When to Bail Out of the Trade and When to Stay In for Additional Profits

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s I said in the Introduction, “The greatest distance to overcome in each trade is found between the ears.”

Every trader has experienced a trade where maybe you see a few pips of profit as you trade toward a legitimate profit target, and suddenly the trade begins to move against you. The logic in your brain tells you the target is a good one and the entry was a perfect entry point, so why is this trade going against you? As the indicators become more and more negative as the loss is quickly approaching your protective stop, panic begins to settle in. You reason that the target is good and that all you have to do is to move the stop a little further. Of course, then the market moves even faster toward your stop, and your reasoning power suggests that you should move the stop to an even greater area of protection, risking even more of the margin. If the market does turn back toward your original limit, which may take hours or even days to surrender, most traders are so happy to see even a small profit that they will escape the trade with only one to five pips of profit. The problem is the market was chasing you (the trader) on the wrong side of the trade, instead of you chasing the market on the profit side.

So get it straight between your ears before you lose your entire margin. Calculate a stop and stick to it, right or wrong! You can always get back into the trade and make your money back if a loss occurs. Failing to get back on the horse quickly is a mistake that many traders make when they fall off the horse, so to speak, or make a loss.

Safety is the primary focus of a professional trader with the risk- return ratio always in mind. Normally, a resistance is formed if an upward-trending market is approaching an extreme, which will bend the market either suddenly or gradually as a reversal. Of course, if the market is bearish, then a support will form when the market reverses.

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When this happens, a stop is placed just above the resistance (about five to seven pips above the high) and if bearish, then the stop would be placed five to seven pips below the new support.

A reversal entry from an extreme must have other confirmations of either a tradi- tional or a modern signal to indicate a confirmation. As Figure 11.1 implies, a tight stop of less than 20 pips is all that is necessary, with potential profits much greater than the risk.

Breaching the extreme level means that traditional and modernistic signals will not appear to justify a reversal entry. The next off-market rate to consider viewing a possi- ble entry is located 25 pips beyond an extreme. If the 25 level is breached, then we will look at the 31st pip beyond the extreme for signals to begin appearing. Beyond the 31st,

51 pips becomes the next target, and then 101 to 105 pips for the reversal to be consid- ered. These pip extensions beyond the extremes offer potential areas that have been his- torically shown as approximate reversal areas that will offer traditional or modernistic signal confirmations.

Conclusion: Who cares if you are trading a simple procedure as long as it helps pay the bills?

^{FIGURE 11.1 A bottom extreme strike and the market only breached the level by approximately}

^{3 pips of negative before beginning its move upward. This stop would have been as small as 7 pips}

^{due to the ROI X up that occurred at the same time as the extreme strike.}

^{Courtesy of Concorde Forex Group, Inc.}

_{PAY THE DUES OF TIME AND PRACTICE}

As I said in the Introduction, “You must persevere in the market, never giving up while learning and paying the dues of time.”

Learning to trade the forex can sometimes be a very dangerous business for neophytes—which includes those traders with a lot of experience from other markets who are now entering the forex for the very first time. After years of introducing peo- ple to the forex, I have found the most successful traders began their new experience by easing into the industry with extreme caution. There is an easing-into-the-experience pro- cedure that is recommended at Concorde Forex Group (CFG), which is to have someone guide you through the procedures of learning how to enter a trade with multiple con- firmations. It takes up to two years to become really fluent with the skills of selective trading, which enables you to walk away from a trade that does not meet the require- ments to be profitable. It’s true that some people grasp the concepts faster than others and begin achieving success almost immediately; however, give yourself the benefit of the doubt and assume that you have something to learn at all times.

Most traders I have met began a trading career with the intention to become indepen- dent enough to eventually become full-time traders at home with no need to deal with the public. I have worked with approximately 5,000 traders who began careers as neophytes, and every one of them had a desire to chase the “pie in the sky” or had a get-rich-quick attitude. The survivors would eventually realize that trading is not an easy task and that it takes time, patience, a positive mental attitude, proper margin funding, and accepting personal responsibility for their own decisions in the market.

A professional trader and one of my personal mentors from Switzerland once told me, “For a beginning trader, it is as easy and quick to lose $1,000 in the market as it is to lose $100,000.” He also said, “A good trader with patience and proper selections of trade entries can make $1,000,000 with $1,000 as well as with $100,000.” When I became a mentor and began to help traders learn the forex, I saw a young trader take a $500 mini account margin to $15,000 in about 30 days, and I also have seen other traders take a $500 mini account margin to $50 in one day. What’s the difference? Selective trading skills were developed along with the patience to wait, watch, and pay the dues of time with lots of practice on a demo.

Suggestion: After proving to yourself that you can trade successfully on a demo, then begin with a small margin investment and ease into the world of live trading by opening a live mini account. It’s a lot different, psychologically, trading a live account as opposed to a demo account, and most beginning traders become very discouraged when finally going live after having tremendous success with a demo. Most beginning traders that I have met have some success on a demo without using stops with a large margin of

$50,000 or more, and then they open small accounts with only $500 to $1,000 and expect

the same results. Even if they are told in a classroom setting about the necessity of using stops, they continue to go live too soon and have unnecessary losses.

A simple approach to entering a trade with a confirmation to consider may be the one described next.

_{INSTRUCTIONS FOR A SIMPLE TRADE}

This trade is not a perfect trade, but if traded on the major currencies and stops are used to avoid unnecessary losses, it may be very helpful for you to consider as one of your primary trade entries. It is called a sore thumb (ST) trade entry. The ST trade entry is fairly easy to recognize, but it needs to have some confirmations to go with it, such as a volume indicator or a River Oscillator Indicator (ROI) pushing in the same direction, because the ST implies that the market is going to move in the opposite direction of the spike or large wick in the near future. Larger time compressions may be the best to trade from, because larger volume is visually apparent.

An ST is formed when the market moves quickly in one direction and then pulls back as a result of a quick reversal in the market, as illustrated in Figure 11.2. The pullback creates a visually obvious wick, or spike, that stands out in appearance from the other

FIGURE 11.2 Example of a sore thumb (ST) trade entry. Courtesy of Concorde Forex Group, Inc.

candles. Once the ST trade entry is made and a stop is placed in the proper position, provided the volume oscillator indicators agree, then you should begin looking for gaps as well as S90/Crossovers for a possible profit target.

_{HAVE A PLAN AND TRADE THE PLAN}

Although there is much confusion on the Internet regarding just how much the foreign currency exchange actually produces per day, one thing is certain: The forex is a very large and volatile business for entrepreneurial traders to become involved in. Every en- trepreneur I have ever met has always had a plan with short-range as well as long-range goals.

Here are three examples of having a plan.

Example 1

Trade 15 trades with one lot per trade, per week, for 10 pips, with an average profit of

$10 per trade; 150 pips per week at $10 equals $1,500 per week.

Let’s add a vacation, as in the next example.

Example 2

Some would say this example is the goal of a part-time trader:

Ĺ Trade 10 points a day.

Ĺ The broker pays an average $10 a point (pip) = $100 per day.

Ĺ Trade five days per week = $500 per week.

Ĺ Trade 40 weeks a year (includes a three-month vacation).

Ĺ Trade one lot per day = $20,000 per year.

Ĺ Trade five lots per day = $100,000 per year.

Ĺ Trade 10 lots per day = $200,000 per year.

Beginning with one lot is the best approach to develop the long-term discipline de- scribed in this book. As you develop personal trading skills, it would not be a good idea to just jump into five lots. It should be a gradual reward system; once you’ve accumulated enough margin, then promote yourself to trading two lots, then three, and so on.

How much needs to be in the margin account before you promote yourself to the next level? There are many different opinions on just how much should be in a margin account per lot trade and just exactly what the risk/reward ratio should be on any given trade. I will offer a few suggestions for you to consider. I am sure that most traders will

come up with their own personal opinions and criteria to follow. After all, risk tolerance is a personal and individual decision that all traders must make. This means you must come to a personal conclusion as to just how much you are willing to allow a trade to go into the negative before bailing out.

Now let’s take a look at the potential of a full-time professional trader.

Example 3

This example involves only one currency combination with focus and selective trading. We will assume that the trader is trading only the $JPY (Japanese yen) on a standard account, with the goal to obtain 100 pips per lot per week.

Pick one or develop your own plan. Start small with only two to four trades per week and set a goal to develop into a 40-lot trader. The example that follows is based on obtaining 100 pips per lot per week and the $JPY paying an average of $8.50 per pip.

100 pips with 1 lot × $8.50 = $850 per week.

100 pips with 2 lots × $8.50 = $1,700 per week.

100 pips with 3 lots × $8.50 = $2,550 per week.

100 pips with 4 lots × $8.50 = $3,400 per week.

100 pips with 5 lots × $8.50 = $4,250 per week.

100 pips with 10 lots × $8.50 = $8,500 per week.

100 pips with 15 lots × $8.50 = $12,750 per week.

100 pips with 20 lots × $8.50 = $17,000 per week.

100 pips with 30 lots × $8.50 = $25,500 per week.

The long-term goal is to obtain 100 pips with 40 lots × $8.50 = $34,000 per week ×

40 weeks = $1,360,000 potential gross with 12 weeks off for vacation.

_{Final Thoughts}

L A S T - M I N U T E A D V I C E

Ĺ Make sure you trade demo or play money successfully before moving into the world of live trading.

Ĺ Once you are ready to trade live, then consider trading on a live mini account with a very small amount of deposited margin to ease into the world of live trading.

Ĺ It is not only an emotional learning experience to gain control of but sometimes a very stressful event in your life to move from trading demo money to live money.

Ĺ Once you have achieved success with a small live mini account, then move on to the larger standard accounts where risk becomes greater as well as potential profits.

Ĺ Consider focusing on one currency combo and become a specialist at that before spreading yourself thin trying to learn about other combinations. Yen combinations are interesting. Starting with the $Yen and then moving on to the EURJPY, and so on, may offer more benefits in terms of gradual skill development than you can imagine. This type of approach can intensify your focus and increase the odds of your success as a trader.

Ĺ When and if you become extremely successful, people may appear in your life offering you a lot of money to trade for them, and if you accept and are not properly licensed with all the necessary extended schooling, then you may find yourself going on a free federal vacation: to prison.

_{Ĺ In other words, you are learning to trade your own money and not someone else’s.}

I feel that great traders have often found a simple trade and have had the discipline to stick with it. No merging of other techniques or personally unproven styles are allowed into their minds once they have discovered the secret simple trade and implemented it successfully on a daily basis.

I have always said a mentor is a guide. The real mentor is found by spending personal time, as an individual, in the market and by developing a maturity that requires time, patience, and sometimes a lot of money. Therefore, spend a lot of time trading on a free demo and save the special good-looking trading opportunities for the live account.

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When failure or a loss occurs, pointing a finger at someone else or a particular methodology is the loser’s way. Not forgetting where you come from as well as accept- ing personal responsibility for personal decisions in the market separates a real trader from the wannabe trader. It separates the winner from a whiner. Always have a winner’s attitude and be happy every time you enter the market.

Stay in the river, Don

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