The two most important commodities that the masses strive to obtain more of are Time and Money. The world to shrinking due to advances in telecommunications, the onslaught of media bombardment and our fast paced lifestyle (consumerism). It seems that each individual is embroiled in a race to see who can come up with the most ‘cheese’ and still have time to eat it before they fizzle and die.  Most of us are wildly out of balance because of our choices and how these choices affect the balance between our time and money (lifestyle).

As an exercise, take 5 minutes on Sunday afternoon after dinner and write what the ultimate week would include for your family, if you had a balanced lifestyle in terms of time and money.  It is very important to understand and internalize why you should use the extra ‘unproductive' hours in your schedule to learn how to trade.  What exactly do you want to accomplish and when?  What will you need to learn?  How will you grow and change into the trader that you want to become?  When are you going to finally take control and start the evolution of your metamorphosis?

In the last two weeks, some of our traders are truly beginning to understand the benefits of migrating to a longer-term trading methodology with decreased lot allocation at 2.5% and a Profit/Loss ratio of between 3 and 25 times their stop.  In our advanced trading room, we have noticed ‘experiential and emotional’ growth in some of our traders, who have embraced a newer money management paradigm. 

Some emails have asked Tim (coach), how to deal with trades that have huge profits, as they have never been in this position before. “Tim, how much do we move our stop into profit?” This is great! I love to see emails from our traders taking trades and expanding their experience in the market, as they learn how to emotionally deal with TEAM FXP's longer-term trading methodology.  This is exciting!

If is not necessary to be a rocket scientist, or even own a calculator, to understand that small risk allocation, reaching for a huge profit potential, will edge out all short-term trading strategies, with greater risk allocation, over time. WHY?

Human Nature
We are emotional beings. If we were not emotional, we would not be human. At some point, each of us falters emotionally or physically. As a result, small gains made weeks prior, can and will be wiped out within a few trading sessions.  If you do not believe this statement, look around and ask other traders you know, how long they have been trading, and why they are in the same position as you.  The likely answer is the ‘silver bullet' of short-term trading strategies, expounded by so many ‘mentors’ in the current educational market.  The brokers are very adept at understanding human nature and they profit immensely from this. 

With a longer-term outlook, you can lose over 50% of your trades in a month, and still come out with excellent profits. Now, my challenge is the fact that I work insane hours and have had some horrible computer challenges this last week. 3 out of my 4 trades went into 1:1 profit territory, where I could at least lock in a few pips of profit to save potential risk to my capital. However, due to my circumstances, I was unable to do this and lost about 6% of my account. One of the trades was positive and due to its profit-to-loss ratio, I was up around 7% on this trade after overcoming the 6% loss.  Each trade had around a 2.5% stop loss allocation from my margin. The point is – I can still be human (I make more mistakes than most during a day) with this longer-term outlook. I was in a position to take profits, even with a win-loss ratio of only 25%!

Mathematics
A 30-pip arbitrary stop, with a 10-pip to 30-pip gain, needs a win-to-loss ratio of over 80% all of the time.  One session’s losses can wipe out a large number of gains that could represent weeks of profit taking. This leads back to human nature! Now understand, when starting to trade, it is necessary for trading strategies to exist for several months, in order to allow people to experience trading mechanics. There is nothing wrong with having a couple of accounts – one for shorter-term, higher-risk trading, and the other as an equity building account.  Remember,last week I was still profitable, even though my win-loss ratio was only 25% for that week on longer-term trades.

This is an excerpt from October 2008 issue of Forex Journal. To view the complete article, please click here.