positive outcome human beings
in the majority of cases will
290
00:26:24,703 --> 00:26:31,243
tend towards certainty. So So
in the scenario one, getting
291
00:26:31,243 --> 00:26:40,263
paid usually eight out of ten
respondents would actually tend
292
00:26:40,263 --> 00:26:48,583
towards box B. And two out of
ten would tend towards box A.
293
00:26:48,583 --> 00:26:57,703
So 80% of people will tend
towards certainty. And 20% of
294
00:26:57,703 --> 00:27:03,763
people will tend towards risk.
So Eighty percent of people
295
00:27:03,763 --> 00:27:09,643
will choose to pull the green
marble from box B because this
296
00:27:09,643 --> 00:27:13,763
provides certainty that they're
going to get paid seven
297
00:27:13,763 --> 00:27:20,803
hundred. Now in trading this
basically means taking profit
298
00:27:20,803 --> 00:27:27,803
too quickly. Human beings focus
too much on locking in profits.
299
00:27:27,803 --> 00:27:32,603
And as traders what we actually
have to do is the opposite. We
300
00:27:32,603 --> 00:27:39,443
have to focus on letting our
profits run. Now how from this
301
00:27:39,443 --> 00:27:43,083
scenario how from this
situation are we making a
302
00:27:43,083 --> 00:27:50,063
profit? Well if you look at the
risk adjusted payoff of each
303
00:27:50,063 --> 00:28:00,823
box the payoff of box A is
actually. 7575% chance of
304
00:28:00,823 --> 00:28:05,903
pulling a blue marble of which
there was three out of four
305
00:28:05,903 --> 00:28:11,983
marbles so 75% chance of
pulling a blue marble and
306
00:28:11,983 --> 00:28:18,923
making 1, 000 pounds. So the
risk adjusted payoff of box A
307
00:28:18,923 --> 00:28:30,003
is actually 750 pounds. So it's
higher than box B by 50 pounds.
308
00:28:30,003 --> 00:28:39,443
So box eight risk adjusted is
75 multiplied by a thousand
309
00:28:39,443 --> 00:28:44,323
equaling seven hundred50
pounds. The risk adjusted
310
00:28:44,323 --> 00:28:52,283
return on box B is just a00%
chance of making 700 pounds.
311
00:28:52,283 --> 00:28:57,243
Now because the numbers are
close together it's not so
312
00:28:57,243 --> 00:29:03,003
obvious when you first look at
it. But the principles apply.
313
00:29:03,003 --> 00:29:07,683
If there were bigger numbers
involved, it would become more
314
00:29:07,683 --> 00:29:15,423
and more apparent. So if we
take risk when getting paid we
315
00:29:15,423 --> 00:29:22,903
make more than if we choose no
risk when getting paid. And as
316
00:29:22,903 --> 00:29:28,343
stated in trading this means
taking profit too quickly.
317
00:29:28,343 --> 00:29:33,263
Human beings will always focus
on locking in profits very
318
00:29:33,263 --> 00:29:35,783
quickly. So when you have a
winning position in your
319
00:29:35,783 --> 00:29:42,583
portfolio taking the profits
because now we think it's
320
00:29:42,583 --> 00:29:47,303
guaranteed to make money so we
lock it in quickly. And what we
321
00:29:47,303 --> 00:29:51,263
actually have to focus on is
the opposite. Because that in
322
00:29:51,263 --> 00:29:56,183
itself is actually just being
human. There's nothing wrong
323
00:29:56,183 --> 00:30:00,823
with being human. But when it
comes to trading portfolio
324
00:30:00,823 --> 00:30:05,103
management and money management
we have to actually do the
325
00:30:05,103 --> 00:30:11,523
opposite. We have to suppress
our urge to tend to Certainty.
326
00:30:11,523 --> 00:30:16,083
We have to focus on letting our
profits run. So when we have a
327
00:30:16,083 --> 00:30:21,483
scenario where we're getting
paid we have to pull from box
328
00:30:21,483 --> 00:30:27,683
A. The metaphorical box. We
have to pull from box A and
329
00:30:27,683 --> 00:30:32,323
keep our position and let it
run.
330
00:30:33,423 --> 00:30:41,003
To allow our profits to run we
have to just accept the risks.
331
00:30:41,503 --> 00:30:47,683
And just accept that risk
exists. And possibly even take
332
00:30:47,683 --> 00:30:53,083
more risk by adding more
capital to the trade. So when
333
00:30:53,083 --> 00:30:57,963
times are good on positions
when we're making money we
334
00:30:57,963 --> 00:31:03,803
actually have to seek out risk.
We have to look to take more
335
00:31:03,803 --> 00:31:10,003
risk or at least as a minimum
run the position. So the
336
00:31:10,003 --> 00:31:15,043
outcome here scenario one
Getting paid when you do this
337
00:31:15,043 --> 00:31:20,083
publicly when we take surveys
on this with lots of people
338
00:31:20,083 --> 00:31:24,963
involved especially in seminar
rooms when the institute is
339
00:31:24,963 --> 00:31:32,203
presenting live 80% of people
in the scenario of getting paid
340
00:31:32,203 --> 00:31:36,723
so facing a positive outcome
making money will tend towards
341
00:31:36,723 --> 00:31:44,283
box B and 20% towards box A. So
if you wrote down box B there's
342
00:31:44,283 --> 00:31:48,363
nothing wrong with that it just
means you're being human but in
343
00:31:48,363 --> 00:31:52,603
trading and portfolio
management and in terms of risk
344
00:31:52,603 --> 00:31:57,683
management you need to actually
be doing the opposite so in
345
00:31:57,683 --> 00:32:02,003
trading and portfolio
management it's actually wrong
346
00:32:02,003 --> 00:32:08,283
to look for certainty and pull
from box B when you're getting
347
00:32:08,283 --> 00:32:13,383
paid when you're winning so
facing a positive numeric
348
00:32:13,383 --> 00:32:20,903
outcome. Now what happens when
we move to our second scenario
349
00:32:20,903 --> 00:32:26,343
when you are actually paying
out so when you are putting
350
00:32:26,343 --> 00:32:32,103
your hand in the box choosing
box A or box B and the outcome
351
00:32:32,103 --> 00:32:37,103
was that you were paying me
well in this instance you're
352
00:32:37,103 --> 00:32:43,623
facing a negative numerical
outcome because the outcome of
353
00:32:43,623 --> 00:32:49,543
this game whichever box you put
your hand in you have to pay me
354
00:32:49,543 --> 00:32:53,503
and if you recall if you pulled
a blue marble you have to pay
355
00:32:53,503 --> 00:33:00,663
me £1, 000 from box A if you go
in box A and pull a red marble
356
00:33:00,663 --> 00:33:06,023
you pay me nothing and if you
put your hand in box B you have
357
00:33:06,023 --> 00:33:11,903
to pay me 700 pounds and if we
think about this in the same
358
00:33:11,903 --> 00:33:16,823
way as we looked at it before
well the boxes haven't changed
359
00:33:16,823 --> 00:33:24,583
the risk adjusted payoff of box
A is 750, and the risk adjusted
360
00:33:24,583 --> 00:33:33,083
payoff of box B is seven00 and
if you put your hand in box A
361
00:33:33,083 --> 00:33:37,683
you're essentially taking risk
and if you put your hand in box
362
00:33:37,683 --> 00:33:45,443
B it's certain the outcome is
you have to pay me 700 so have
363
00:33:45,443 --> 00:33:50,883
a look at your paper which box
did you write down for the
364
00:33:50,883 --> 00:33:55,323
second scenario paying out so
facing the negative outcome of
365
00:33:55,323 --> 00:34:04,763
paying me money well it. When
this is done over many cases so
366
00:34:04,763 --> 00:34:11,083
when many participants in a
room are asked to write down
367
00:34:11,083 --> 00:34:18,283
the answer to this question we
get the opposite of the
368
00:34:18,283 --> 00:34:26,123
scenario, scenario one, getting
paid. 80% of respondents tend
369
00:34:26,123 --> 00:34:34,743
towards or choose box A when
facing the negative outcome and
370
00:34:34,743 --> 00:34:44,943
20% choose box B. And this is
again being human. When faced
371
00:34:44,943 --> 00:34:50,543
with a negative outcome human
beings tend towards risk
372
00:34:50,543 --> 00:34:55,303
seeking behaviour. The vast
majority of people will choose
373
00:34:55,303 --> 00:35:02,383
box A because there's a chance
that they might have to pay me
374
00:35:02,383 --> 00:35:10,323
nothing or pay out nothing. But
in the overall picture the risk
375
00:35:10,323 --> 00:35:17,883
adjusted payoff of box A is
seven fifty and off box B seven
376
00:35:17,883 --> 00:35:25,003
00 so the way to think about
this is take a risk and pay me
377
00:35:25,003 --> 00:35:35,123
750 or pay out 750 pay out a
certain amount with certainty.
378
00:35:35,123 --> 00:35:40,523
And in trading and portfolio
management in the scenario when
379
00:35:40,523 --> 00:35:46,883
you're paying out and facing
the negative outcome in trading
380
00:35:46,883 --> 00:35:51,883
this means holding on to losing
positions for too long so
381
00:35:51,883 --> 00:35:56,923
instead of taking a guaranteed
loss of 700 pounds as in
382
00:35:56,923 --> 00:36:01,883
cutting the position the
natural reaction or instinct is
383
00:36:01,883 --> 00:36:06,003
to choose to hold on to the
losing position or do nothing
384
00:36:06,003 --> 00:36:12,623
and hope that you get out the
position for nothing. So we
385
00:36:12,623 --> 00:36:17,823
actually have to be doing the
opposite again. In trading and
386
00:36:17,823 --> 00:36:20,943
portfolio management what you
have to be doing when you're
387
00:36:20,943 --> 00:36:26,223
faced with losses is take the
guaranteed loss not the unknown
388
00:36:26,223 --> 00:36:30,583
loss. Because if you think
about this now we've looked at
389
00:36:30,583 --> 00:36:36,983
this as a one shot scenario in
both scenarios of getting paid
390
00:36:36,983 --> 00:36:40,863
and paying out. But what if you
did this exercise over an
391
00:36:40,863 --> 00:36:48,303
infinite amount of traits?
Well, if you're getting paid,
392
00:36:48,303 --> 00:36:52,743
so you have winning positions
and every time you have a
393
00:36:52,743 --> 00:36:59,103
winning position you pull from
box B and you limit your upside
394
00:36:59,103 --> 00:37:04,643
of the winning position and at
the same time when you have
395
00:37:04,643 --> 00:37:10,203
losing positions so you're in
the paying out scenario you
396
00:37:10,203 --> 00:37:15,723
choose to pull from box A then
every time you have a winning
397
00:37:15,723 --> 00:37:21,523
position you make 700 and every
time you have a losing position
398
00:37:21,523 --> 00:37:27,083
you're likely to be paying out
750 well it just means that
399
00:37:27,083 --> 00:37:30,083
over time and over an infinite
amount of trades you're never
400
00:37:30,083 --> 00:37:34,483
going to make money in fact the
most likely outcome is you're
401
00:37:34,483 --> 00:37:41,023
going to be losing money. But
if you do the opposite So in
402
00:37:41,023 --> 00:37:47,663
the scenario where you're
getting paid you seek risk and
403
00:37:47,663 --> 00:37:53,323
the likelihood is you're going
to make seven fifty but when
404
00:37:53,323 --> 00:37:59,603
you're paying out you guarantee
that you only lose 700 then the
405
00:37:59,603 --> 00:38:02,763
likelihood is you're either
going to over an infinite
406
00:38:02,763 --> 00:38:08,403
amount of trades break even or
make money so when times are
407
00:38:08,403 --> 00:38:14,443
bad when we're paying out and
losing money we pull from box B
408
00:38:14,443 --> 00:38:19,483
we restrict our losses when
we're winning we pull from box
409
00:38:19,483 --> 00:38:25,363
A we take risk and uncap the
upside to our winning
410
00:38:25,363 --> 00:38:29,843
positions. We want to make sure
we have as much upside as
411
00:38:29,843 --> 00:38:34,843
possible if not infinite upside
on our winning positions and
412
00:38:34,843 --> 00:38:39,163
overall with very little to no
risk to the rest of our
413
00:38:39,163 --> 00:38:46,103
portfolio. So you can see now
how human behavior in getting
414
00:38:46,103 --> 00:38:51,463
paid tends towards certainty
and when paying out tends
415
00:38:51,463 --> 00:38:56,303
towards risk. What we actually
have to do as traders,
416
00:38:56,303 --> 00:39:03,023
portfolio managers, is take the
opposite approach. And this is
417
00:39:03,023 --> 00:39:09,103
exactly why we have risk
management parameters and
418
00:39:09,103 --> 00:39:14,563
principles in place in our
retail trader books or even
419
00:39:14,563 --> 00:39:18,803
professional trader books. This
is all very basic stuff for
420
00:39:18,803 --> 00:39:23,483
professional traders. This is
exactly why they have strong
421
00:39:23,483 --> 00:39:29,363
risk management principles and
parameters in place. Whereas
422
00:39:29,363 --> 00:39:34,803
retail traders don't really
understand why risk management
423
00:39:34,803 --> 00:39:40,923
exists in the first place and
by not understanding it they
424
00:39:40,923 --> 00:39:45,463
sometimes have risk management
in place but by not Knowing
425
00:39:45,463 --> 00:39:50,383
what it really means behind it
become ill disciplined and
426
00:39:50,383 --> 00:39:54,743
don't manage risk correctly. So
this is very very important to
427
00:39:54,743 --> 00:39:59,543
understand. And as mentioned
previously this type of
428
00:39:59,543 --> 00:40:03,743
analysis can be rolled out to
many many other genres across
429
00:40:03,743 --> 00:40:10,703
your entire life. So trading
psychology in terms of
430
00:40:10,703 --> 00:40:18,003
improving your longer term risk
management in your portfolio.
431
00:40:18,003 --> 00:40:23,563
And improving your returns on
your positions and overall in
432
00:40:23,563 --> 00:40:27,363
your portfolio can actually be
applied right across your life.
433
00:40:27,363 --> 00:40:30,923
If you want to know all of that
stuff we go into great detail
434
00:40:30,923 --> 00:40:35,923
in the PTM video series. But
here we'll be looking only at
435
00:40:35,923 --> 00:40:40,963
applying these principles to a
currency portfolio. So how do
436
00:40:40,963 --> 00:40:47,503
we actually apply this to the
Forex currencies market? Well
437
00:40:47,503 --> 00:40:51,863
it's the same as if we apply
this to the stock market the
438
00:40:51,863 --> 00:40:55,183
same as if we apply this to
commodities or even the
439
00:40:55,183 --> 00:41:00,023
interest rate bond market. The
principles all stay the same
440
00:41:00,023 --> 00:41:02,983
when trading any asset class in
your approach to risk
441
00:41:02,983 --> 00:41:08,463
management. The first thing we
have to do is always ensure
442
00:41:08,463 --> 00:41:14,063
that we use hard stop losses.
So what do we mean by stop
443
00:41:14,063 --> 00:41:22,783
loss? It means if you go long
or short an asset you put a
444
00:41:22,783 --> 00:41:31,503
guaranteed limit order to trade
out of the asset if it goes
445
00:41:31,503 --> 00:41:40,183
against you so for example if
you bought an asset at 100 you
446
00:41:40,183 --> 00:41:46,583
entered a limit order to sell
your entire position if the
447
00:41:46,583 --> 00:41:53,843
asset traded at ninety and then
the asset trades at ninety, you
448
00:41:53,843 --> 00:41:59,443
trade out automatically. This
stops you from being human.
449
00:41:59,443 --> 00:42:05,483
What it does is guarantee your
downside. So, when that order
450
00:42:05,483 --> 00:42:11,083
is triggered, you're
essentially pulling from box B.
451
00:42:11,083 --> 00:42:17,263
It's an insurance policy
against you being human. So it
452
00:42:17,263 --> 00:42:20,863
guarantees your downside
pulling from box B when you're
453
00:42:20,863 --> 00:42:24,863
paying out to the market. So
when you're losing money. It's
454
00:42:24,863 --> 00:42:29,463
stopping you from being human
and seeking out more risk when
455
00:42:29,463 --> 00:42:35,743
you're losing. So the human
attendency would be to even buy
456
00:42:35,743 --> 00:42:43,183
more at 90 and try to average
all the way down keep losing
457
00:42:43,183 --> 00:42:48,263
money and more and more money
as the asset continues to fall
458
00:42:48,263 --> 00:42:55,503
and the same on shorts if you
short an asset at 100 you enter
459
00:42:55,503 --> 00:43:00,743
a hard stop loss to guarantee
your downside where if the
460
00:43:00,743 --> 00:43:08,463
asset trades at 108 for example
you trade out automatically you
461
00:43:08,463 --> 00:43:13,463
pull from boxby So when you're
paying out to the market and
462
00:43:13,463 --> 00:43:19,103
losing money it guarantees you
and it guarantees you what your
463
00:43:19,103 --> 00:43:23,543
loss is so you know before you
enter the trade what your
464
00:43:23,543 --> 00:43:28,183
maximum loss is going to be. So
what your tolerance for a loss
465
00:43:28,183 --> 00:43:33,223
is and it stops you from being
human. It stops you from
466
00:43:33,223 --> 00:43:38,663
seeking out more risk and for
example shorting more of the
467
00:43:38,663 --> 00:43:43,443
asset at one oh eight then
shorting more of the asset at
468
00:43:43,443 --> 00:43:52,563
115 and 120 and 130 and so on
and so forth. The first cut is
469
00:43:52,563 --> 00:43:56,563
always the cheapest cut.
Remember that quote. So
470
00:43:56,563 --> 00:44:00,963
entering hard stop loss orders
to guarantee your downside.
471
00:44:00,963 --> 00:44:07,743
Pulling from box B when you're
paying out. What about targets?
472
00:44:07,743 --> 00:44:12,503
So what about when we're
actually winning? Well, in
473
00:44:12,503 --> 00:44:16,063
trading and portfolio
management, we approach this by
474
00:44:16,063 --> 00:44:22,543
using soft targets. What do we
mean by soft targets well if
475
00:44:22,543 --> 00:44:28,503
you purchase or go long an
asset at 100 we don't want to
476
00:44:28,503 --> 00:44:33,063
limit our upside and say for
example at 110 we will trade
477
00:44:33,063 --> 00:44:37,943
out automatically what we want
to do is have a target whereby
478
00:44:37,943 --> 00:44:43,623
we consider running or adding
to our position when the asset
479
00:44:43,623 --> 00:44:48,263
gets to that price so for
example if we go long an asset
480
00:44:48,263 --> 00:44:54,623
at 100 we may consider if it
trades at 120 or 130 because
481
00:44:54,623 --> 00:44:58,783
we're being paid we may
consider running the position
482
00:44:58,783 --> 00:45:03,863
or even adding to the position.
So a soft target is a
483
00:45:03,863 --> 00:45:12,623
discipline whereby we may enter
an order to buy a little bit
484
00:45:12,623 --> 00:45:20,583
more and this order itself at
as a trigger or reminder to
485
00:45:20,583 --> 00:45:26,643
make us think about our real
risk in this position. So we
486
00:45:26,643 --> 00:45:34,203
may enter a soft target of say
120 or 130 and if it actually
487
00:45:34,203 --> 00:45:37,843
trades there so if we're
disciplined enough or we're not
488
00:45:37,843 --> 00:45:41,803
too busy enough where we can
actually know that it's traded
489
00:45:41,803 --> 00:45:45,843
there then we don't have to
obviously enter an order we can
490
00:45:45,843 --> 00:45:52,443
enter a reminder into the
system where it can basically
491
00:45:52,443 --> 00:45:57,283
ping us an email or it depends
on the brokerage platform that
492
00:45:57,283 --> 00:46:01,563
you use you can get a
notification on your retail
493
00:46:01,563 --> 00:46:06,523
brokerage platform that an
asset has traded at a
494
00:46:06,523 --> 00:46:11,363
particular price and then when
it gets to our soft target we
495
00:46:11,363 --> 00:46:17,083
consider our risk at that point
in time So what does a soft
496
00:46:17,083 --> 00:46:22,283
target do? It reminds us that
we've got to a point where
497
00:46:22,283 --> 00:46:26,843
we're considering adding to the
trade or at least running it
498
00:46:26,843 --> 00:46:30,643
and we're pulling from box A.
So when we're getting paid by
499
00:46:30,643 --> 00:46:34,963
the market and making money
it's stopping us from being
500
00:46:34,963 --> 00:46:39,483
human. So we don't trade out
automatically when we're making
501
00:46:39,483 --> 00:46:44,163
profits. We're actually
considering the opposite. So
502
00:46:44,163 --> 00:46:47,903
how would this look for example
specifically applied to the
503
00:46:47,903 --> 00:46:54,463
currency market well let's use
Euro dollar so Euro USD as an
504
00:46:54,463 --> 00:47:00,783
example and let's short sum
theoretically at 130 so if you
505
00:47:00,783 --> 00:47:07,223
sell Euro dollar at 130 and
decide a sensible stop loss is
506
00:47:07,223 --> 00:47:16,703
133 and a good target a good
soft target is 121 and then
507
00:47:16,703 --> 00:47:23,423
Euro dollar then goes to 121
within say seven weeks which is
508
00:47:23,423 --> 00:47:29,263
a good time period for that
type of volatility well what's
509
00:47:29,263 --> 00:47:35,503
actually happened well on paper
you have a mark to market
510
00:47:35,503 --> 00:47:44,503
profit of nine big figures so
big points not pips and what
511
00:47:44,503 --> 00:47:50,763
you do in this in a winning
trade is you must seek more
512
00:47:50,763 --> 00:47:57,683
risk or at least run the
position however in terms of
513
00:47:57,683 --> 00:48:01,443
risk management the way you
apply these principles is to
514
00:48:01,443 --> 00:48:08,363
roll your stop loss from 133
down to one twenty-four so you
515
00:48:08,363 --> 00:48:13,803
protect your downside on the
trade. So what you're doing is
516
00:48:13,803 --> 00:48:21,103
moving your stop loss from 133
to 120 four because now Euro
517
00:48:21,103 --> 00:48:27,223
dollar is trading at 121 and
you're running the winning
518
00:48:27,223 --> 00:48:33,743
trade but in this situation now
if you get stopped out your
519
00:48:33,743 --> 00:48:40,463
profit is actually six big
figures so 130 minus one
520
00:48:40,463 --> 00:48:46,703
twenty-four What happens then?
Well, basically, if you move
521
00:48:46,703 --> 00:48:52,223
your stop loss from 133 down to
one twenty-four, you've now
522
00:48:52,223 --> 00:49:01,063
locked in an almost guaranteed
profit. Because if the if the
523
00:49:01,063 --> 00:49:07,863
currency pair Euro dollar from
121 goes lower you continue to
524
00:49:07,863 --> 00:49:13,063
make money but if it trades
back at one twenty-four you
525
00:49:13,063 --> 00:49:19,303
make money anyway so what
you've got now is a free trade
526
00:49:19,303 --> 00:49:25,543
you lock in the potential
profit now you will have some
527
00:49:25,543 --> 00:49:29,983
gap risk which will come on to
in a second but this is the
528
00:49:29,983 --> 00:49:33,943
principle you have to stick to
the gap risk is low it still
529
00:49:33,943 --> 00:49:39,463
exists but it's very unlikely
that you're going to get
530
00:49:39,463 --> 00:49:49,323
stopped out on the trade above
one twenty-four So the other
531
00:49:49,323 --> 00:49:53,723
scenario that you might
consider in this example is
532
00:49:53,723 --> 00:49:58,283
actually adding to your
position so let's say for
533
00:49:58,283 --> 00:50:03,923
example when Euro dollar trades
at 121 you double the size of
534
00:50:03,923 --> 00:50:12,843
your position and that means by
doubling the amount of notional
535
00:50:12,843 --> 00:50:18,243
exposure to the position you've
multiplied that by two so your
536
00:50:18,243 --> 00:50:23,443
average price on the short will
be halfway between the two
537
00:50:23,443 --> 00:50:30,323
shorts that you've put on so
the short will be one spot 2550
538
00:50:30,323 --> 00:50:33,803
that's going to be the average
price that you're short at so
539
00:50:33,803 --> 00:50:39,163
let's say for example you
shorted 100, 000 euro dollar So
540
00:50:39,163 --> 00:50:46,943
one lot at 130. You put your
stop loss in at 133 so you'll
541
00:50:46,943 --> 00:50:53,103
automatically trade out of that
$100, 000 if it trades at 133
542
00:50:53,103 --> 00:50:56,303
so pulling from box B if it
goes wrong and you're paying
543
00:50:56,303 --> 00:51:02,023
out and losing money trade out
automatically at 133 you apply
544
00:51:02,023 --> 00:51:08,423
a soft target of 121 when it
trades at 121 you sell another
545
00:51:08,423 --> 00:51:13,903
$100, 000 so another one lot
546
00:51:14,503 --> 00:51:20,483
you double the size of your
position. So you do that your
547
00:51:20,483 --> 00:51:25,723
average price on two 00 000
short is going to be one spot
548
00:51:25,723 --> 00:51:30,923
two five five zero Now if you
roll your stop loss down at
549
00:51:30,923 --> 00:51:36,283
exactly the same time to one
twenty-four if you get stopped
550
00:51:36,283 --> 00:51:44,103
out so if Euro dollar goes from
121 to 120 to one twenty-four
551
00:51:44,103 --> 00:51:47,703
therefore you getting stopped
out you're going to you're
552
00:51:47,703 --> 00:51:56,463
going to make one 2550 minus
1twenty-four so 1. 55 big
553
00:51:56,463 --> 00:52:01,743
figures so one and ahalf big
points essentially so what you
554
00:52:01,743 --> 00:52:07,383
actually have because you have
a free trade is a situation
555
00:52:07,383 --> 00:52:12,463
where for every tick or pip or
basis point whatever your
556
00:52:12,463 --> 00:52:19,403
measurement is for every point
that it goes lower you will
557
00:52:19,403 --> 00:52:23,523
make double the amount on Euro
dollar but you're also
558
00:52:23,523 --> 00:52:28,243
guaranteeing that you will make
some money on the trade. So you
559
00:52:28,243 --> 00:52:34,203
cannot lose. So this is why we
pull from box A when we are
560
00:52:34,203 --> 00:52:39,563
getting paid. Because we can
use risk management parameters
561
00:52:39,563 --> 00:52:45,963
to actually enter a free trade
situation. Now we did mention
562
00:52:45,963 --> 00:52:50,223
there that you cannot lose. Uh
it's very unlikely that you
563
00:52:50,223 --> 00:52:53,783
will lose. You know currency
markets are open six days a
564
00:52:53,783 --> 00:53:02,523
week but there is some sort of
gap risk still there. The gap
565
00:53:02,523 --> 00:53:07,243
risk being that if the currency
markets close on a Friday and
566
00:53:07,243 --> 00:53:10,643
reopen on a Sunday you do have
depending on where you are in
567
00:53:10,643 --> 00:53:14,403
the world Saturday or Sunday
gap risk where if a
568
00:53:14,403 --> 00:53:18,723
macroeconomic event or
information comes out that is
569
00:53:18,723 --> 00:53:23,243
significant your stop loss may
not get triggered at one
570
00:53:23,243 --> 00:53:28,683
twenty-four if Euro dollar just
goes up so closes on Friday at
571
00:53:28,683 --> 00:53:33,943
121 and then trades at one
twenty-six straight away on
572
00:53:33,943 --> 00:53:38,623
Sunday your stop loss will be
triggered if you leave it in
573
00:53:38,623 --> 00:53:43,983
the system at 120 at one
twenty-six. So you need to
574
00:53:43,983 --> 00:53:46,503
understand that in the
background there is still gap
575
00:53:46,503 --> 00:53:51,823
risk in currencies even though
market participants with
576
00:53:51,823 --> 00:53:54,943
conflict of interest will lead
you to believe always that
577
00:53:54,943 --> 00:53:59,943
there isn't. There is still gap
gap risk present when trading
578
00:53:59,943 --> 00:54:05,043
currencies but hopefully you
can understand the overall
579
00:54:05,043 --> 00:54:08,723
approach to risk management
here when we're using hard stop
580
00:54:08,723 --> 00:54:13,603
losses and soft targets so when
we're using stop loss in the
581
00:54:13,603 --> 00:54:18,563
euro dollar example of 133
that's a hard stop loss we're
582
00:54:18,563 --> 00:54:22,363
guaranteeing our downside we're
pulling from box B if it trades
583
00:54:22,363 --> 00:54:26,203
at 133 we just trade out we
don't have to think about that
584
00:54:26,203 --> 00:54:31,283
too much we don't waste our
time on losses but when we're
585
00:54:31,283 --> 00:54:35,443
winning we have two choices. So
when we're winning we're
586
00:54:35,443 --> 00:54:39,723
pulling from box A because we
are getting paid and making
587
00:54:39,723 --> 00:54:45,963
money. The first choice is to
just run the position. But we
588
00:54:45,963 --> 00:54:52,643
roll our stop loss down using
common sense. Our stop loss
589
00:54:52,643 --> 00:54:59,683
goes lower to a level which is
still according to volatility
590
00:54:59,683 --> 00:55:05,243
over the time period that we
look at one to three month our
591
00:55:05,243 --> 00:55:13,623
stop loss is still tight enough
which gives us discipline when
592
00:55:13,623 --> 00:55:18,423
trading out where the position
goes against us but still wide
593
00:55:18,423 --> 00:55:23,543
enough on our time frame of one
to three months to give us a
594
00:55:23,543 --> 00:55:28,143
continued or good chance to
continue to make money on the
595
00:55:28,143 --> 00:55:33,143
winning trade if we get stopped
out we still make money so this
596
00:55:33,143 --> 00:55:40,623
becomes a relatively low risk
free trade our second choice is
597
00:55:40,623 --> 00:55:43,903
to double the size of the
position or at least increase
598
00:55:43,903 --> 00:55:49,583
the size of the position and
stick to the principle that our
599
00:55:49,583 --> 00:55:54,743
new average price so in this
example where we're short euro
600
00:55:54,743 --> 00:56:01,663
dollar our new average price is
above our newly rolled stop
601
00:56:01,663 --> 00:56:08,023
loss which means we're still
guaranteeing ourselves that
602
00:56:08,023 --> 00:56:11,803
we'll make some money on the
trade but now we're getting
603
00:56:11,803 --> 00:56:16,843
double or at least more for
every point the trade continues
604
00:56:16,843 --> 00:56:21,403
to go in our favor. Now what
would happen if we went long?
605
00:56:21,403 --> 00:56:27,123
So we did it the other way
round. Well we would ensure if
606
00:56:27,123 --> 00:56:34,963
we're long our average price is
below our stop loss. So if the
607
00:56:34,963 --> 00:56:39,843
trade then went against us
after we added to the position
608
00:56:39,843 --> 00:56:44,643
we would get stopped out. But
because our average price is
609
00:56:44,643 --> 00:56:49,403
lower than our stop loss our
automatic trade out would still
610
00:56:49,403 --> 00:56:55,283
ensure that we're making some
money on the trade. But for
611
00:56:55,283 --> 00:57:01,723
every point Euro dollar goes up
or the as in general terms goes
612
00:57:01,723 --> 00:57:07,803
up we're making double or at
least some more on the winning
613
00:57:07,803 --> 00:57:11,963
trade now there are further
principles that we have to
614
00:57:11,963 --> 00:57:18,003
apply in our risk management of
our trading book one of which
615
00:57:18,003 --> 00:57:27,363
is seeking or using a 1 to3
ratio on all trades. Now in the
616
00:57:27,363 --> 00:57:32,643
previous example it's not a
coincidence that we selected a
617
00:57:32,643 --> 00:57:38,963
hard stop. So a hard stop loss
of three points. So three big
618
00:57:38,963 --> 00:57:45,003
points in Euro dollar and a
soft target of nine big points
619
00:57:45,003 --> 00:57:50,683
in Euro dollar. Now when
entering a trade and setting
620
00:57:50,683 --> 00:57:56,603
our hard stops and soft targets
we must always enter a
621
00:57:56,603 --> 00:58:02,683
situation in which our soft
target is within within the
622
00:58:02,683 --> 00:58:09,603
realms of reality and is
realistic and possible within
623
00:58:09,603 --> 00:58:12,683
the time frame that we're
looking at so within the one to
624
00:58:12,683 --> 00:58:18,083
three month time horizon and by
the same token our hard stop
625
00:58:18,083 --> 00:58:23,023
losses must be wide enough to
give ourselves a chance of
626
00:58:23,023 --> 00:58:27,583
making money but not wide
enough that we're being ill
627
00:58:27,583 --> 00:58:34,463
disciplined and and allowing
ourselves to be human. Now
628
00:58:34,463 --> 00:58:39,703
setting a one to three ratio on
all positions is a very good
629
00:58:39,703 --> 00:58:44,303
discipline. What we actually
mean by that is whatever your
630
00:58:44,303 --> 00:58:50,063
stop loss is and bear in mind
it has to be within the realms
631
00:58:50,063 --> 00:58:55,923
of one to three month
volatility you. So we're being
632
00:58:55,923 --> 00:58:59,643
disciplined. We're not being
ill disciplined. So whatever
633
00:58:59,643 --> 00:59:05,723
your stop loss is if you
multiply this by three this
634
00:59:05,723 --> 00:59:12,883
should be roughly your soft
target. So approximately your
635
00:59:12,883 --> 00:59:17,563
soft target should be three
times greater than your stop
636
00:59:17,563 --> 00:59:23,243
loss. But the same principle
applies in that your soft
637
00:59:23,243 --> 00:59:30,203
target should be within the
realms of reality when looking
638
00:59:30,203 --> 00:59:36,963
at volatility within the one to
three month time horizon so
639
00:59:36,963 --> 00:59:41,283
let's have a look at this one
to three ratio on our previous
640
00:59:41,283 --> 00:59:49,003
example we had euro dollar
short at 130 and a 3. 3 big
641
00:59:49,003 --> 00:59:54,603
point stop loss and a soft
target of nine points. so a
642
00:59:54,603 --> 01:00:01,323
soft target of of one
twenty-one. So our entry at 130
643
01:00:01,323 --> 01:00:10,323
our hard stop loss at 133 and
our soft target of 121 and
644
01:00:10,323 --> 01:00:15,643
that's that's not an accident
because when we look at Euro
645
01:00:15,643 --> 01:00:21,763
dollar volatility these look
like sensible targets over or
646
01:00:21,763 --> 01:00:30,863
sensible levels over a 1 to 3
month time horizon I if we
647
01:00:30,863 --> 01:00:36,423
first look at the one to three
ratio the reasons why we do
648
01:00:36,423 --> 01:00:41,823
this is because it's simply
good discipline and there's
649
01:00:41,823 --> 01:00:45,583
three main reasons for doing
it.
650
01:00:46,203 --> 01:00:52,983
If we want to get paid at least
three times what we pay out
651
01:00:52,983 --> 01:00:58,383
then we're not going to enter
trades that we look at and we
652
01:00:58,383 --> 01:01:03,303
decide that they don't provide
us with at least this potential
653
01:01:03,303 --> 01:01:07,743
payoff and that can only be a
good thing. It means we're
654
01:01:07,743 --> 01:01:11,303
looking at volatility. We're
looking at the realms of
655
01:01:11,303 --> 01:01:16,143
reality in terms of volatility.
We're setting our stop losses
656
01:01:16,143 --> 01:01:22,083
at sensible common sensical
levels and we're setting our
657
01:01:22,083 --> 01:01:27,123
soft targets at sensible levels
so within the realms of
658
01:01:27,123 --> 01:01:30,563
possibility on a one to three
month volatility or time
659
01:01:30,563 --> 01:01:38,003
horizon and our soft targets on
a payoff of three times that of
660
01:01:38,003 --> 01:01:41,523
our stop losses and we're
saying if we don't see the
661
01:01:41,523 --> 01:01:48,223
possibility of making that on
our targets then we won't be
662
01:01:48,223 --> 01:01:54,743
looking at doing the trades at
all. Secondly if we trade out
663
01:01:54,743 --> 01:01:59,503
of all our losers at our stops
and all of our winners at our
664
01:01:59,503 --> 01:02:03,303
targets so not adding to the
position or running to the
665
01:02:03,303 --> 01:02:08,103
position if it's winning if we
just trade out at our stops and
666
01:02:08,103 --> 01:02:14,543
we trade out at our targets
then on a risk reward ratio we
667
01:02:14,543 --> 01:02:21,543
only have to get 33% of our
trades right so if two thirds
668
01:02:21,543 --> 01:02:27,023
of our trades go wrong and we
get stopped out but one third
669
01:02:27,023 --> 01:02:32,903
of our trades go right and hits
our targets we break even. And
670
01:02:32,903 --> 01:02:38,423
this takes the pressure off us
not requiring a very high win
671
01:02:38,423 --> 01:02:43,023
ratio to make money. So the
percentage of the trades that
672
01:02:43,023 --> 01:02:46,903
you win on is your win ratio
and the percentage of your
673
01:02:46,903 --> 01:02:52,163
trades that you lose on is your
loss ratio. And if we get more
674
01:02:52,163 --> 01:02:56,363
than 33% of our trades right
when we're trading out at both
675
01:02:56,363 --> 01:03:01,723
our stop losses and our targets
we will be making money which
676
01:03:01,723 --> 01:03:07,163
is obviously a good thing which
is our objective and if we add
677
01:03:07,163 --> 01:03:11,763
to our winners so the third
reason as to why setting a one
678
01:03:11,763 --> 01:03:16,603
to three ratio on all positions
is a good discipline is if we
679
01:03:16,603 --> 01:03:23,283
add to our winners and then we
get paid more than we can get
680
01:03:23,283 --> 01:03:28,683
less than 33% right. So all
round adding a one to three
681
01:03:28,683 --> 01:03:34,443
ratio on all positions is a
very good discipline. So we've
682
01:03:34,443 --> 01:03:38,403
picked up quite a lot of
important principles there. Uh
683
01:03:38,403 --> 01:03:44,643
firstly obviously picking up
the box A box B principles. So
684
01:03:44,643 --> 01:03:50,923
always pulling from box A when
getting paid and always pulling
685
01:03:50,923 --> 01:03:56,563
from box B when paying out and
therefore doing opposite of
686
01:03:56,563 --> 01:04:03,403
human nature in which people
always look towards certainty
687
01:04:03,403 --> 01:04:07,403
when getting paid off so
looking towards pulling from
688
01:04:07,403 --> 01:04:13,603
box B when making money and
looking towards seeking risk
689
01:04:13,603 --> 01:04:19,403
when paying out so when losing
money seeking more risk. We
690
01:04:19,403 --> 01:04:22,683
want to be doing the opposite
of that. We want to be pulling
691
01:04:22,683 --> 01:04:27,963
from box A when getting paid
and pulling from box be when
692
01:04:27,963 --> 01:04:33,643
paying out and also picking up
the principle here of entering
693
01:04:33,643 --> 01:04:40,443
trades that present at least
three times more upside than
694
01:04:40,443 --> 01:04:47,583
potential downside. But how do
we actually set our stop losses
695
01:04:47,583 --> 01:04:51,903
and targets on currency trades
well here we're going to use
696
01:04:51,903 --> 01:04:57,983
the Euro USD example as before
when we looked at the previous
697
01:04:57,983 --> 01:05:05,423
example we used points so big
figures as stop losses and as
698
01:05:05,423 --> 01:05:11,263
targets this was deliberate and
for illustrative purposes in
699
01:05:11,263 --> 01:05:16,063
order to simplify the concept
for you so you shortcut to its
700
01:05:16,063 --> 01:05:22,023
conclusion and understanding.
What you'll recall is that in
701
01:05:22,023 --> 01:05:27,903
all of our volatility so
opportunities analysis we
702
01:05:27,903 --> 01:05:33,623
measured everything in
percentages or base metrics and
703
01:05:33,623 --> 01:05:37,743
it's no different in risk
management practices because
704
01:05:37,743 --> 01:05:42,383
we're literally looking at the
same data. What matters is the
705
01:05:42,383 --> 01:05:47,403
volatility over the time frame
that we're looking at. And if
706
01:05:47,403 --> 01:05:52,683
you recall opportunity and risk
are literally the same thing.
707
01:05:52,683 --> 01:05:57,163
You just can't have one without
the other. So we need to take a
708
01:05:57,163 --> 01:06:00,923
very common sense approach
using our risk management
709
01:06:00,923 --> 01:06:08,643
principles. So we set
percentage soft targets based
710
01:06:08,643 --> 01:06:15,623
on opportunity and hard stop
losses based on risk risk. So
711
01:06:15,623 --> 01:06:20,063
we're now going to go back to
the spreadsheet that we saw
712
01:06:20,063 --> 01:06:25,343
much earlier on in the video
series. ATR rankings and
713
01:06:25,343 --> 01:06:30,743
analyse ATR in order to set
sensible stop losses and
714
01:06:30,743 --> 01:06:35,583
targets and stick to our risk
management principles at the
715
01:06:35,583 --> 01:06:39,543
same time. So what we're
essentially doing here is
716
01:06:39,543 --> 01:06:44,343
looking at a theoretical trade
that's come through the overall
717
01:06:44,343 --> 01:06:50,323
idea generation process the gay
keeping process has ticked many
718
01:06:50,323 --> 01:06:55,043
of the boxes so our timing
looks good and now we're
719
01:06:55,043 --> 01:07:00,323
choosing to enter the trade
take a real position and we
720
01:07:00,323 --> 01:07:06,003
have an overall trading
opportunity and risk assessment
721
01:07:06,003 --> 01:07:12,923
in order to set our hard stop
losses and soft targets so we
722
01:07:12,923 --> 01:07:17,103
essentially have a plan when
we're entering the trade
723
01:07:17,103 --> 01:07:20,423
deploying capital and this
position becomes a real
724
01:07:20,423 --> 01:07:25,263
position in the portfolio. So
if you go to the download
725
01:07:25,263 --> 01:07:32,703
section we have a an updated
version of the ATR average true
726
01:07:32,703 --> 01:07:37,023
range rankings spreadsheet
where we have an example in
727
01:07:37,023 --> 01:07:43,423
there for Euro dollar so if you
keep your ATR rankings
728
01:07:43,423 --> 01:07:48,763
spreadsheets for the tradeable
set always up to date you'll be
729
01:07:48,763 --> 01:07:54,843
to access the data and look at
the historical volatility
730
01:07:54,843 --> 01:07:59,523
assessment which is backwards
looking obviously but you'll be
731
01:07:59,523 --> 01:08:06,363
able to use this to enable you
to pick your stop losses and
732
01:08:06,363 --> 01:08:11,603
your targets very sensibly. So
let's go over to the
733
01:08:11,603 --> 01:08:20,123
spreadsheet ATR rankings. And
if you recall we had our entire
734
01:08:20,123 --> 01:08:26,203
tradeable set with our daily
weekly and monthly rolling ATR
735
01:08:26,203 --> 01:08:32,323
numbers and we have them we
have them ranked and you can
736
01:08:32,323 --> 01:08:39,983
see here that our monthly ATR
on a one year rolling average
737
01:08:39,983 --> 01:08:47,743
for euro dollar is just under
three point three percent. So
738
01:08:47,743 --> 01:08:51,783
if we use the example that we
were using earlier where Euro
739
01:08:51,783 --> 01:08:59,263
dollar is at 130 and we're not
applying a points system we're
740
01:08:59,263 --> 01:09:06,723
applying a percentage system
then we're going to assess on
741
01:09:06,723 --> 01:09:13,723
our time frame one and three
month volatility and look at
742
01:09:13,723 --> 01:09:21,323
our theoretical soft target and
our theoretical stop so we're
743
01:09:21,323 --> 01:09:28,283
going to be referencing the
cell here Dtwenty-five now if
744
01:09:28,283 --> 01:09:35,083
we go to this cell here
Ftwenty-five or we have do is
745
01:09:35,083 --> 01:09:41,123
multiply across by three to get
our three month volatility
746
01:09:41,123 --> 01:09:50,923
using our one month volatility
so we end up with 9. 87% and we
747
01:09:50,923 --> 01:09:57,203
can change this to percentage
and we can change this to two
748
01:09:57,203 --> 01:10:01,883
decimal places and we have our
one month volatility which we
749
01:10:01,883 --> 01:10:04,123
know
750
01:10:04,963 --> 01:10:12,463
is around 3. 3%. So we can
change this to percentages.
751
01:10:12,963 --> 01:10:17,703
And all we have to do is take
the euro dollar price and work
752
01:10:17,703 --> 01:10:22,943
out how many points for a
theoretical soft target and
753
01:10:22,943 --> 01:10:28,063
theoretical stop loss are
required as the parameters for
754
01:10:28,063 --> 01:10:35,523
this volatility calculation. So
we take the three month
755
01:10:35,523 --> 01:10:41,163
volatility and multiply it by
one point three. So we have our
756
01:10:41,163 --> 01:10:46,843
theoretical soft target number
of twelve points or just under
757
01:10:46,843 --> 01:10:53,723
13 points. Our theoretical stop
is simply the one month
758
01:10:53,723 --> 01:11:02,003
volatility times 1. 3, which
gives us 4point2 or just under
759
01:11:02,003 --> 01:11:12,423
4 point three points. So when
we work out our soft target we
760
01:11:12,423 --> 01:11:24,063
simply minus this number off if
we're going short and this
761
01:11:24,063 --> 01:11:29,503
presents us with our
theoretical soft target
762
01:11:30,543 --> 01:11:33,723
we add
763
01:11:34,623 --> 01:11:47,303
this on to 1. 3 and we get our
theoretical stop loss. Now,
764
01:11:47,303 --> 01:11:53,223
when we look at these two
numbers here, what we need to
765
01:11:53,223 --> 01:12:00,503
do is remember our risk
management principles.
766
01:12:01,343 --> 01:12:06,883
So when we look at stop losses
first our theoreticals our stop
767
01:12:06,883 --> 01:12:11,723
loss that we actually want to
apply needs to be within the
768
01:12:11,723 --> 01:12:18,923
realms of possibility and be
tight enough so that we're not
769
01:12:18,923 --> 01:12:23,483
being ill disciplined but wide
enough to still give us a
770
01:12:23,483 --> 01:12:32,083
chance of making money. So
going short Euro dollar at 130
771
01:12:32,083 --> 01:12:36,523
if we put a stop loss in by
looking at these numbers if we
772
01:12:36,523 --> 01:12:43,723
decided a sensible stop loss is
138 well we're just kidding
773
01:12:43,723 --> 01:12:50,563
ourselves because we know one
month volatility is 3. 3% and
774
01:12:50,563 --> 01:12:56,123
from where Euro dollar is
trading one 3428 means that in
775
01:12:56,123 --> 01:13:01,383
an average month if it goes
against us it's going to
776
01:13:01,383 --> 01:13:08,583
probably to around one
thirty-four. So 1 38 is
777
01:13:08,583 --> 01:13:15,143
obviously being very ill
disciplined. If we're wrong for
778
01:13:15,143 --> 01:13:20,063
an entire month then we're
probably going to be wrong for
779
01:13:20,063 --> 01:13:24,663
a very long time. So probably
wrong over our entire 3 month
780
01:13:24,663 --> 01:13:34,183
period. So we have to cut and
having a sensible stop loss is
781
01:13:34,183 --> 01:13:39,263
within the realms of
possibility so using the
782
01:13:39,263 --> 01:13:43,923
monthly volatility as a yard
stick to measure What's
783
01:13:43,923 --> 01:13:50,323
possible and deploying some
common sense. Now if we did the
784
01:13:50,323 --> 01:13:53,763
opposite of being ill
disciplined and we wanted to be
785
01:13:53,763 --> 01:14:00,483
ultra disciplined and said well
why don't we have a stop or one
786
01:14:00,483 --> 01:14:06,483
thirty one thirty-one. Well it
just means we can be stopped
787
01:14:06,483 --> 01:14:10,603
out very very quickly. And
we're not really giving
788
01:14:10,603 --> 01:14:16,603
ourselves a sensible chance of
making money in this scenario.
789
01:14:16,603 --> 01:14:20,163
So we're not looking at monthly
volatility really if we choose
790
01:14:20,163 --> 01:14:25,003
a 131 stop. We're looking at
weekly or even daily
791
01:14:25,003 --> 01:14:31,543
volatility. So what we need to
Think about here is having a
792
01:14:31,543 --> 01:14:39,223
sensible stop loss around one
month volatility. So around 133
793
01:14:39,223 --> 01:14:44,543
134 is probably sensible and
then we're looking to multiply
794
01:14:44,543 --> 01:14:52,583
that by three as a soft target.
Now if we go inside that number
795
01:14:52,583 --> 01:14:56,863
and multiply by three then our
soft target is going to be
796
01:14:56,863 --> 01:15:03,703
higher than 117. Now we know
that it's possible from our
797
01:15:03,703 --> 01:15:10,143
three month volatility analysis
that Euro dollar could quite
798
01:15:10,143 --> 01:15:15,463
easily within three months
trade towards 117 or even trade
799
01:15:15,463 --> 01:15:24,223
at 117 so we have our soft
target at either three times 3
800
01:15:24,223 --> 01:15:31,983
9 points or four times 312
points and take this away from
801
01:15:31,983 --> 01:15:41,343
130 so we're either going to
have a soft target of one
802
01:15:41,343 --> 01:15:50,383
twenty1 or a soft target of one
eighteen. And both of those
803
01:15:50,383 --> 01:15:54,303
soft targets are within the
realms of possibility based on
804
01:15:54,303 --> 01:15:58,663
our volatility analysis. Now
one other thing that we could
805
01:15:58,663 --> 01:16:04,423
consider doing that we decided
or looked at is a good
806
01:16:04,423 --> 01:16:07,803
potential strategy when
entering trades from a risk
807
01:16:07,803 --> 01:16:12,123
management perspective earlier
on in the video series is to
808
01:16:12,123 --> 01:16:17,363
look at taking a starter
position. So what we could
809
01:16:17,363 --> 01:16:23,483
actually do here is put on a
half size position rather than
810
01:16:23,483 --> 01:16:29,243
put on our full size position
and widen the stop loss and
811
01:16:29,243 --> 01:16:35,103
widen the target. And add to
the position when it's actually
812
01:16:35,103 --> 01:16:43,103
working so for example if our
full position size is 100, 000
813
01:16:43,103 --> 01:16:50,263
currency pairs so one lot and
it and that's the limit that we
814
01:16:50,263 --> 01:16:54,863
put or put on ourselves when
trading currencies in our
815
01:16:54,863 --> 01:17:03,503
portfolio then this means we
could short 50, 000 so five
816
01:17:03,503 --> 01:17:09,843
mini lots in portfolio so 50,
000 gross exposure to one
817
01:17:09,843 --> 01:17:21,923
position at 130 and if it
trades lower to say 127 128 we
818
01:17:21,923 --> 01:17:27,283
could then add to the position
and then put the stop losses on
819
01:17:27,283 --> 01:17:32,243
from that point but we could
actually when we put the
820
01:17:32,243 --> 01:17:39,103
starter position on make the
stop and the target twice as
821
01:17:39,103 --> 01:17:44,183
wide. So instead of having a
three point stop loss have a
822
01:17:44,183 --> 01:17:50,223
six point stop loss. And
instead of having a 12 point
823
01:17:50,223 --> 01:17:55,743
target have a twenty-four point
target. However we know when
824
01:17:55,743 --> 01:17:59,663
entering the trade we're either
going to cut it or add to it
825
01:17:59,663 --> 01:18:05,063
when it's winning. So we know
that a twenty-four point target
826
01:18:05,063 --> 01:18:11,103
is very unrealistic but we're
not at our full position size.
827
01:18:11,103 --> 01:18:14,463
So we're in this scenario we're
either going to get stopped out
828
01:18:14,463 --> 01:18:19,023
on a starter position or we're
going to be adding to it when
829
01:18:19,023 --> 01:18:23,223
it just starts to work in our
favor and deploy some common
830
01:18:23,223 --> 01:18:28,663
sense. So before we go before
we add to the other 50% to the
831
01:18:28,663 --> 01:18:33,663
position and increase it to a
full position size. And then
832
01:18:33,663 --> 01:18:38,463
when we do increase it to a
full position size we then look
833
01:18:38,463 --> 01:18:43,863
at our one month ATR and go
through this exercise again and
834
01:18:43,863 --> 01:18:48,383
come to the conclusion of what
our hard stop loss our new hard
835
01:18:48,383 --> 01:18:53,583
stop loss is going to be and
our new soft target is going to
836
01:18:53,583 --> 01:18:59,303
be before we even add to the
position and roll our stop loss
837
01:18:59,303 --> 01:19:04,183
now there's something to cover
there as well if you have a
838
01:19:04,183 --> 01:19:08,683
gross exposure limit on one
position in a currency pair
839
01:19:08,683 --> 01:19:13,883
which is 100, 000 currency
pairs or one lot and the trade
840
01:19:13,883 --> 01:19:19,363
becomes what we call a winning
trade because it's traded very
841
01:19:19,363 --> 01:19:23,403
close to or at your soft target
842
01:19:24,803 --> 01:19:29,463
when you have these exposure
limits because your trade and
843
01:19:29,463 --> 01:19:34,103
you're rolling your stop is
becoming is becoming a free
844
01:19:34,103 --> 01:19:38,223
trade because you're basically
guaranteeing that even if you
845
01:19:38,223 --> 01:19:42,623
add to the position you're
going to make money when you
846
01:19:42,623 --> 01:19:47,183
enter that situation you are
actually allowed to break your
847
01:19:47,183 --> 01:19:52,623
risk metrics because you
basically cannot lose so you
848
01:19:52,623 --> 01:19:57,603
get big and you run the
position. When you're in a
849
01:19:57,603 --> 01:20:02,043
winning position you have a lot
more choices and your life
850
01:20:02,043 --> 01:20:08,723
becomes very easy. So when
you're actually just running
851
01:20:08,723 --> 01:20:12,963
the position to a point before
it gets to your stop before it
852
01:20:12,963 --> 01:20:18,843
gets to your soft target you
don't have a huge amount of
853
01:20:18,843 --> 01:20:23,323
choice until the trade is
really proving to you that it's
854
01:20:23,323 --> 01:20:28,943
working and you're winning and
doing well on the trade and
855
01:20:28,943 --> 01:20:34,823
then you've got enough room to
maneuver to add to the position
856
01:20:34,823 --> 01:20:39,983
and create a situation by
rolling the stop loss where you
857
01:20:39,983 --> 01:20:46,503
have a free trade. So in this
example with Euro Dollar if you
858
01:20:46,503 --> 01:20:53,423
remember from earlier in the
presentation we shorted Euro
859
01:20:53,423 --> 01:21:03,543
dollar at 130 and when Euro
dollar went to 121 we then
860
01:21:03,543 --> 01:21:08,183
added to the position by
increasing or doubling the size
861
01:21:08,183 --> 01:21:16,623
of the position and our average
price became one 2550 and we
862
01:21:16,623 --> 01:21:24,183
rolled our stop loss to one
twenty-four thus ensuring that
863
01:21:24,183 --> 01:21:29,423
we would guarantee that we make
money on the trade so we'll
864
01:21:29,423 --> 01:21:35,663
make one and a/ 2 points we're
making something but we're also
865
01:21:35,663 --> 01:21:39,943
opening up the possibility that
if Euro dollar continues to go
866
01:21:39,943 --> 01:21:45,543
lower we actually make double
the amount of money for every
867
01:21:45,543 --> 01:21:53,823
point or tick or pip or basis
point that it does go lower so
868
01:21:53,823 --> 01:21:58,423
overall in that example what
we're showing is that we've got
869
01:21:58,423 --> 01:22:02,683
guaranteed downside on the
original trade where we have a
870
01:22:02,683 --> 01:22:07,683
stop loss. Our downside is
absolutely guaranteed and we're
871
01:22:07,683 --> 01:22:13,803
going to be pulling from box B
and make sure our stop loss is
872
01:22:13,803 --> 01:22:18,803
triggered and we trade out of
the position. If it goes in our
873
01:22:18,803 --> 01:22:24,363
favor and reaches our soft
target then we're looking to
874
01:22:24,363 --> 01:22:30,683
pull from box A. But sticking
to the principle that we don't
875
01:22:30,683 --> 01:22:38,623
obviously trade out we roll our
stop loss and when we roll our
876
01:22:38,623 --> 01:22:44,543
stop loss it's below our new
average price which opens up
877
01:22:44,543 --> 01:22:51,023
the possibility of us making
even more money but at the same
878
01:22:51,023 --> 01:22:58,303
time guarantees that we trade
out and pull from box B if we
879
01:22:58,303 --> 01:23:03,743
then begin to enter a situation
where the trade is going
880
01:23:03,743 --> 01:23:10,343
against us so as we build out
the position the risk becomes
881
01:23:10,343 --> 01:23:16,583
asymmetric so we end up with a
free trade so overall you can
882
01:23:16,583 --> 01:23:21,463
see how this works now on a one
to three month time frame
883
01:23:21,463 --> 01:23:26,863
rather than looking at very
short term time frames coming
884
01:23:26,863 --> 01:23:34,143
up with poorly thought out
ideas only looking at things
885
01:23:34,143 --> 01:23:40,343
like technical analysis to
generate ideas not deploying a
886
01:23:40,343 --> 01:23:45,823
gatekeeping process that's
overlaid to an idea generation
887
01:23:45,823 --> 01:23:50,583
process which is fundamentally
driven and then timing is
888
01:23:50,583 --> 01:23:55,183
technically driven and risk
management is volatility
889
01:23:55,183 --> 01:24:01,443
dependent. You can see how this
works now when we do it in a
890
01:24:01,443 --> 01:24:07,883
proper overall professional
trading systematic process. Now
891
01:24:07,883 --> 01:24:11,843
one other thing that you can
consider doing after looking at
892
01:24:11,843 --> 01:24:16,883
the volatility assessment and
deciding what your sensible
893
01:24:16,883 --> 01:24:22,523
stop losses and soft targets
are going to be then for
894
01:24:22,523 --> 01:24:27,283
example with soft targets
around your soft target if
895
01:24:27,283 --> 01:24:34,203
there's key technical levels in
the currency pair then you can
896
01:24:34,203 --> 01:24:37,843
use those technical levels as
well where if they break those
897
01:24:37,843 --> 01:24:43,483
technical levels convincingly
then you can actually go in and
898
01:24:43,483 --> 01:24:47,843
if it hasn't quite reach your
soft target or it's reached
899
01:24:47,843 --> 01:24:53,083
your soft target but hasn't
broken the technical level you
900
01:24:53,083 --> 01:25:00,923
can actually consider in the
previous example of if it's not
901
01:25:00,923 --> 01:25:04,043
to reach your soft target but
it's broken the technical level
902
01:25:04,043 --> 01:25:08,643
adding to the position and if
you if it's your if it's broken
903
01:25:08,643 --> 01:25:14,763
your soft target adding to the
position as well because now
904
01:25:14,763 --> 01:25:19,843
the market will be very focused
on the fundamental drivers that
905
01:25:19,843 --> 01:25:24,643
have occurred that have made
the currency pair break a big
906
01:25:24,643 --> 01:25:28,983
or Important technical level.
And as we were talking about
907
01:25:28,983 --> 01:25:34,103
earlier Don't worry too much
about the small things. Get the
908
01:25:34,103 --> 01:25:39,203
big things right when it comes
to technicals. Everybody can
909
01:25:39,203 --> 01:25:43,123
make a claim that there's an
important technical level every
910
01:25:43,123 --> 01:25:47,683
single day in every single
asset because you can find
911
01:25:47,683 --> 01:25:51,643
reasons to find technical
levels get the big ones right
912
01:25:51,643 --> 01:25:56,203
so get big support levels get
big resistance levels get the
913
01:25:56,203 --> 01:26:01,003
big commonly formed patterns
correct and these are the this
914
01:26:01,003 --> 01:26:04,683
is the approach that's going to
make you on the 1 to 3 month
915
01:26:04,683 --> 01:26:09,703
time horizon with well thought
fundamentally driven ideas, a
916
01:26:09,703 --> 01:26:14,983
solid gatekeeping process, and
a solid volatility dependent
917
01:26:14,983 --> 01:26:18,903
risk management plan, this is
the approach that's going to
918
01:26:18,903 --> 01:26:22,463
make you the big money. Instead
of sitting with a retail
919
01:26:22,463 --> 01:26:26,703
trading account that just
dribbles out money and loses
920
01:26:26,703 --> 01:26:30,703
money every day. This is the
approach overall that's going
921
01:26:30,703 --> 01:26:33,783
to make you the big money. And
you've just gotta stick at it
922
01:26:33,783 --> 01:26:38,923
and be patient. So that brings
a to the end of having
923
01:26:38,923 --> 01:26:43,403
discipline or risk management
number one let's go back over
924
01:26:43,403 --> 01:26:48,203
to the trading desk for a recap
okay so welcome back to the
925
01:26:48,203 --> 01:26:52,243
desk what you just saw there is
probably one of the most
926
01:26:52,243 --> 01:26:56,163
important things in trading all
of these risk management
927
01:26:56,163 --> 01:27:00,643
principles because throughout
an idea generation process
928
01:27:00,643 --> 01:27:04,643
throughout a gatekeeping
process you can still always be
929
01:27:04,643 --> 01:27:08,563
in the position where you can
lose money because you manage
930
01:27:08,563 --> 01:27:15,703
risk badly trades can go wrong,
trades can go right. More
931
01:27:15,703 --> 01:27:21,063
frequently, trades for retail
traders will go wrong versus
932
01:27:21,063 --> 01:27:26,143
right but the way you treat
your losers and the way you
933
01:27:26,143 --> 01:27:31,463
treat your winners sets you
apart as much from everybody
934
01:27:31,463 --> 01:27:35,383
else as to your idea generation
process, your gatekeeping
935
01:27:35,383 --> 01:27:39,103
process and all of that
combined because you can still
936
01:27:39,103 --> 01:27:43,503
come up with great ideas, time
them well, but manage your risk
937
01:27:43,503 --> 01:27:48,423
badly. So if you think about
this in an overall process risk
938
01:27:48,423 --> 01:27:53,903
management fits in to a point
where we have fundamental ideas
939
01:27:53,903 --> 01:27:57,863
that increases the probability
that's making money through the
940
01:27:57,863 --> 01:28:01,423
idea generation process because
we're concentrating on
941
01:28:01,423 --> 01:28:05,303
fundamentals and we're looking
at the fundamental picture in
942
01:28:05,303 --> 01:28:10,063
the bigger picture one to three
months moving forward. We then
943
01:28:10,063 --> 01:28:15,483
fully admit to ourselves that a
idea is just an idea and we can
944
01:28:15,483 --> 01:28:19,603
still mistime it. So we have a
gatekeeping process which stops
945
01:28:19,603 --> 01:28:24,763
us doing stupid things. So the
gatekeeping process is a layer
946
01:28:24,763 --> 01:28:30,763
that stops us getting into good
ideas that are mistimed and we
947
01:28:30,763 --> 01:28:36,323
get stopped at or bad ideas
altogether. We then have
948
01:28:36,323 --> 01:28:41,363
another layer of risk
management which then basically
949
01:28:41,363 --> 01:28:46,443
stops us doing silly as well
when we have real positions
950
01:28:46,443 --> 01:28:50,643
with real money. And the
underpinnings of understanding
951
01:28:50,643 --> 01:28:54,563
why we have risk management in
the first place is really
952
01:28:54,563 --> 01:28:58,283
important to understand.
Because if you don't understand
953
01:28:58,283 --> 01:29:02,083
this stuff when you end up with
real positions you won't
954
01:29:02,083 --> 01:29:05,563
respect risk management. You
will just keep thinking that
955
01:29:05,563 --> 01:29:09,803
you're right all the time. And
you'll end up averaging into
956
01:29:09,803 --> 01:29:15,363
losers and losing a lot of
money. So the most important
957
01:29:15,363 --> 01:29:19,203
thing to understand here is
really that if you get to this
958
01:29:19,203 --> 01:29:23,283
point and you've been through
the fundamental processes
959
01:29:23,283 --> 01:29:27,323
you've got fundamental trade
ideas those ideas are just
960
01:29:27,323 --> 01:29:30,923
ideas so we know we have to
look to time them better we
961
01:29:30,923 --> 01:29:35,283
then think that the timing is
optimal and we're looking to
962
01:29:35,283 --> 01:29:39,563
deploy capital and we end up
with a real position you have
963
01:29:39,563 --> 01:29:44,263
to make the assumption still
that there's not that you don't
964
01:29:44,263 --> 01:29:48,783
know that the market doesn't
know and you have to understand
965
01:29:48,783 --> 01:29:52,983
human psychology. If you don't,
you won't respect risk
966
01:29:52,983 --> 01:29:57,463
management and you'll end up
being one of these arrogant
967
01:29:57,463 --> 01:30:01,703
traders that ends up thinking
they're always right but you'll
968
01:30:01,703 --> 01:30:05,743
always lose money. So, you have
to be good at risk management
969
01:30:05,743 --> 01:30:11,063
as much as you are good at
producing really strong
970
01:30:11,063 --> 01:30:16,463
fundamental trade ideas and
timing them well. Now because
971
01:30:16,463 --> 01:30:21,943
of the assumption of the market
because of human psychology we
972
01:30:21,943 --> 01:30:27,103
understand that now and we
understand why we have soft we
973
01:30:27,103 --> 01:30:32,903
have soft targets and hard stop
losses but also why we analyse
974
01:30:32,903 --> 01:30:38,783
everything on a 1 to 3 payoff
ratio it's so we can basically
975
01:30:38,783 --> 01:30:42,903
protect our downside and
unleash our upside on every
976
01:30:42,903 --> 01:30:48,803
trade now a really good example
of that was euro dollar and
977
01:30:48,803 --> 01:30:52,323
this principle that we
introduced you to with that
978
01:30:52,323 --> 01:30:58,563
example is the principle of
trying to find the free trade
979
01:30:58,563 --> 01:31:03,403
and that only happens once
you've got a position and this
980
01:31:03,403 --> 01:31:07,843
principle of the free trade is
extremely powerful because when
981
01:31:07,843 --> 01:31:11,443
you're trading over one to
three month time horizons and
982
01:31:11,443 --> 01:31:15,603
going for the percentage moves
that we look to go for over
983
01:31:15,603 --> 01:31:19,263
those time windows so having
the three percent stop loss
984
01:31:19,263 --> 01:31:24,183
with the nine, 10% soft target.
When you're going for those
985
01:31:24,183 --> 01:31:28,303
size moves and you start and
they start to play out and
986
01:31:28,303 --> 01:31:34,023
start to break technical
levels, you can start adding to
987
01:31:34,023 --> 01:31:39,583
positions in a way that ensures
you can never lose money
988
01:31:39,583 --> 01:31:43,863
because your risk management is
strong and you're trading over
989
01:31:43,863 --> 01:31:48,503
a time horizon that allows you
to do this and your funding
990
01:31:48,503 --> 01:31:52,943
idea is starting to play at and
when you add to these positions
991
01:31:52,943 --> 01:31:59,303
rolling your stop in a way that
ensures you simply cannot lose
992
01:31:59,303 --> 01:32:02,463
money when you've added to the
position but now you're
993
01:32:02,463 --> 01:32:07,783
unleashing the upside in profit
on the trade and capping the
994
01:32:07,783 --> 01:32:12,303
downside to ensure that you're
still going to make money this
995
01:32:12,303 --> 01:32:16,063
principle of free trade is
extremely powerful and the
996
01:32:16,063 --> 01:32:20,803
whole and as part of an overall
process it's extremely guys at
997
01:32:20,803 --> 01:32:25,003
the institute have had
incredible successes in their
998
01:32:25,003 --> 01:32:27,763
trading accounts by applying
these risk management
999
01:32:27,763 --> 01:32:33,883
principles to fundamental trade
ideas that have been timed well
1000
01:32:33,883 --> 01:32:37,403
and they come up quite often
you know they come up several
1001
01:32:37,403 --> 01:32:40,123
times a year where you have a
big winner in your portfolio
1002
01:32:40,123 --> 01:32:43,123
because it's fundamentally
right you've timed it really
1003
01:32:43,123 --> 01:32:46,243
well and now you're adding to
it and managing your risk
1004
01:32:46,243 --> 01:32:51,243
really well on the principle of
the free trade in as you guys
1005
01:32:51,243 --> 01:32:55,563
have been short Euro dollar
made a ton of money on that
1006
01:32:55,563 --> 01:32:58,603
that's one of the reasons why
we use it as an example because
1007
01:32:58,603 --> 01:33:01,643
it was a classic example
towards the end of 2014
1008
01:33:01,643 --> 01:33:06,643
beginning of 2015 made a ton of
money on the oil move down from
1009
01:33:06,643 --> 01:33:10,283
100 bucks down to 50 bucks they
were shorting it all the way
1010
01:33:10,283 --> 01:33:14,243
down and making sure that their
risk management was perfect all
1011
01:33:14,243 --> 01:33:19,203
the way down and that the stop
loss was always ahead of the
1012
01:33:19,203 --> 01:33:22,683
average price which ensured if
they get stocked out they would
1013
01:33:22,683 --> 01:33:27,403
always make money and they've
done it continuously in a
1014
01:33:27,403 --> 01:33:30,923
number of stocks when they're
long and short in their overall
1015
01:33:30,923 --> 01:33:35,483
long short portfolios and the
principle applies to currencies
1016
01:33:35,483 --> 01:33:38,763
of course it does it applies to
every asset class you know the
1017
01:33:38,763 --> 01:33:42,563
guys have great successes on
Euro dollar and one of the and
1018
01:33:42,563 --> 01:33:48,123
this principle was applied all
the way down So, the big things
1019
01:33:48,123 --> 01:33:54,603
here, make sure you get the big
picture, right? The big picture
1020
01:33:54,603 --> 01:33:59,683
is fundamental idea generation.
The ideas come out of the idea
1021
01:33:59,683 --> 01:34:03,723
generation process, gatekeeping
timing that's there to stop us
1022
01:34:03,723 --> 01:34:07,803
doing stupid things. Risk risk
management is there to stop us
1023
01:34:07,803 --> 01:34:12,443
being human. And you've gotta
be a good risk manager as much
1024
01:34:12,443 --> 01:34:18,063
as generating your ideas. Okay,
so now let's move on to having
1025
01:34:18,063 --> 01:34:22,143
discipline two risk management
two we're going to look now at
1026
01:34:22,143 --> 01:34:26,823
more parameters that we can
deploy into our portfolios so
1027
01:34:26,823 --> 01:34:29,863
more risk management parameters
that will make us better
1028
01:34:29,863 --> 01:34:34,463
traders in terms of managing
our risk over the longer term
1029
01:34:34,463 --> 01:34:38,423
and being consistent in our
approach. I'll see you in the
1030
01:34:38,423 --> 01:34:40,903
next video.
97015
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