Due to a technical problem I was unable to post this yesterday, but here it is

This last scenario was based on 200 pips per month and no losing months, at a 5:1 leverage. We have already discussed leverage, but let me remind you that this means 5 mini lots per trade position per $10,000 in your trade account, or 5 100k lots per trade position per $100,000 in your full account.

As you can see, I have even allowed for a deduction of $100 per month for subscription fees!

The account grows from a starting balance of $10,000 to a final balance of $88,200 after two years!

Yes, that’s eighty eight thousand two hundred dollars after two years!

This has been achieved at a conservative 200 pips a month with a very safe leverage of only 5:1, and you can see that most of the growth has come about through sensible growth and re-investing profits at a safe rate of return.

That’s the power of compounding!

Note how the number of lots traded grows as the account balance grows, enabling you to make more money from the money you have already made. If you push the projection out for just one more year, the profits are an amazing $274,200!!

Well, if only it were as simple as that. The problem is that not every month is a winner (although 100% are at this time) and we don’t make 200 pips every other month. The good news is that we actually make over 300 pips per month most of the time, and the bad news is that we must allow for losing months.

Ok, so let’s look at scenario 2 – a more realistic picture of what might be achieved. I have changed the winning months to 300 pips each (compare this to the actual results in the table on the first page) and have also allowed for three losing months of -350 pips each. Let’s look at the more realistic Scenario 2:

EUR/USD

Weekly Trend direction: Bullish

Weekly trend reversal level: 1.2860

Key G7 support levels: 1.2960/80, 1.2920, 1.2660/70

Counter-trend and scalping opportunities:

Strategy: Whilst above the weekly trend reversal level buy dips to support levels after an entry signal.

Today's trade suggestion:
A messy old day on Friday (as expected on the last Friday of the month) saw some nasty whipsaws leaving the price essentially unchanged since Thursday. This week we are bullish yet again, with weekly support at 1.2860 and various support levels above there at 1.2960 and 1.2920. The strategy remains unchanged – but the euro into
dips after a clear g7 entry signal with a target of 1.3100 and perhaps higher. A word of caution – the price has reached just shy of the weekly 38% retracement level (see weekly) chart, and the euro is more overbought than it has been since October 2009. This means we are possibly due for a sharp correction, which could take us below the weekly trend reversal level in quick time.

Summary: Buy dips to support levels listed above after a clear G7 entry signal, allowing for a sudden pullback as far as 1.2500. First target 1.3000 and then 1.3120.

EUR/USD Hourly chart:

Note that Scenario 2 produces $95,000 in the 24 month period.

That’s a return of $85,000 on an initial investment of only $10,000.

And that’s allowing for three losing months of 350 pips each.

OK well, there you have it. How to transform a small trading account into a much larger one using sensible money management and a profitable trading system. I would very much like to help you achieve the same.

In fact, we have been using a leverage of 5:1 in these calculations, but when using 10:1 leverage, the same $80,000 is achieved in only 2 years from a starting balance of only $1000!

Consider these facts:

1. The scenario tables above, which show you can multiply your account over and over again, are simple maths – no gimmicks and no tricks – as long as you can stick to the trading methods and keep your head!

2. If you apply the 3 simple disciplines we have mentioned, and join the Live Charter Group of James’s, so that you have a reliable trading system as well to assist you, you have a good chance of converting your account into a genuine money spinner! Of course there are no guarantees, and there is always a risk, but we have shown it can and is being achieved.

3. On your own, you may struggle to produce profitable trades. With the Live Charter Group you will have the best possible chance of making money from the Forex. And it will only cost you a small fraction of your trading profits – that’s why we even took them off the profit examples on the Excel sheets above.

I really hope that this article clarifies the power of compounding for you, and helps you understand just how important this factor is in the long term picture.

Cheers for now,

Chris.

P.S. My business partner, James, applies this in a live environment to show traders exactly how it works in the real world. If you really want to learn how to apply this practically then check out his Live Charter Group

Your Trading Plan
Your trading plan should be based around your investment objectives, your personality and your starting capital. Trading is different for everyone and it is important to have a plan that is realistic and reflects your unique personality and circumstances.
Constructing & Implementing – Your Trading Plan:

Do Your Homework
It is firstly essential to learn the basics, how and why markets move and research a method that you are comfortable with to trade: ie one that is based on sound methodology, and one you can trade with confidence, and discipline. So before you start to trade make sure you have good background knowledge on all aspects of trading. You would not try and drive a car without lessons, and the same is true of trading currencies. If you trade and “shoot from the hip”, or on tips from friends, and stories in the financial press, you are almost certainly going to end up a loser over time.

Match Your Method To Your Personality
It should be one you have decided you have confidence in and can implement with discipline. This may sound obvious, but many traders trade in a way that is totally opposed to their personality. For example, if you are impatient and hate giving back any profits then a long-term trend following system is not for you; you would probably be better suited to a shorter-term swing trading method.


Begin With A Simple Method
One fact that remains true is that simple systems work best for most traders. There is no link between the complexity of a method and how successful it is. Another advantage of simple systems is they are easy to understand and implement and this helps you stay disciplined in the face of the inevitable run of losing trades.


Begin With Sufficient Capital, Trade Small Positions And Diversify
The utopian dream is to start trading with a small amount of money and make it into a fortune in a few months. The reality is this is unlikely to happen to the majority who trade. The first thing to do when trading is start with enough capital to take a string of losses. The simple fact is: the less you start with the lower your odds of success. It’s a matter of logic. If you are hoping to get on board one big move, it may take ten consecutive losses before the winner comes. By then your capital could easily be depleted and the move you were hoping for comes without you being able to participate. Always start with enough capital to allow you to take a few losses. If you can you should hold a few trades in different areas to diversify your positions ie “don’t put all your eggs in one basket” and blow your money in one trade. To start with keep your position size small and spread the risk.


Make Objectives Realistic
What is realistic amount of profit to aim for annually on your starting capital? Many investors when asked this question simply say as much as possible. They have not sat down and thought about it, they simply have read stories of the minority who have made it big and want to do the same. The fact is that most traders’ start with unrealistic expectations and this leads them in to a false sense of security. They ignore the risks of trading; they concentrate too much in one trade and risk too much and end up losing.

So what is realistic?[/b]
Any trader who can achieve growth rates compounded of 30% + per annum is doing very well. Generally, a compound growth of 30 – 50% per annum would place you in the top 10% of traders that make money and this is a realistic goal if you do your homework.


Be Independent and Isolate Yourself
Emotions are your enemy when trading so it is important to be independent and follow your own path. It may sound lonely relying on yourself and is in fact uncomfortable to many but as time goes on your own opinion is just as valuable, perhaps more so than any others, experts or novice traders.

Don’t Lose Sight Of Your Ultimate Goal:
The ultimate goal of trading is to make money. There is no goal greater than this in trading. Though there are other benefits to trading self-satisfaction, competitiveness and the actual thrill, these are all secondary. If you seek revenge against the markets, other traders or merely want to compete for the sake of it, then the primary goal of speculating will be lost and so will your money.

EUR/USD 6 Auguts

Weekly Trend direction: Bullish

Weekly trend reversal level: 1.2860

Key G7 support levels: 1.2960/80, 1.2920, 1.2660/70

Counter-trend and scalping opportunities:

Strategy: Whilst above the weekly trend reversal level buy dips to support levels after an entry signal.

Today's trade suggestion:
A messy old day on Friday (as expected on the last Friday of the month) saw some nasty whipsaws leaving the price essentially unchanged since Thursday. This week we are bullish yet again, with weekly support at 1.2860 and various support levels above there at 1.2960 and 1.2920. The strategy remains unchanged – but the euro into
dips after a clear g7 entry signal with a target of 1.3100 and perhaps higher. A word of caution – the price has reached just shy of the weekly 38% retracement level (see weekly) chart, and the euro is more overbought than it has been since October 2009. This means we are possibly due for a sharp correction, which could take us below the weekly trend reversal level in quick time.

Update: A messy week, with whipsaws yesterday and no real direction. Still, we managed a good profit from the euro in session, and we’ll continue to look to buy dips to support. It’s NFP Friday so I won’t be trading until possibly after the NFP news is released.

Summary: Buy dips to support levels listed above after a clear G7 entry signal, allowing for a sudden pullback as far as 1.2500. First target 1.3000 and then 1.3120.

EUR/USD Hourly chart:

Weekly Trend direction: Bullish

Weekly trend reversal level: 1.3040

Key G7 support levels: 1.3100, 1.3040/50

Counter-trend and scalping opportunities:

Strategy: Whilst above the weekly trend reversal level buy dips to support levels after an entry signal.

Today's trade suggestion:
August chop already seems to have set in, with Friday’s NFP gains already wiped out, and nasty swings yesterday. We haven’t managed to get into any Euro trades this week so far, and just as well – bullish attempts would have been stopped out. For today, we’ll look to buy the euro into dips with just two support levels left beneath us: 1.3100 (yesterdays support low) and 1.3040/50 (the weekly reversal level and the 78.6% retracement of the last swing rally) Be careful of whipsaw, and don’t be in a rush to enter this market today. With over 300 pips in the bank already this month, I am willing to be VERY patient.

Summary: Buy dips to support levels listed above after a clear G7 entry signal. If we drop below the weekly reversal level at 1.3040. Stay out.

EUR/USD Hourly chart:

OK, so it's Friday 13th, and just like any other day, the sun will rise, the coffee will be hot, the traffic will be sh*t and we'll all go out for drinks after work...

Problem is, the markets don't know that everything should be normal today. Some of the dice rollers at the top of the food chain will believe that today is either lucky or unlucky (depending on what their grandmothers taught them)

Superstition does strange things to markets. And we are in the middle of the vacation period, so things are jittery enough already.

Combine superstition with thin markets and Friday afternoon drinking, and you get a nasty trading market. On top of that, the euro and the pound have reversed their weekly directions, and are theoretically "no-go zones"

I am already way over my monthly target for August - surprisingly, as August can be crappy - and I won't be trading today. I'll let the gamblers have their turn, whilst I calmly whistle around my office, listen to music and make tea.

I'd recommend you do the same. There's plenty of money to be made next week. And the week after. And the week after....

Have a great weekend, and go have some fun. Forget about trading for a couple of days. If you haven't got anything else to do, take up carpet bowls, pet-rock painting or ornithology. Whatever.

Over and out

EUR/USD

Weekly Trend direction: Bearish

Weekly trend reversal level: 1.3340

Key G7 resistance levels: 1.2900/20, 1.2960, 1.3030, 1.3100

Counter-trend and scalping opportunities:

Strategy: Whilst below the weekly trend reversal level sell rallies to resistance levels after an entry signal.
Today's trade suggestion:

A sudden reversal of fortunes for the Euro has created a large bearish weekly candle and a drop below last week’s reversal level. That means we are bearish this week, whilst below 1.3340, a long way above us. Remember that August is traditionally a tough month to trade due to thin markets creating sudden swings in both directions. The two hundred period moving averages are around about the first resistance levels between 1.2900 and 1.2960, and these are the first levels where we’ll look to sell. Targets will be back down at 1.2750 and perhaps lower.

Summary: Sell rallies to resistance levels, starting at 1.2900, after a clear G7 entry signal. Target 1.2750 and perhaps lower.

EUR/USD Hourly chart:

Weekly Trend direction: Bearish

Weekly trend reversal level: 1.3340

Key G7 resistance levels: 1.2900/20, 1.2960, 1.3030, 1.3100

Counter-trend and scalping opportunities:

Strategy: Whilst below the weekly trend reversal level sell rallies to resistance levels after an entry signal. Today's trade suggestion: A sudden reversal of fortunes for the Euro has created a large bearish weekly candle and a drop below last week’s reversal level. That means we are bearish this week, whilst below 1.3340, a long way above us. Remember that August is traditionally a tough month to trade due to thin markets creating sudden swings in both directions. The two hundred period moving averages are around about the first resistance levels between 1.2900 and 1.2960, and these are the first levels where we’ll look to sell. Targets will be back down at 1.2750 and perhaps lower.

Update: Pretty much ranged since the start of the week. The strategy remains the same – sell into rallies, with resistance levels unchanged. After last week’s dramatic move lower, it’s not unusual to get a period of consolidation whilst the traders not on holiday digest the moves.

Update Friday: No change – strategy remains the same!

Summary: Sell rallies to resistance levels, starting at 1.2900, after a clear G7 entry signal. Target 1.2750 and perhaps lower.

EUR/USD Hourly chart:

We are all familiar with the terms Fear and Greed, or at least we should be. We hear about them all the time. Everyone is always preaching to us about the dangers of these two powerful emotions. But do we actually realise just how powerful they are? And more importantly, how influential they are? After all, they alone are responsible for moving trillions of dollars a day. Now that’s real power.

Yes, these two little old emotions are just not given their due.

The good news though is that once you actually understand how they work, and no longer just “know” that they exist, then for the very first time, you will be able to take control of your trading future.

These are the two emotions that single handedly drive the entire currency market…yes…you read it right…emotions drive the price action, not some mysterious force, that you have been struggling to come to grips with.
The market is driven by emotion under the guise of human behaviour and nothing else

Whether it’s a lonely $500 punter on his home computer, or a large fund manager hedging millions of pension dollars; or perhaps a young buck on the trading floor desperate to carve out his reputation as a respectable trader. They all fight the fight on a daily basis – they wage war constantly against these two forces.

Every half-decent life coach will acknowledge that we are driven primarily by two forces. We are maybe more familiar with them under the more common names of – Pleasure and Pain, but nearly all of life is influenced by these two forces, so make sure you know them well – make sure you are able to recognise them under whichever guise they may appear to you. Your mission as a trader is to learn to recognise the power they hold over you and be able to control them from here on out.

The truth is we move towards pleasure and away from pain, its as simple as that.

We do this on a day to day basis but we don’t even know it. Almost every single decision we make is weighed up, in a split second, by our sub consciousness – processed and executed, without us even realizing it. And what’s more – we don’t even know we are doing it. The reality is though, that the underlying forces behind every action we take are these two powerful forces. Every trading decision we have ever made was governed by these two forces.

Not me I hear you say?

Are you sure about that?

Maybe it isn’t all that obvious at first, so let’s paint a picture for you. Let’s look at a few examples and see if you can picture yourself in any of these scenarios at all?

* Ever stood on the side line paralysed by fear only to see your trade run away with you?
* Ever had to utter these words to yourself afterwards? “Darn, why the heck didn’t I take the damn trade…I knew it was right, I did all the right analysis…what the hell happened – why didn’t I pull the trigger?”
* Ever got into a trade all too quickly only to be struck by an almost immediate and overwhelming feeling of uncertainty?
* How many trades have you been in when you suddenly realised that just maybe you had rushed the entry and now you were seeing other criteria backing the opposite view.
* Ever been in a trade and – against your better judgment – decided to move a stop away, because you just could not afford another loss at that point?
* How about moving a stop up too soon only to be stopped out, then see the trade fly off in your direction, but your are no longer in it?

These are only a handful of the day to day “mistakes” that traders have been making for as long as the currency market has been around and in fact as long as any market has been around.

And that’s the real problem here – by the time we figure this all out, and realise just what is going on, we are broken, and yes, probably broke traders, with little resolve left to continue the fight.

I have been conducting surveys with traders for, as I said, a long time now, and I can go over every survey…and it doesn’t matter if it was from 1999 or 2009. I will show you a common thread running through all these surveys?

Was it immediately obvious at first?

No not at all.

Why?

Well because I wasn’t looking for it.

I was looking for what it was that every trader wanted!

I was looking for answers to questions I have long been asking myself.

Why does every trader seem to struggle so much, and why do so many fail?

I wanted to give them answers…the problem is none of them knew what they were looking for. They wanted solutions…

* They wanted a better system
* They wanted a proven track record
* They wanted someone to trade for you (perhaps a robot)
* They wanted to know the “secrets”
* They wanted to know what broker to use
* They wanted to know what charting package to buy
* They wanted to know if we could trade a managed fund for you
* They wanted a signal service

Well you know what – they had all of that already…and you know what’s more?

Most of them still struggled…even with all the right answers!

So tell me what the hell is wrong with this picture then?

Are we all too stupid?

Perhaps we are all too inexperienced?

Perhaps all the so called experts are just crappy teachers?

Maybe the odds are so stacked against us that we never stood a chance anyway?

Well the truth of the matter is that none of those are correct. None of this matters one damn bit in the end. You can have the best charting, the best “ninja/guru” teacher….I sure know that you aren’t stupid – so what is it then?

Well you should have got to some realization by now…if not then maybe I was wrong in my last assumption after all ;-)

You should be thinking to yourself by now…could it be Fear & Greed? Just maybe, could it be something as simple as this and not all the technical stuff after all that is responsible for my poor showing?

Well you’re right. It is Fear and Greed!

The reason it isn’t all that clear, initially, is because we aren’t looking for what might be causing the problem…

WE ARE ONLY LOOKING FOR A SOLUTION!!!

When I began diagnosing the results, it wasn’t just inconceivable that the same mistakes were being repeated year in and year out, by so many traders, but it was also clearly obvious to me that there was some underlying ‘cause” behind these mistakes…

It was no longer the mistakes that interested me, but why we made these very same mistakes time after time…

It was now a frantic search for the common denominator – the common thread that wove itself through each and every trader’s story – that perpetually joined us all together.

Mistakes that not only blow out accounts in one dramatically tragic trade, but that can also just as easily slowly and agonizingly hemorrhage a person’s trading account.

And not just in the sense of their money I might add…but more importantly – of their confidence.

And let me tell you, once you lose your confidence as a trader….then all is lost!

The search was on to establish why we all made the same mistakes!

If we all make them – then we must have something in common – the solution must be something we all have within us then!

Let’s take a quick look at some more trading scenarios that play out every single day in the market.

Still think our emotions don’t affect the bigger picture?

* The greed factor (fear) of missing out on a strong trend causes people to buy in at the top, or at the end of a run thus pushing it even further until people start getting nervous and the expectancy of (much more) abates. The market then falters – opinion shifts, and the chase is on again, only this time in the opposite direction.
* The Fear factor (Pain) also causes people to eventually cut their losses, and I might add, after, often having held on a lot longer than they should have. This once again adds to the momentum and the market is fueled again causing the price to continue dropping.

Greed & Fear play out in many more scenarios. Traders can be frozen by fear and never enter a trade for example. However, the fear is not of the trading itself, but rather a fear of loss…they are fearful of losing money (or perhaps face) and so if they don’t ever take a trade…well they won’t ever be wrong…or lose anything either of course.
It’s far easier to sit on the side lines and pass comment than play the game yourself!

This is the real driving force behind the ebb and flow of the markets. If the market was 100% efficient and currencies were valued at their fair value then there would be no need for traders. The seasoned trader knows how to take advantage of this, and knows how to capitalize on the emotions of others.

So how do we become that seasoned trader when we have these strong emotions of Fear and Greed constantly pulling at us every day?

Most of us were drawn into trading due to the lure of easy money. How difficult can it be after all…it can only go up…or down…surely we have got to get that right more times than not?…after all we’re clever – above average at the very least. And we’re not one of those suckers who have unrealistic expectations are we?

So we trawl through a few free web sites, download some videos off You-Tube and we grab a free meta- trader charting account.

We demo trade for a while and as per our expectations it isn’t all that hard after all. We trade a 50k account and make thousands of dollars at a time – this sure feels good. And those loses…well we weren’t really paying attention … after all we were on the phone…we had to rush out..so it wasn’t really a trade that counts…we can ignore it…but that 100 pip win yesterday…the trade we forgot we even had in the system…man that was awesome – this trading thing rocks!

Then one day we go live…we don’t have a 50k account of course but we scrape together $500, and suddenly the feeling isn’t quite the same. The wins aren’t quite as euphoric as they used to be, as we now only bank a few dollars at a time. So what do we do…we up the leverage…hey man what an idiot I am…I could be making double this amount if I just trade a few more positions at a time.

That’s how we make our first ‘mistake’…

Did you recognise anything here…get any AHA moments…maybe thought to yourself…but that’s stupid…that’s just being GREEDY…

Oh look there’s that word again – greed ;-)

So – we make mistakes – why?

Is it because we are stupid?

Well that can be argued of course, as an entire species we don’t seem to be doing all that well – and you only have to watch 10 minutes of local news to figure that one out.

So ok let’s assume we aren’t all that stupid…then it must be something else…

Ignorance; Perhaps?

Well unfortunately we can’t blame that one either as we knew the rules before we started – we had after all read up all about money management and risk, and had been warned enough times – so could it be?

No, surely not?

Could it simply be that we were too greedy?

Well it does seem so, after all…

After all, we did go against proven logic and sound trading principles …and what led us down the slippery road to certain emotional carnage?

A little bit of Greed, that’s all it took in the end, and the painful journey had begun.

But surely we knew!

Surely if we figured we could make double – we figured we could also lose double?

Well unfortunately human nature as it is…we tend to ignore pain (and possible painful outcomes)…and we attach ourselves to pleasure (just imagine the endless bragging rights we will be entitled to when we hit the big one).

So here comes a good healthy dose of pain…

To start with, your spouse tears into you for being so dense – after all, even they could see that was a stupid decision.

But just imagine the possibilities should you have got it right…you could have…well let’s not go there…

So after beating your head against the wall in your office for a few nasty minutes, you swear to never do this again.

The problem is we don’t remember the pain all that long…and unless it is really painful…we are back testing our intelligence again in no time.

We get it eventually though, but now the pendulum swings and the problem is compounded further…

The pleasure of winning is never as strong as the pain of losing.

And so now here we are, hunched over our charts, frozen with fear at every opportunity or set up that comes our way.

Analysis Paralysis – here we come!!!

Then what happens next?

Ouch, we now add to this rather sad outlook by now trying to make up for the loss…

So we start to…oh forget it – go back to page 2 and read it again.

As traders, I really hope that you get this message loud and clear. We are all driven by Pleasure and Pain. Every decision you make is in some way or how based on the implication of one or even both of these two outcomes being unavoidable.

Never forget to analyse the true reason you made those basic trading mistakes…don’t forget to look for the cause.

Kind regards,

Chris Mathews.