Welcome back folks. This is Lesson 5 of January 2017 ICT Mentorship. We're going to be discussing money management and higher time frame analysis.
Okay, we're going to be just talking about a broad brush perspective on this view of trading, in other words, long-term analysis. We're going to assume for a moment that everyone... that's learning the concepts from January is contemplating the medium of long-term trading or position trading.
Now that may not be your cup of tea. That may not be the discipline of trading that you are going to adopt as your career. But I would advise you to at least work in this time frame a little while.
At least try to work it at least for a year. And the reason why I say that is because some of you may not be contemplating managed funds. In other words, managing other people's money or working for a firm, maybe working for a prop firm.
And while you may not have a large equity base to start with, it's not important now. But what is important is growing your understanding over a long period of time. That means getting experience in the marketplace.
There's no better experience than... actually applying the things that you've practiced in a demo account with positive results and then segueing into a Live setting where you're using live funds, but it's not important that you have a big account Because what you're focusing on is the control over drawdown keeping it manageable keeping it tolerable What's a tolerable level of drawdown? I think I'd say about 15% annually is a realistic objective most folks would would start to cringe over 25% or so. But if you can control your draw down to around 15% as a maximum, that's absolutely amazing.
But 20 is probably okay if you can still maintain a positive outcome for the annual return. But thinking about managed funds, I want you to think about the possibility While you may be thinking about only managing your own individual assets and moving your wealth forward independently apart from using anybody else's money, for some of you that may not be the case. Maybe you came into this mentorship with every expectation of learning to do that very thing.
Well, it starts here. You have to have a realistic expectation coming in and knowing that you don't need a whole lot of money. If you can show a consistent equity curve that's improving, very little drawdown, very infrequent, erratic or slow periods in your trading, that is very good for investors. When they see things like that, and it doesn't have to be high rates of return, but having a steady increase over a calendar year, that really attracts investors.
You have no idea how much money is sitting out there. Just waiting for people to say, hey, look, you know, I'll take that money and control it for you and turn a profit. Now, you also don't need to use the entire equity base that you start with. Many times, $10,000 trading account, and they assume that they have to maximize every possible dollar in that account to get a respectable rate of return. And I don't teach that.
I actually have a very conservative approach. When I'm trading, my view is I don't want to allocate every possible dollar to the marketplace. What I do is I limit my allocation to only 30% of my total equity. It may be shocking to some of you, but it's the truth.
So let's say, for instance, I have a $100,000 trading account. Or let's say you have a hypothetical $100,000 trading account. That means I'm only going to be using $30,000 to meet... whatever margin requirements or trade parameters that I use for that trading. In other words, if I'm going to be doing a percentage basis of my equity and let's just say for instance that I'm going to be using this standard in the industry of 2% that means I'm going to be using 2% of 30,000 not 2% of 100,000.
And the reason why that's done is because I'm never going to have to worry about margin calls. I'm never going to be over leveraged. I'm never going to have wild dips in my equity.
But I can still manage to carve out a very nice equity curve even just using 30 percent of my equity. Investors like to see that. They like to see that you're not 100 percent exposed. They like to see that, you know, having a good reserve of cash. in the account.
That way you always have opportunities that you can still take that if they're really too good to pass on you have never extended yourself too much and spread yourself too thin. So that way you always have an opportunity to take something that may otherwise not have been on your radar screen. Something comes up in the charts, something comes up as an opportunity, you always have equity at your disposal to take advantage of that move. So what you're doing again is you're determining your maximum risk exposure in a percentage basis on 30% of your equity.
So you're really, really, really drawn down in the terms of risk. You're not maximizing the risk for maximum return. You're looking for a very low end risk exposure with the expectation that you're going to have consistently pulling in percents of return that are respectable over a calendar year.
Again, you're going to ideally set 1% as the most risk per trade. That means 1% of 30% of your total equity base. Okay, so you have $10,000 in your account, and you're going to be using 30% of your account. That means your account trading is going to be based on $3,000, not $10,000 over leveraged, not looking for the maximum return.
You're looking at only using $3,000. for your trading account to be meeting those margin requirements for your trades. 1% of that is going to be $30.
So $30 is your total maximum risk per trade. And I already know what some of you are thinking, Michael I can't get rich doing this. And that's right, you're not going to get rich right now.
You're not going to get rich tomorrow or next month. But you're not thinking like that right now. I want you to consider, and I'm not trying to force you into managed funds, I'm trying to broaden your perspectives on a lot of things and allow yourself the opportunity to even just think about the possibility. And again, I personally know from experience it's not fun to manage other people's money. For me, it's very stressful.
But for some of you, it may be exactly what you'll need to get over that hump. And you can make a lot of money managing other people's money rather quickly. And then you can take that money and seed your own investing.
and then you can do your own speculation how you'd like to do it. And if you want to take a little bit more risk on, not that you should, but you can do that in that medium where you get other people's money to pay you. Fill your account up with funds, not out of your own pocket, and you can independently trade apart from other people's money.
And then you can close shop on trading other people's money and just focus primarily on yourself. I'm going to be targeting 3 to 1 reward to risk or higher setups. Now again, some of you are again totally completely turned off to actually trading on the higher timeframes.
But for some of you, this is going to be perfectly designed for you. It's going to be your cup of tea, if you will. There's still three to one setups that are offered on these higher timeframes charts.
And that's what you're going to be focusing on. Now having low risk, high reward permits very, very low accuracy. You don't have to be accurate all the time, but you do have to be patient on this time frame. The other benefit is low risk allows equity for more setups. So in other words, you're going to see more possible trade setups by not having all your money in one trade.
Okay, expectations. Again, you want to be focusing on a handsome annual percent return. Now, what is this? What's an annual return that's respectable?
I think 18%. to 25% a year, which is like an industry standard for managed funds. If you could do that every single year, I can promise you, you will never have a shortage of people that will want to hand you money and manage their money for them. Now, as we get deeper into this mentorship, I'll actually tell you how you can well up other people's money and reach out to other people through different mediums and build business.
relationships with folks that would want to do that type of thing. Again, it's something that you'll have to make the decision on your own. But using higher time frame analysis like this, I want you to go forward from this point on and contemplate taking long term trades. Once we complete January's content, I want you to think about operating at least for the remainder of this mentorship for the next eight months or so.
You want to be focused on doing that very thing. looking for higher timeframe trades and letting them pan out. Don't try to get in there and take a little bit out of the marketplace and then move to the sidelines real quick. And remember, when you're managing money with higher timeframe trades, there's very little in terms of frequency with higher timeframe setups.
So long-term setups form very infrequently annually. So there's not a whole lot of trades throughout the year on higher timeframe charts. When you're trading this higher time frame, you're going to have to learn to allow short-term drawdowns in profits.
That means that while you're in these long-term trades and they pan out, there's many times you're going to see that there's going to be retracements that you're going to have to weather. You're going to have to sit through several days, maybe a week or two, where the market has actually given back some of your open profits. They're not realized profits until you close the trade.
By allowing that mindset early on, saying, OK, I know that there's going to be some give and take in these trades. Sometimes over a period of time when you start trading larger, this give and take can be rather large. It could be, you know, emotionally charging, seeing tens of thousands of dollars coming in and out of your account over the course of several weeks.
If you're not used to that, it actually makes it hard for you to think about being objective about the trade. So. The reason why I also talk about only using 30% of your equity, getting back to that, because I know some of you probably snickered and said there's no way I'd be doing that.
But by having your account only allocating 30% towards long-term trades, that gives you equity and margin to trade short-term trades. So that way, while we cannot in the U.S. trade like a hedger, in other words, we can't hedge our trades, we can trade markets that are closely correlated or inversely correlated with. the long-term positions that we are holding.
I'll give you an example. For instance, if we're looking at the dollar Japanese yen. If you were trading this pair and say you happen to be short dollar yen.
If your short position long term starts to have and you can anticipate these types of things when it starts to have a retracement against your short position you're going to give back some of that open profit or paper profit. before you realize it and close it and move that profit into your account, that give and take on your P&L is going to be bothersome for some of you, most of you, in fact. So the way you can counteract that is if you're going to be a long term trader or position trader, if you're short on dollar yen, if there's an opportunity for seeing a bounce in your short position on dollar yen, you can actually go in. and trade the Euro dollar.
It's an inverse related pair and you would do the opposite. Whatever you're seeing retraced in the dollar yen, you would trade the opposite in Euro dollar. So if you're getting retracement higher on a short position on dollar yen, you can actually go short Euro dollar or maybe British pound dollar and capitalize some more money in the marketplace while your long-term position is in somewhat of a drawdown. and you're giving back some profits, you can actually hedge that by trading other pairs that are inversely related. So that's one way you can beat the North American hedging rule.
But you just have to understand simple intermarket analysis, which we just covered in previous lesson. So having an understanding that there's going to be a give and take, you're going to have to have that in the forefront of your mind saying, OK, either I'm going to trade. shorter term swing trades or short term trades to allow myself to compensate for the drawdown in open profits on my long term trades.
And then when that retracement takes shape and comes to completion, when your long term trade and then it starts to resume, you're back in and you've made more money once you get back to that old equity high in your long term position. So you're able to continuously make more money and also cover. those drawdown periods on open profits on your long-term trades. Now stop-loss orders are not a measure of ability.
Now, obviously, you know, most of us in this mentorship are predominantly male. And males have a tendency to like to pull out the measuring stick and see how they measure up against the next guy or how they measure up against you. Stop loss orders, for whatever reason, has over the ages of technical analysis, it's become a way of knowing how good you are. And if you can trade with a 10 pip stop loss, you must be elite.
That doesn't belong in any way, shape or form in long term trading. Long term trading, it's not. You don't limit your trade idea or opportunity based on a set number of pips.
Like intraday trading, I like to have about 35 maximum. That's about a safe number for me. 30 pips is a general rule of thumb, but about 35 pips is about the number one go-to number for me. Because generally, if it's 100 pip daily range average ADR, not that everyone is or that it maintains 100 pip average, but a third of that.
would be 33% so I rounded to 35 pips and that gives me a real good round number to go for. But you can use what I've always said before about 30 pips. But on long-term trades, 30 pips isn't going to do it sometimes, especially if you're only trading off of and keying off of the daily time frame.
So if your daily chart is your executable time frame, which is what you'd be using if you're trading with a monthly and weekly chart and you can't use intraday charting because of your business or your Your home life doesn't permit you to be up or in front of the charts or you just have a job. I mean, let's just face it. Some of you in here, they have jobs and there's nothing wrong with that. I came from a world where I had to go to work, too.
But you have to understand that your stops are going to have to be proportionate to the time frame you're trading in, which leads us to the next point here. You know, when you're trading a trade that has a setup that requires a 200 pip stop loss on it, that means you're risking 200 pips. For some of you, that's...
mind-boggling. There's no way that you're going to permit yourself to risk 200 pips of price movement against you because you're so used to and ingrained in looking at those lower time frames. But just because it's a 200 pip stop loss on a setup on a daily time frame, assume for a moment that you're aiming for a 600 pip win. That's still a three to one reward to risk ratio.
There's nothing wrong with that. You're still gearing the same way you would, you know, to... to be in line with a very low objective in terms of win rate, you can still do very well with that gearing.
And obviously, that's the minimum. So you want to be looking for higher levels of reward to risk ratios on these higher time frame charts. OK, another thing you want to think about when you're managing your money trading with these higher time frames is resist the impulse to move your stop loss to break even or even reducing the risk. On higher time frame long term position trading, you're going to have to suppress that desire to reduce risk right away.
Position trading requires a great deal of patience. And unfortunately, there's no way of forming that for most of you. You either have it or you grind it out and you develop it over a long period of time. It just doesn't happen overnight.
So if you don't have a whole lot of time to develop patience, position trading is probably not going to be for you. Okay, and that's one of those things you're just going to have to live with. If you need to be in front of the markets a little bit more and you're trading in these lower time frames, then obviously we can move our stop loss sooner to break even and lock in profit on these lower time frames.
Higher time frame, just forget that altogether because you want to be waiting for the market to really be moving a significant measure of pips before you even consider moving that stop loss from the initial point at which you enter the trade. And you're going to have to learn to exit at logical targets and look to re-enter at a later time. We can take positions off at logical areas of resistance when we're in a long-term trend.
And instead of sitting through a measure of drawdown on our P&L, what we would be doing is actually exiting the position or maybe some of the position. And we'll talk about this when we go into trade management. We're actually going to specifics. This teaching here is just.
to get your mind thinking about some of the things that's going to plague you as a long-term position trader. But if you're looking at a long-term trade and you're bullish on, for instance, the dollar yen, and you get to a level where you would reasonably and with high probability expect some resistance or some retracement, you may take some of your position off. You may take half your position off.
You may take three-quarters of your position off, a third of your position off, one-quarter of your position off, and allow that to you know, be in your account as a profit. And then once it retraces back to a level where it would be logically time to see another move higher in your long term trade, then you can add back that position. Or maybe a little bit more than what you profited when you took off a quarter.
Maybe you'll put back on a third. Maybe you'll put back on a little bit more than a quarter. Or you'll just put back that original quarter you took off for some partial profits.
And then you can add it back and you can get a larger position built on and see that next leg price higher where you would make more money than you would have if you just would have kept the original gearing and entry point. the point of entry. And finally long term is not get rich quick but get rich steady. So before you go into the next series of teachings and where we actually go into a little more detail about what it is you're actually doing with long term position trading just know that You are not going to see velocity for your money trading these higher time frames It just isn't there now velocity is how fast you put your money at work And it makes a profit for you and you get it right back right away.
That's velocity That's why I like day trading because I can compound my money very quickly Some of you cannot do that and don't feel that you can't be profitable because you can't do that Discipline of trading so therefore you can't be profitable. That's not true. You can make very very handsome returns on just long-term position trading, but it has to fit your psyche.
It has to fit your inner trader, that person inside of you that makes who you are as a trader. It has to fit that criteria of the inner person, because if it's at odds with your thinking process, you can't, no matter how you slice it, it's going to be at odds with you. You're not going to be able to sit through the trades. You're going to force things. Because you're impatiently waiting for something to come to fruition and it's just going to be a problem.
So the money management aspect will become harder for you if you can't get yourself in alignment. But every one of you in the mentorship should be trying to apply long-term position trading to some degree for the remaining portion of this mentorship. And you'll see how you don't really need a whole lot of skill in terms of entry technique. The entry technique you're actually going to learn is really simplistic.
And some of you will probably start using it a lot more frequent than I do if I was long term position trading. But for long term position trading, it's the style of entry that I use. And when we get into all the entry techniques and concepts, you'll learn it there. But before we get into trade entry and stop loss orders and how much money should I risk and all that business.
You have to have some broad brush ideas about money management. And that was the core point of this teaching, because I want you to have the mindset going into it with, yes, you're managing money. No, it's not going to be a whole lot of trades.
It's not going to allow you to parlay that account quickly. And it's a pretty common sense. But some of you are so new and you're naive to the fact that these time frames require a great deal of time.
And by having. That submission to time, it will allow you to, number one, improve your overall analysis because what you see on these higher time frames, that's what directs the lower time frame to move as they do. But your objective, if you're going to be a managed fund trader and you're going to be trading other people's money, OPM as they call it, other people's money, that career is very lucrative. especially if you are consistent with your rate of return. And if you can consistently pull 20% or 25% every single year, and you're only doing a handful of trades.
Now think about this. We've already mentioned that there's very little trades going on on this higher time frame. So if you have every three months, there's a potential trade that could theoretically form every three months.
It doesn't work like that though, folks. I look personally for two, and if I'm lucky, three good... position trade setups a year. So that means over the course of January to the end of December, you're probably going to see two very simple, easy to find long-term trade setups. Maybe if you're lucky and you're really dialed in and the market's really working well and it's very symmetrical, you may see a third setup for the year.
Generally, rarely have I seen four setups in a full January to December where I've actually been able to participate in it. So unless you get to the degree where you're able to see it better than I, and that's the goal here also, you want to be better than ICT. And also the market.
profile for that calendar year is just so conducive for a Four move set up where you have every three months or so you have a quarterly shift that would be You know that be great for you, but just know going in the expectations should be it's not going to most likely be there for you Okay, so we're focusing primarily on two really good setups a year and really milking those positions and if we're lucky We'll get a third. Okay, and You're probably doing the math on this and thinking, okay, well, if I just did three to one and I'm risking 1%, the best I can make is 3% on each one. Okay, great.
Yes, I agree. And if you get two, that means you're only making 6%. Right. That's correct.
But you're also only risking 1% per trade. So that means if you have a setup that's moved into profitability, now you have new equity. So the equity can be put to work as well.
on new trade setups. And just because you missed the lowest possible buy for a long-term long position doesn't mean you can't get into the position in that long-term trend with a long-term mindset and still make more percent return. And we'll talk about that when we get into execution and trade management.
So don't think you're just going to make, well, I can only make about, if there's only two a year and the best I can make is 3% return. That means I'm going to make 6% for the year. That's not attractive, Michael.
That's only if you're taking one setup. Now, if you take two trades and your maximum exposure is going to be at 2% and you change the roles here, then obviously that gives you a little bit more leeway. But it's not meant for you to go in trying to maximize how much you can earn.
What your goal is, is how much can you manage in terms of. draw down, keeping it low, and still carve out a rate of return over the full calendar year. That's the goal.
That's the homework for the rest of this mentorship. You want to have at least one long-term trade where you are able to execute on and hold it through a long period of time, at least three months. So if you can do that, you'll have what I personally believe that it takes to put it to work where you can turn a profit over a whole calendar year. Now, if you are going to...
manage other people's money, okay, and you become better at your trading, you understand what you're doing, and you're risking 2% of 30% of the total equity. If you make 2% your total maximum risk per trade and you have several opportunities throughout the year where you can take the position, then you can short-term trade or swing trade any drawdown periods. You can maximize that.
You can very easily get to that 18 to 20% rate of return on equity for the year. You're not going to be doing a whole lot of trades. You won't be forced to be in front of the marketplace every single trading day. You're actually going to be very free with your personal time. That's the reason why large fund managers are always on vacation.
They're always doing that because they're not trading every single day. The idea is that you want to put other people's money at work for you, but under the guise that you're doing them a favor, rather. But really what you're doing is you're trying to do as very little as possible because the more times you take a trade with other people's money, the more times you're exposing them to risk.
When you expose a client to risk enough times, eventually that risk will grow teeth and bite you. Now, you're going to feel it emotionally and psychologically and monetarily. The client's going to feel it monetarily, and they're going to be mad. They're going to be upset, especially if that drawdown continues for a long period of time. It eats and erodes into what their equity base was when they allowed it to you.
So if you can keep your frequency low and focus on very high odds potential setups and keep the risk light and carve out that rate of return, 18 to 20 percent per year, people will dogpile on you. throwing new money at you. And as you have a management fee, all the percentage bonuses that you would establish and set up when you make your prospectus and you sit down with clients, all those things are in your favor. The client would be making money too, obviously, as a result, but you're not working yourself too hard to get that money for them.
And therefore, because it's going to be a large degree of money, hopefully a pooled account where you're having other people pull money into it, not just you and one client. You want to work with a fund level that has ability to bring other people's money in and when you do that It builds that equity base a lot larger. So that way, if you're making a 25% rate of return on, say, $10 million, now we're talking about something a little bit more significant. And then if you have a 2% management fee on top of that, you're getting 2% management fee regardless of what you make. And then you get a performance bonus that you would set up.
All that goes into your pocket. So, yes, in your mind, you're probably thinking, I'm going to push it to the limit and get a better performance incentive. in terms of paying myself.
But that's not what your goal should be. You should be having a steady Eddie approach, only aiming for that easy, low hanging fruit. The clients will absolutely love you. They're going to talk about their fund manager, you. Every time they go out, they're all going to be asking, who is he?
Can you talk to him for me? And new funds will always find their way to you. So your account that you manage would continuously be growing, allowing new funds to come in. And that just...
By default, keeps pushing your pay every single time this happens, your pay goes up. So it's not about how much money you have right now. It's how you can manage money right now and going forward.
And the goal is not to see a lot of drawdown. Drawdown happens by way of a lot of action because no matter what, it's a numbers game. You can be good all day long.
OK, but if you play the game enough, you get up to the bat enough times, you're going to strike out. When you deal with other people's money and you're managing that money, you do not want to have a big, long, drawn out strikeout period. You don't want that.
They want to see consistency. And if you're consistently infrequent with risk exposure, but you're showing a rate of return that's handsome over the calendar year, they will love you. And love in the form of managed funds is money. Lots of money.
It comes by way of new funds. They put more money into your hands because they've seen that you've proven yourself. A lot of folks will test you out and they'll put a small amount of money. Okay, I'll see what you do with this.
And if you show consistency and a rate of return that's very sobering and it's not over the top, you're not trying to swing for the fences. Managing this money will invite, by default, other money to come in by either the client you already have or clients that you have. By their word of mouth because they will invariably talk about what you're doing for them new money is very talkative It just likes to chatter. So when it talks to other potential clients they by Default will reach out to you and you will see your your fund management business grow And that just puts more money in your pocket And again, nothing changes just because there's more money coming in and you're managing you don't want to change the idea of What you do about your trading?
You're not trying to impress anyone. You've already made the impression that this is the rate of return you're aiming for. There's no guarantee you're going to get it. But are they going to be mad if you made 16%?
No way. They're not going to complain about that. If they made 16% on their money and they had very little period of drawdown where they didn't have any real exposure to risk, but they had 16% rate of return, 16% return on $10 million is respectable.
You can't find that rate of return anywhere in the marketplace right now. They don't get it in CDs. They don't get it in equities.
They're not getting it in money markets or anything like that. So what they're doing is they're allowing you to work for them by managing that money. Well, in their eyes, you're working really hard. And when you're managing money, you don't want to be working hard. You want to be working smart.
And smart means you're not doing a whole lot of work to make that money. You only want to put it at risk when it's. very favorable and you'll see when we get into the execution stage and the management stage of long-term trading you'll see this it takes very little to do very well on these higher time frames until next time i wish you good luck and good trading