Money Management (on Individual Instrument) By Ken Hodor 11/2/10

What I hope you get out of this Have some fun with our friends Learn a bit about Forex trading Explore trading a nice trending market

The plan Quick overview of Forex and rules—15 min. Break into teams and work the game—15 min. Collect and compile results (offline)—30 min. Show best trading so far Future trend trading Suggest way to profit from what you learned Q&A Total time about 1.5 hours including 0.5 hour offline

Game Overview You will be granted Prophet powers and be able to see into the future. Use these Prophet powers and knowledge of margin to trade as effectively as you can, given the rules.

Forex BackGrouder Trading Mini-lots of 10,000 units per lot A price of 1.3800 implies you will control $13,800 Just slide the decimal point over 4 places We will be assuming minimum margin requirement of 1% 1.3800 requires $138 of margin, so slide decimal 2 places. There is no expiration, or Greeks IMHO it is simpler than options with better leverage and higher returns on margin

The Game Rules Start with $5,000 – a typical starting account Trade Mini-Lots –10,000 units Minimum Margin is 1% of value Dropping below this level you blowup account Only go short or buy-to-cover Write down lots to sell short or cover in appropriate column

Logistics Divide into 4 to 10 groups Hand out chart and trade list Would like one member to have Forex experience Hand out chart and trade list After 15 minutes collect and tally results Summary of results—announce winner Demonstrate best results achieved so far Speculate on future EURUSD trading

Start Suggest 5 minutes to make a quick plan 10 minutes to implement plan

EURUSD Trade List Initial Capital $ 5,000 This is typical of initial margin required to open a FOREX account. SellShort   BuyToCover # Date and Time Price Lots Difference CumLots NetMargin 1 1/5/2010 16:59 $1.44156 1/10/2010 23:00 $1.44278 ($0.00122) 2 1/12/2010 5:00 $1.44726 1/22/2010 5:00 $1.41223 $0.03503 3 2/10/2010 23:00 $1.37371 2/16/2010 16:59 $1.36998 $0.00373 4 2/17/2010 16:59 $1.36547 2/22/2010 5:00 $1.36511 $0.00036 5 2/23/2010 23:00 $1.35096 2/26/2010 11:00 $1.35954 ($0.00858) 6 3/30/2010 16:59 $1.34225 4/8/2010 16:59 $1.33553 $0.00672 7 4/27/2010 23:00 $1.31698 4/30/2010 11:00 $1.33123 ($0.01425) 8 5/11/2010 5:00 $1.27657 5/17/2010 23:00 $1.23955 $0.03702 9 5/21/2010 11:00 $1.25016 5/27/2010 23:00 $1.23667 $0.01349 10 5/30/2010 23:00 $1.22649 6/3/2010 11:00 $1.23001 ($0.00352) 11 6/3/2010 23:00 $1.21617 6/8/2010 16:59 $1.19478 $0.02139 Missing from the above is Roll Over (Carry Trade) calculations. Which make the results slightly better than realized. Margin requirement is 1% to keep the calculations easier and is indicative of when we experienced these prices.

Results Gain Team 1 Team 2 Team 3 Team 4 Team 5 Team 6 Team 7 Team 8

So what about future? Dollar should continue to weaken EURUSD may go from 1.4000 to 1.5000 How do we make as much as possible?

Gain when Euro goes from 1.4 to 1.5 by Ken Hodor 11/2/2010 Margin 2% Initial Equity 5000 Expontential growth Linear growth Maximize Margin Utilization (Optimal f) BuyandHold   EURUSD Lots Remainder Gain Equity Optimal Equity B&H 1.4 17 240 $ 5,000 1.402 19 12.4 340 $ 5,340 1.404 20 104 380 $ 5,720 $ 5,680 1.406 21 214.8 400 $ 6,120 $ 6,020 1.408 23 63.2 420 $ 6,540 $ 6,360 1.41 24 232 460 $ 7,000 $ 6,700 1.412 26 137.6 480 $ 7,480 $ 7,040 1.414 28 81.6 520 $ 8,000 $ 7,380 1.488 312 48.8 5840 $ 92,900 $ 19,960 1.49 332 204 6240 $ 99,140 $ 20,300 1.492 354 146.4 6640 $ 105,780 $ 20,640 1.494 377 212.4 7080 $ 112,860 $ 20,980 1.496 402 121.6 7540 $ 120,400 $ 21,320 1.498 428 211.2 8040 $ 128,440 $ 21,660 1.5 456 200 8560 $ 137,000 $ 22,000 %Gain 2740% % Gain 440%

Conclusion There are a few general trading tactics Reversion to the mean Trade the Trends best return on equity Scale in with optimal money management Strive for geometric portfolio gains

Additional Reading www.babypips.com for additional Forex info “Portfolio Management Formulas” By Ralph Vince (explains exponential growth concepts) “The Handbook of Portfolio Mathematics” by Ralph Vince (I have not read this yet)