Choosing your Level of Trade Activity
Trading the Interest-Earning Advantage signals that appear on our daily charts can be as exciting and involved as you want to make it or as effortless as you want to make it. In fact, if you simply don't want to do any trading yourself but still benefit from our trading system, you may participate in the 100% hands-free Automated Trade Execution (ATE) program and do absolutely nothing at all. So, if you are not going to be self-trading your own brokerage account, then the strategies on this page do not apply to you. On the other hand, if you want to take an active role in the trading and add some more excitement to it (with potentially better returns), then this section is for you. On this page we will discuss different ways to trade the Monthly Interest-Earning signals in a way that can reduce the size of your draw downs (losing periods) while possibly improving your overall profitability.
Trading Terms:
In our examples, we will use the terms Account Equity, Leverage, and Leverage per Currency Pair quite often. So, before we go any further, you need to understand what these terms mean and how they are calculated in our examples...
What is Account Equity?
Account equity is simply the total net sum of your brokerage account if you were to close all of your open trade positions. This includes all floating profits & losses on open trades plus your account balance. For example, if your account balance is $8,000 and you have $2,000 in floating profits from open trade positions, your Account Equity is $10,000. Likewise, if your account balance is $8,000 and you have $2,000 in floating losses, your Account Equity is $6,000.
What is Leverage?
Leverage (or gearing) is a term used to describe the amount of trade volume (or contracts/lots) you are trading vs. the amount of equity in your brokerage trading account (where your money is held and traded). Many traders use different mathematical equations to calculate their leverage and some methods can be quite confusing but for the examples on this page, we will use the simplest and most accurate way of calculating leverage. In our examples, leverage is simply trade volume divided by account equity. Here are some examples:
Account Equity: $10,000
Open Trade Volume: $50,000 (or five $10k contracts)
Leverage: 5:1 ratio (open trade volume is 5 times your account equity)
Since we provide Interest-Earning trade signals for 11 different currency pairs, it is possible to have open trades on up to 10 currency pairs at the same time. In our leveraging strategy examples further below, we will break the leverage down to a "per currency pair" basis for consistency and easier understanding. Here's an example of how leverage is calculated per currency pair:
Account Equity: $10,000
Number of Currency Pairs with open trades: 5
Open Trade Volume per currency pair: $10,000
Leverage per Currency Pair: 1:1 ($10k volume per $10,000 in Account Equity, a 1:1 ratio per currency pair)
Combined Trade Volume: $50,000 ($10k volume on 5 currency pairs each = $50,000 in total Trade Volume)
Total Leverage Ratio: 5:1 ($50,000 in total trade volume vs. $10,000 acct equity = a 5:1 ratio)
If the leverage ratio is less than 1:1, we will use a decimal point before the number, such as: .5:1 to represent 50% of account equity or .5x to represent .5 times which also equals 50% of account equity. Simple enough? Now that you understand what we mean by Account Equity, Leverage Ratio, and "leverage per currency pair", let's move on.
Don't Wait for New Entry Signals To Begin Trading...
Before going into our trading strategies, it is important to know when to enter your trades when starting out. Since most of our Interest-Earning signals remain open for many months or even years, we have had subscribers mention that they don't want to enter a trade late in the move and ask if they should wait for the next entry signal before opening any trades. By all means, DO NOT WAIT for a new entry signal to occur. That could take months and the system is designed so that all of the currency pairs with open trade signals work together as a whole. This also provides diversification among the different currency pairs, rather than putting all of your eggs in 1 or 2 baskets. On average, there open trades on 6 to 8 different currency pairs at any given time, each with it's own set of fundamentals driving it's movements.
The past-performance of the Interest-Earning Advantage signals is calculated month to month (not trade to trade). Therefore, the monthly performance you see on our Performance Page is calculated by measuring each currency pair's price from the beginning of each month to the end of the month in which there is an open trade position for that currency pair. If you open each of your trades at the beginning of the month (regardless of when the open trade signal was generated in the past), your performance should be a very close match to that on our performance page assuming you are using the same leverage used in our model. Keep in mind that, when comparing your performance to that on our performance page, you will need to adjust for differences in leverage if your account is leveraged differently than our hypothetical performance models, which use consistent leverage every month. Slippage, spread fees, and trade timing will also contribute to performance discrepancies. We deducted spread fees from our hypothetical performance model in the months the entry signals were generated.
Maximum Monthly Risk Limit (Monthly Stop-Loss)
Most traders place a stop-loss on individual trades but since the Advantage trading strategy (signals on the Monthly charts) trades 11 currency pairs as a single diversified trade, it makes more sense to use a Monthly Stop-Loss in addition to a single trade stop-loss. Regardless of the trading model you choose to follow below, you should ALWAYS base your leverage strategy on the maximum amount of equity you are willing to risk each month. Even the most aggressive traders should NEVER risk more than 30% of their total account equity in any given month. Therefore, if 30% is your monthly cutoff point, then you should close all of your open trades once your equity drops 30% from where it was on the 1st of the month. By following this rule, in theory, you could never lose 100% of your account equity and you would always remain in the trading game.
Buy & Hold Strategy: (The easiest way to self-trade)
Aside from our hands-free automated trade execution, this is the easiest strategy of them all and you should compare this trading model to the other strategies below so you can gauge which one best suits your lifestyle and your desired level of participation. To follow this strategy, you would simply follow our monthly trade signals and make no adjustments to your account until there is a trade that opens or closes on the ProSignal charts, or until you reach your maximum monthly risk threshold, which means you could do absolutely nothing for a few months at a time. We call this the "Buy & Hold" strategy.
Buy & Hold - Aggressive (1:1 Leverage per Currency Pair)
If you are a very aggressive trader, then 1:1 leverage per currency pair is the most aggressive leverage you should use when trading our Monthly Advantage signals. This means trading $1000 volume per currency pair for every $1000 in account equity (a 1:1 ratio). If you trade at a consistent 1:1 leverage per currency pair, you should be willing to risk up to 30% of your account equity per month so that, in a worst-case-scenario, the most you could lose in a single month is 30% of your account equity. Therefore, 30% would be your Monthly Stop-Loss (as explained 2 paragraphs above), which is equal to the 6th benchmark in the illustration below (which we will explain later). The reason we suggest a 30% monthly Stop-Loss (when trading at 1:1 leverage per currency pair), is because at this level of leverage, you will be trading about 7 or 8 times your account equity on average. For example, if you have $10,000 in account equity at the beginning of a month, and we have 8 open trades that month, you would have an open $10k trade position on 8 different currency pairs for a total of $80,000 in trade volume. That's 8 times your account equity and is considered very high leverage. At this level of aggressiveness, there can be very wild equity swings during the month, as much as 10 - 15% overnight on some occasions. Therefore, you must give the market sufficient breathing room so you don't exceed your maximum monthly risk tolerance just from some temporary hick-ups in the market. According to historical data, our signals would have never exceeded a 30% intra-month draw down in the past 8 years; however, it has come very close on several occasions. The worst intra-month draw down (at 1:1 leverage per currency pair) since 1999, was approximately -27%, which occurred in March 2007, yet the month managed to end with +6% profit. If you had been leveraged higher than 1:1 per currency pair this month, then you would have certainly hit your monthly stop-loss and closed out the month with a big loss instead of a profit. Since it is impossible to know exactly how far the market will move against you during a month, we recommend that you strictly adhere to your pre-determined monthly stop-loss and never risk more than 30% of your account value per month..
In the illustration below, the blue column is our "control group" and represents the draw downs of the Buy & Hold strategy at 1:1 leverage per currency pair. The yellow column is the "test group" which represents the draw downs of the strategy we are analyzing. The illustration compares the draw downs of each strategy for our analysis. Since this illustration compares the control group to the control group, both the blue and yellow columns represent the same draw down values. The left-hand column, labeled "Avg-Down Benchmark", is a scale used to quickly reference each 5% draw down increment of our control group (the blue column). For example, the 6th benchmark represents a 30% draw down when trading at consistent 1:1 leverage per currency pair.
Buy & Hold (Aggressive)
Leverage Ratio per Currency Pair: 1:1 (or 1x)
Buy & Hold - Less Aggressive (.5:1 Leverage per Currency Pair)
Here we will follow the same strategy as above but with HALF the leverage. In this example we will trade at .5:1 leverage per currency pair, or $500 trade volume for every $1,000 in account equity. Therefore, if you have $10,000 account equity at the beginning of the month and we have 8 open trades on the monthly charts, you would open $5,000 trade volume for each of those 8 currency pairs for a total of $40,000 in combined trade volume (half of the volume as the example above). Half of the trade volume as our control group equals half of the potential losses, as illustrated below. In this example, the 6th Benchmark equals a 15% draw down at .5x leverage per currency pair (yellow column) vs. a 30% draw down in the control group (blue column). Therefore, if your Monthly Stop-Loss is the 6th Benchmark, then you only need to risk a maximum of 15% of your account value per month, which is the same Money Management strategy we use in our 100% Hands-Free Automated Trade Execution program.
Buy & Hold (Less Aggressive)
Leverage Ratio per Currency Pair: .5:1 (or .5x)
Averaging-Down
In this section we will show you the potential risks involved when trading with a different type of Money Management strategy than the Buy & Hold. Most investors want aggressive profits with conservative losses (or draw downs). The truth is, in general, the more you want to make, the more you will have to risk but we are going to show you ways you can reduce your potential downside without sacrificing much of the upside potential. In fact, these strategies can even generate profitable months from, what would otherwise be, losing months in our hypothetical model. The technique is called "averaging-down" and is easily done by adjusting the leverage (or number of contracts you buy or sell) on your brokerage account. A simple example of how this works is this...
Suppose you buy a gallon of gasoline for $2.50. The next day the price drops to $2.00 and you buy another gallon. You paid $2.50 for the 1st gallon and $2.00 for the 2nd gallon so your average price is now $2.25 per gallon. The next day the price jumps up to $2.40 and you sell your 2 gallons back to the gas station at market price ($2.40 per gallon). You average 15 cents profit per gallon for a total of 30 cents net profit even though you bought the 1st gallon at a higher price than you sold it. Not only does this "averaging-down" strategy work the same way in forex, but our trading system is specifically designed to earn daily interest on top of it at a rates most banks would never dream of paying!
Keep in mind that, in order to use the averaging-down strategy, you will need to set aside some buying power for a later date when the prices are lower (like conserving ammunition in case you need it later). This means buying less up front than you would otherwise buy if you were not using this strategy. This also means exercising discipline. Most people are eager to make as much money as possible as quickly as possible, which means they will buy as much as they can up front in hopes of getting lucky and will often regret it later. Therefore, you must have the discipline to choose a leverage strategy within your risk tolerance and follow it precisely without letting greed interfere with your decisions.
Trading Cycles
In our leveraging strategies below, we will consider each month a trading cycle. Each trading cycle begins on the 1st of the month and ends on the last day of the month. If you choose to follow a monthly trading cycle, then you will begin each month trading at the same leverage ratio to account equity. For example, if you have $10,000 account equity and decide to begin each month trading at .25:1 ratio per currency pair, then you would open a $2,500 position on each currency pair that has an open trade signal. If you add contracts during a draw down within the month in an effort to average-down, you will close these additional contracts at the end of the month and start the next month at the same leverage ratio you started with on the previous month. This forces you to compound your profits. To help keep the odds of a profitable outcome in your favor, you will only Average-Down (add contracts) if the draw down occurs within the 1st three weeks of the month so the market has at least 1 week to turn back in your favor. If your account does not recover the losses by the end of the month, we recommend that you close your additional contracts at the end of the month anyway and repeat the entire process again the following month. One of the biggest benefits of a monthly cycle is that it often splits draw down periods into separate cycles so you don't end up riding out a large 2 or 3 month draw down at high leverage. Starting each month at the same leverage ratio will help protect you from times when there are long draw down periods with consecutive losing months in a row. This also solves the problem of trying to decide when to close out the additional contracts you've added on the draw down.
Following are a few "average-down" strategies to give you an example of the effects it can have on your results.
Average-Down Strategy #1 (Aggressive)
If you're a very aggressive trader, willing to risk 30-35% of your account in any given month, then this averaging-down model is something for you to consider. While we have never seen any intra-month draw down exceed the 6th benchmark, we have seen peak-to-valley (equity high to equity low) draw downs approach the 8th benchmark. Therefore, it should be assumed that an intra-month draw down to the 10th benchmark (or beyond) may eventually happen someday.
In the following illustration, we have started the month with .5:1 (or .5x) leverage per currency pair (50% of account equity per currency pair) and we're adding .25x leverage per currency pair at draw down benchmarks 2, 4, and 6 (left column). After the 6th benchmark, we stop adding contracts and hope the market turns back in our favor before hitting our Monthly Stop-Loss of 30-35% before the end of the month. Keep in mind that you can risk as much or as little as you want but regardless of your risk tolerance, you should set your monthly stop-loss between the 6th or 7th benchmark. We don't see any reason to risk more than this since the market has not broken the 6th benchmark in at least 8 years of back-testing.
With this model, you can compare what your draw down would be (the yellow column) vs. what it would have been if you had started with and maintained constant 1:1 leverage per currency pair the entire month (the blue column). At the 10th benchmark, your draw down (yellow column) is still slightly less than the blue column even though you are now leveraged higher than 1:1 per currency pair. In addition, your profit potential is now much greater than it would have been if you had maintained consistent leverage the entire month. If the draw down reached the 6th benchmark intra-month and the market bounced back in your favor and ended the month at the same point that it started, then this example would realize a 15% profit when it would have, otherwise, broke even if you had not added any contracts during the draw down. In other words, your initial starting contracts broke even for the month but the contracts you added later (intra-month) all made a profit.
Month's Beginning Leverage per Currency Pair: .5x
(or $500 per trade per $1,000 account equity)
Here's another hypothetical example: If the blue column ended the month at +10% profit (after dipping to the 6th Avg-Down benchmark), your return would be +27.5% profit following the model above. Here's how: Your initial contracts (.5x leverage per currency pair) would have made +5%. The contracts added at Benchmark 2 (.25x leverage per currency pair) would have made +5%. The contracts added at Benchmark 4 (.25x leverage per currency pair) would have made +7.5%. The contracts added at Benchmark 6 (.25x leverage per currency pair) would have made 10% for a total of +27.5% profit. This hypothetical example shows how Averaging-Down can decrease your draw down (blue column vs. yellow column) while greatly increasing your upside potential (10% profit vs. 27.5% profit).
Note: When averaging down, the amount of trade volume you add at each benchmark should be based on your account's equity at the beginning of the month so the trade volume you add at each benchmark remains consistent and does not decrease along with your equity during the draw down. Of course, you are free to calculate it any way you want but this is how we calculate it in our examples and calculating it this way will help maintain the strength of the averaging-down process.
Averaging-Down Strategy #2 (Less Aggressive)
The following illustration uses the exact same averaging-down strategy but starts the month with half the beginning leverage as the above example (.25:1 ratio per currency pair or 25% of account equity per currency pair). The averaging-down strategy adds the same amount of trade volume (25% of the month's beginning equity per currency pair) at the 2nd, 4th, and 6th benchmark. In this example, if the 6th benchmark is reached during the month, the blue column would experience a -30% draw down (at consistent 1:1 leverage), while your draw down would only be -18.75% following this model. If the month bounces back and ends at the same average price that it began, this example would also realize a 15% profit. Your starting contracts broke even while the contracts added during the month each made a profit.
Month's Beginning Leverage per Currency Pair: .25x
(or $250 per trade per $1,000 in account equity)
Averaging-Down Strategy #3 (Best Odds)
The following model starts with .25x leverage per currency pair and increases the leverage ratio added at each benchmark. This method creates increasingly more weight at lower prices offering the best chance of a profitable month during months that experience large equity swings. The downside of this type of strategy is that it only adds .1x leverage per currency pair during the first 3 draw down benchmarks while most months do not dip below this level. However, what profit is forfeited during most months can be made up in a big way during the months that make large draw downs that recover by the end of the month.
Month's Beginning Leverage per Currency Pair: .25x
(or $250 per trade per $1,000 in account equity)
Averaging-Down Strategy #4 (Most Active)
The following illustration demonstrates the most active averaging-down technique where you would add contracts to your trade positions at each benchmark. In order to use this method, you must start conservatively and also add contracts conservatively at each benchmark. This averaging-down model is good for traders who like to "pull the trigger" and take a more active roll in the trading.
Month's Beginning Leverage per Currency Pair: .25x
(or $250 per trade per $1,000 in account equity)
Peak-to-Valley Cycles
Another type of cycle you may choose to follow (which is also much riskier) is the Peak-to-Valley draw down cycle where each cycle begins at a drop below your last equity high and does not end until your equity reaches anywhere above the previous high (for you to decide). However, using a Peak-to-Valley cycle will experience much larger draw-downs than a monthly cycle, which starts over each month regardless of your month's profit or loss. As mentioned earlier, one of the biggest benefits of a monthly cycle is that it often splits draw down periods into separate cycles so you don't end up riding out a long-term draw down at high leverage. When following a Peak-to-Valley cycle, you do not have this level of protection. You could get stuck in a long draw down period at high leverage for a few months straight, not knowing when it will ever recover. The upside to this strategy though is that if and when the market does recover in your favor, you could potentially make a lot more money than if you had followed a monthly cycle. By starting with very low leverage and only adding a little at a time at your chosen benchmarks, you may experience great results with a Peak-to-Valley cycle but you stand the risk of experiencing much larger draw downs that could cause many sleepless nights (this, of course, depends on your level of aggressiveness). As a rule of thumb, if your chosen level of aggressiveness can potentially expose you to losses that you can't stomach, or simply causes your emotions to interfere with your trading system, then you are either leveraged too high or you are not trading "RISK" capital. You should only trade with money you can afford to lose and trade within a risk level that does not cause you to become emotional.
Averaging-Down Strategy #5 (for Peak-to-Valley Cycles)
The following model is the same strategy as the previous one but begins the month with much lower leverage at .1x per currency pair (10% of account equity). This model may be more appropriate for traders who choose a Peak-to-Valley draw down cycle instead of a monthly cycle. The lower starting leverage will enable you to withstand much larger draw downs. Contracts added during draw downs can be closed out once your equity makes a new high or at any point thereafter (depending on your level of aggressiveness). Keep in mind that a new cycle cannot begin until your added contracts have been closed. Once your added contracts have been closed, your next cycle can compound the profits from the previous cycle. Compounding is where the real power lies over the long-run. With this model, following a draw down to the 10th benchmark, the market only needs to correct to the 4th benchmark for you to realize a profit.
Cycle's Beginning Leverage per Currency Pair: .1x
(or $100 per trade per $1,000 in account equity)
Set a Monthly Stop-Loss Benchmark
Once again, regardless of the trading model you choose to follow, you should ALWAYS base your leveraging strategy on the maximum amount of equity you are willing to risk each month. Even the most aggressive traders should NEVER risk more than 30-35% of their total account equity in any given month. Therefore, if 30% is your monthly cutoff point, then you should close all of your open trades once your equity drops 30% from where it started on the 1st of the month. To help you calculate where your Monthly Stop-Loss should be, you should assume that an intra-month draw down beyond the 5th or 6th benchmark will occur at least once per year. Even though an intra-month draw down to the 6th benchmark has never happened in the past 8 years of our hypothetical performance model, it can happen and you should assume that it will one day. Since 1999, our performance model has experienced 3 intra-month draw downs slightly exceeding the 5th benchmark. The most recent being March, 2007. Therefore, the 6th or 7th benchmark may offer the best Monthly Stop-Loss and we encourage you to plan your money management strategy accordingly. For example, if you decide that you don't want to risk more than 20% of your account equity in any given month with the 6th benchmark as your Monthly Stop-Loss, then choose a leveraging strategy where the 6th benchmark equals a 20% draw down and be sure to close all of your open trades when your draw down exceeds -20% as of 5 pm EST. The reason we say 5 pm EST is because the market usually makes exaggerated swings during peak hours but by 5 pm EST, the market has usually settled down and retraced from it's highs/lows.
Benchmark Email Alerts
As part of our trade signal service, ProSignal will send out an email alert whenever a monthly draw down benchmark has been reached or exceeded as of 5 pm EST (NY time). The benchmarks will follow the same models as above where each benchmark represents a 5% drop below the month's beginning equity based on trading all of our open interest-earning trade signals at constant 1:1 leverage per currency pair. Temporary spikes below a benchmark prior to 5 pm EST will not trigger an alert for that day. An email alert will only be generated if the benchmark is exceeded as of 5 pm EST. At this time, and at your sole discretion, you may add contracts to your positions based on the Averaging-Down model you have chosen to follow, or close your open trades if your Monthly Stop-Loss has been exceeded. This eliminates the need to constantly monitor your charts and brokerage account.
Benchmark alerts are not linked to your SMS Editor. These alerts are sent out manually by our staff and, by default, will be sent to the email address you used at the time you signed up for your ProSignal subscription. To add an additional email address for Benchmark Alerts, please send your request to ProSignal Support.
Benchmark Cell Phone Alerts
Benchmark Alerts cannot be sent to cell phone email addresses due to restrictions with our email service provider. However, you may have these alerts sent to a maximum of 3 normal (non-cellular) email addresses and you may have one of these email address forward the text message to your cell phone. To add an additional email address for Benchmark Alerts, please send your request to ProSignal Support.
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