01. Money Management & Risk Control Archives

Advanced Trading Strategy (Scaling)

This is an advanced strategy, so if you’re not ready for it, save this one for the future, file it under “Optimizing For Maximum Profits”..

Imagine that 50% of your trades are winners, therefor 50% are losers, and both winners and losers are the same in size. In this scenario, you are near break-even over time. One way to improve your results is to have larger winning trades than losers. If your position was double the size when you win, your profits would be twice the size. Now if your winning trades were all bigger positions than your losing trades, you would come out ahead over time even if you were only winning 50% of the time.

We never know in advance which trades are winners, any trade can become a loser. But as the trade develops, we often get a sense that the trade is a good one, the setup and trigger were executed, and the trend is solid. Using specific setups and triggers, we can take advantage of winning trades to improve our performance.

There are strategies to increase your trade size as the trade progresses, so your winning trades are bigger, and your losers are smaller. With a good strategy, trades that fail quickly will be small, only the winning trades will be larger. An additional aspect, is to keep your risk under control. This is vital for your survival! It is important not to exceed your tolerable risk exposure as you increase the size of your position. Every time you trade, you should be operating according to your trading plan, including your risk exposure.

Imagine if you could increase the size of winning trades, without increasing the risk… Think about that.

These techniques are advanced, well beyond the scope of beginners. I have a seminar that specifically teaches this technique (practical stop-loss planning) on my website Fibonacci Trading Strategies

I don’t present those seminars very often, so watch that website for updates, so you can get in on the “practical stop-loss-planning webinar.

Have You Lost Too Much Money, No Confidence?

This is a trader question from email.

Ivan says:
-Hi Neal,

I need a piece of advice.

When I started trading, I lost a lot of money and now have some problems to enter the market. It is some sort of mental problem. How to overcome it?


Neal responds:

Trading will always be risky. There is no way to trade without risk. so we must learn to accept risk, and to control it.

Unfortunately beginners have the greatest chance of failure, because their knowledge is lacking and their skill is non-existent. So it is common for beginners to lose a lot of money before they gain enough knowledge about risk control and survival.

Once a trader has had major losses, there is damage to the trader’s confidence. Patterns of fear are developed, because the pain of a large loss is so severe. Excess fear causes bad behavior, because our brain is trying to avoid future pain. This can cause the trader to avoid taking trades, to get into a trade late, to get out too early, to avoid placing a stop-loss etc. There are endless ways that fear can cause bad trading.

We have to tolerate a certain amount of fear because of the risk involved. Without risk, no gain is possible, no profits can result.

So how does a fearful trader recover, and start to trade more comfortably? How does a trader regain the lost confidence? It takes time, and experience.

First, eliminate the risk. If you can trade without risk, you can monitor your progress, and build confidence as your results prove to be positive. You can do this within a demo account. Take as long as necessary. After a few months, review the results, do you have confidence in your strategy, in your trading techniques?

Once you develop some confidence, you can begin to trade using risk capital. Once again, control the risk! Start with minimal leverage, and small positions. The goal is not to make huge profits. Focus on technique and strategy. Focus on building confidence. The goal is confidence, not large profits.

After some time, you will have enough confidence to take larger positions, and to use more leverage. Always monitor your fear and stress. If you are too uncomfortable, reduce the risk! You do not want to have another mentally devastating event. The goal is survival, building confidence. Take your time, this is a long-term project, not an overnight miracle!

-Neal. (FibMaster’s Fibonacci Trading Desk)

Moving From A Demo To A Live Trading Account


This is a trader question from email.

Bruce asks:
I’ve been trading in demo accounts to get started and am getting ready to start a real account with trading capital. In the past I have made some mistakes which have lost all my demo capital.

I’d like to start with a small account, using real money and grow it. How can I work a small account into a larger account?


Neal responds:
In a demo account you will probably be taking more significant risks. You will be testing new ideas, taking some bad trades, and experimenting. sometimes you’ll take trades with excessive risk. Any of those can erase your account, whether it’s a demo account or real money.

Don’t rush to a live account, because there are many lessons to be learned without risking actual cash. When you do trade a live account, you will be trading with a drastically different mindset, so there will be some adjustment and a new learning curve.

With a live account, trading real cash, you will have to learn to take smaller trades, with less risk, to trade more cautiously.

To build a small account, you will probably have to take smaller profits, have close stops, and avoid those long-shot big winners that you may have tried in your demo account. Try this in your demo account first. If you are consistently making smaller proftis and keeping risk under control, you could be ready to move to a live trading account.

Once you have developed confidence in a demo account, you will know when you are ready to use actual trading capital. If you are unsure, then you are not ready to make the move. Evaluate your confidence level before making the switch. The insecurities and fears you have will not be any less when real money is on the line. When you make the switch, trade conservatively for some time, that’s what it takes to survive.

The biggest difference between trading a demo account and a live account, is how you react to stress. It’s all in your mind, your comfort, your confidence. Developing that confidence through practical experience in a demo account is a great way to start. If you can remain calm and make good decisions while risking real money, you’ll make the transition smoothly.

-Neal. (FibMaster’s Fibonacci Trading Course)

Fear, Greed, Managing Emotions While Trading


This is a trader question from the Fibonacci Trading Forum.

Justin says:
I need to develop trust – once I do the analysis, find an entry point and make the trade – I don’t trust the levels I’ve come up with and pull the trigger to exit right when it starts to go against me.

Neal responds:
It seems that you do not trust your entries? Or are you nervous about taking a loss?

There are two issues that come to mind… The first is the distrust of your triggers. The second is the question of how much room you should allow a trade to go against you, before it continues to your profit exit.

Traders who distrust their triggers should study past trades, and keep a log of current trades. Work to determine whether the trigger has a positive result over time. If you had not distrusted the trigger, and allowed the trade to continue, would it have been profitable? How many times would it be profitable vs unprofitable? Perform this analysis on historical charts, and current ones too. Calculate some statistics, and also plan a viable exit strategy on the losing trades. If you trust your ability to exit bad trades with a controllable risk, you may have less urgency to exit quickly.

On the topic of allowing a trade some room to move, we should discuss that in one of our live webinars. Since we are generally entering when a trade is moving in the right direction, we don’t want to allow too much of a move against our position, but some risk is inevitable.


Risk/Reward Ratios


This is a trader question from the Fibonacci Trading Forum.

Martin asks:
I always try for a 2-1 ratio but because i trade the daily and 4-hour, the risk is quite high.

Neal responds:
Aah, the risk/reward ratio, one of the most frequent causes of failure! Trying to force your trading to fit an arbitrary ratio can be very difficult and very detrimental to your capital.

The market doesn’t care what your favorite ratio is. Traders must be flexible, and adjust trading decisions to accommodate a variety of conditions.

We’ll discuss this in a future Fibonacci Trading Forum webinar.

-Neal (FibMaster’s Fibonacci Trading Course)