1

0
1.0 Introduction
This first Chapter aims to Bulletproof 17 concepts that you must know to

master the art of not getting Bankrupt once you start trading.

I have decided to keep all the lectures very small and give you only the meat

of the matter and no extra commentary which isn't necessary.

Before you begin to learn trading, you must have a few Questions in mind

1. Can trading be a profitable means of income?

2. How much should I risk?

3. How much leverage should I use?

4. How much profit can be expected?

5. How to set the target.

I promise you that after you're done reading this document, all these

questions will be answered and soon appear trivial. I have already covered a

lot of these concepts in detail via my twitter and telegram handles.

Your first step would be to forget everything you know about trading and be

ready to take a restart. There are many ways to trade the markers but we are

going to restrict ourselves to trading via Charts. Many people question if the

market can just be studied through charts and I would quote John Murphy.

Figure 0.1(A) Excerpt form “Technical Analysis Of Financial Markets” by John Murphy

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The study is charts if done logically, and provides your statistics about price.

Price is derived automatically by the market after considering all the

fundamental news, the fear and Optimism of the market and hence the study

of price is indirectly the study of trend and Strength of the asset.

Hence is a Powerful way to trade, if not the best.

Why does trading with charts work, if at all.

To be honest the only reason trading which chart works is because historical

events replicate themselves and rhyme.

Figure 0.1(B) Excerpt form “Technical Analysis Of Financial Markets” by John Murphy

Scientists and statisticians look at the past data and try to find a repeating

event which can be a stimulant for another event.

A dark cloud cover for a common man could act as the sign of a rain and so

on.

Patterns repeat, behaviour repeats.

Example, if at a support region, there is a lot of market selling but all of this is

being absorbed by the limit orders, we can assume that whales want to

accumulate there.

All of trading is taking historical data, be it candlestick patterns on the chart

or a repeat of similar kind of macroeconomic conditions or news for

fundamentals driven traders, or a similar trend shown pricing and strike

prices for options traders.

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There are many ways to skin the cat, but in each scenario, we take historical

data and try to find correlations where history might rhyme with the present

conditions.

The following tutorial is a culmination of different trading tools and tips you

need to bulletproof your trading. It is an introduction to how markets move

and function and teach you how you should at first, manage risk and take

trades.

There are two types of trading:

1. Discretionary Trading - Discretionary trading, on the other hand, relies on

the trader's judgement for making all trading decisions. Discretionary

traders ultimately make their decisions based on their experience, intuition,

and judgement. For example, a discretionary trader might start the day

with a plan to buy a particular stock if it drops to a certain price. However,

if news comes out during the day that changes the trader's outlook on the

stock, they might decide not to buy it after all, or perhaps to buy more of it

than they originally planned.

2. Systematic Trading - Systematic trading refers to a method of trading

where decisions are made based on a pre-set system or algorithm. This

system is developed using quantitative research and statistical analysis.

Once the system is developed, trades are executed automatically based

on the rules set by the system. For example, a systematic trading strategy

might be to buy a particular stock when its 50-day moving average

crosses above its 200-day moving average, and sell when the opposite

happens. This is a simple example of a systematic trading rule based on

technical analysis.

We will focus on discretionary trading methods in this masterclass.

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This tutorial is the most comprehensive and one-stop resource for the

following topics:

● Trading Terminologies/Jargons

● Candlesticks

● Types Of Candlesticks

● Different Types Of Charts

● Invalidation

● Risk Management For Traders

● Psychological Principles For Traders

● Stop Loss

● Entry Triggers

● Exit Strategies

● Position Sizing

● Leverage For Futures Trading

● Risk-to-Reward Ratio (R:R)

● Price Action Basics

● Laddering Orders

● Trade Management

● Orderflow Basics

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 IMPORTANT
I am reminded of the book War of Art

'' Resistance is the most toxic force on the planet. It is the root of more unhappiness than
poverty, disease, and erectile dysfunction. To yield to resistance deforms our spirit. It
stunts us and makes us less than we are born to be. You must declare resistance evil, for
it prevents us from achieving the life we intended''

If you overcome the resistance which prevents you from learning, which prevents you
from sitting down, and slowly grow this new skill of looking at the market, and decide that
it is yours and only your decision to overcome this urge to give up and not learn
something that's hard, valuable yet hard, then my friend, shall you win.

I am starting this series after hundreds of requests and thousands of feedback, and I am
promising to do the same, sit down, recall the best sources and I know and share with you
all the little secrets and tricks that I know, in a manner that's easier to digest.

In the past, I have made the mistakes of not not indexing, not writing clearly and also
assuming that advanced jargon would be understood by the readers.

All those mistakes, as I am still learning, shall be addressed here.

So I ask you to sit down, read, practice, comment if something isn't understood, join the
Telegram so you can be updated and not miss out on any sequence (Link)

I promise to give the best of myself in the weeks ahead in the best of manners and I hope
you promise to give your best too. It's a fair deal.

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Index
1.0 Introduction 1

1.2 References 7

1.3 Technical Trading Dictionary 8

1.4 Candlesticks 16

1.5 Understanding market dynamics 21

1.6 Risk Management 23

1.7 Leverage 39

1.8 Introduction to Principles of Price Action 42

1.9 The Psychology Of The Range 46

1.10 Trade Management 51

1.11 Conclusion 55

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1.2 References

● CryptoCred - https://twitter.com/CryptoCred?s=20

● Adam From Tradingriot - https://twitter.com/abetrade?s=20

● Tom Dante - https://twitter.com/Trader_Dante?s=20

● MindJacked - MindJacked - YouTube

● Axia Futures - Learn To Trade With Elite Traders | Axia Futures

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1.3 Technical Trading Dictionary
First we take a look at common trading jargon. It is not important for you to

memorise all of them as it will all become familiar over time as you study

more tutorials and interact with many other traders. However, it is necessary

to go over them once to make sure you are not lost when you come across a

new term.

Arbitrage - a method of making profit using the price difference between

exchanges

Accumulation - The process by which one builds a position in an asset

Altcoin - all coins except Bitcoin

Ask/Bid - Sell orders are asks and buy orders are bids. (refer Figure below)

Figure 1.0: Ask / Bid

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ATH - All-time high

Bearish MS - when price makes a series of lower lows and lower highs

Bearish MSB OR BOS - when the price takes out a low to form a lower low, we

get a brearish break of structure

Bots - automated trading set-ups on exchanges

BULL - is someone expecting the price to go higher, and the bear is the

opposite. Bullish MS - when the price makes a series of higher highs and

higher lows

Bullish MS - when the price makes a series of higher highs and higher lows

Bullish MSB OR BOS - Bullish market structure break of break of structure,

happens when the price takes out a high to form a higher high

Bull Market - A market where the prices are seeing a continuous uptrend,

leading to new highs being created.

Bull Trap - A technique used by market makers to buy a huge amount

suddenly, spiking the price.

Bubble - a situation where the prices are irrationally high as compared to the

actual value of the asset.

Bag - A position held in any asset or coin

Bag Holder - Someone holding a coin at a loss

Bear Trap - The market makers sell enormous amounts, pushing the prices

down, in turn liquidating everyone else that had bought, producing a

cascading effect of liquidations get a bearish break of structure.

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Bull Market - A market where the prices are seeing a continuous uptrend,

leading to new highs being created.

Bull Trap - A technique used by market makers to buy a huge amount

suddenly, spiking the price.

CHOCH - Change of Character, is the first switch turning the substructure

from bullish to bearish or bearish to bullish

CMP - Current Market Price

Consolidation - A period where the price is ranging in a well-defined region.

Figure 1.1: Consolidation

Correction - A fall in price after making a new peak or an upward rally.

Day Trading - Taking a position in the market and exiting it the same day

Deep Swings - A deep swing high is the highest point that causes the swing

low, and a deep swing low is the lowest point that causes a swing high.

Depth of Market (DOM) - it is a list/window that shows how many open limit

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buy and limit sell orders there are at different prices in real time.

Deviation - When price goes below the support but reverses, or the same

happens with resistance.

Downtrend - A price trend characterised by lower highs and lower lows.

Exchange - In terms of Crypto, a marketplace that allows buying and selling

of Bitcoin and other coins.

FIB Levels - Fibonacci levels are specific levels from swing point to swing

point, these levels represent percentages. Price reacts at these levels.

FOMO - Fear of Missing Out, a behaviour where traders enter a trade without

enough research due to the fear of missing out on profits.

FUD - Fear, Uncertainty, and Doubt, negative sentiments or misinformation

affecting market sentiment.

Fractal - A pattern of price movement that has occurred earlier and might

occur again.

FTA - First Trouble Area, an area where price might be rejected before

reaching the target.

HH - Higher High

HL - Higher Low

LH - Lower High

LL - Lower Low

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 Figure 1.3: HH HL LH LL

HTF - Higher Time Frame

LIQ - Liquidity; a liquid asset or coin means how quickly you can buy or sell

something without moving the price too much.

Laddering - you place multiple buy or sell orders when wanting to enter a

trade setup and get an average entry price

Leverage - refers to the extra amount of asset bought or sold, over your

capital

Long Position - this is a buy position with leverage

LTF - Lower Time Frame, usually anything under 4H

Margin - The amount of funds required to open a leveraged trade.

Market cap - the market capitalization of an asset calculated by current

supply of coins multiplied by CMP of one coin

Market Maker - an individual or firm that can cause large swings in price due

to overwhelming position size.

MM - Market Maker; is an individual or firm that is able to single-handedly

cause large swings in price.

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MS- Market Structure, it defines the structure that the current market is

trading in.

Pattern - A chart pattern is a predefined shape that has been historically

studied by technicians. Traders try to use these previous performance

statistics to predict future price movements.

Point of Control (POC) - the price level for the time period with the highest

traded volume.

Figure 1.4: Point of Control (PoC)

Positional Trading - the aim is to buy monthly lows and hold them for days,

weeks or sometimes months. This is a longer term trading time period

Rally - an upward trend leading to increase in price of the asset, can happen

in both bear and bull market

Return-on-Equity (ROE) -this is calculated by the actual capital employed in

a trade and not through leverage

R:R - Risk to Reward Ratio 2:1 R:R can simply be called as 2R

Sell off - Profit taking after a rally in price, which leads to lowering of price of

the asset

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Short position - Exact opposite of a long entry. You enter a short when you

expect the prices to fall.

Sideways market - an indecisive market which isn't leading to a breakdown

or a break out

Spread - the difference between what the sellers are ready to sell at and

what the buyers are ready to buy at. There always exists a small spread on all

exchanges. The higher the liquidity, the lower the spread

Support and Resistance - a support is a zone or line (green below) where we

can expect price to bounce back. Resistance (red below) is a line/zone where

we can expect the price to rebound downwards.

Figure 1.4: Support and Resistance

Stop Loss - Order that is triggered when the price goes below this point, and

is used to cut losses

Swing Trade - This method looks for buying and selling positions in a weekly

range. Swing traders make 2-3 traders a week.

Time Period / Time Frame - the time spread of each candle in a chart.

Common time periods are 15 min, 30 min, 1 hour, 4 hour, daily and so on. In a

In a 15 min time frame, a candle will take 15 mins to close.

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 Figure 1.6: Time Period/Time Frame

Example: You can see the time frame on tradingview on the top left corner

and also edit it from there.

Total Supply - the amount limit of coins that will ever exist.

Trading Charts - Where to see them? There are several websites, I use

tradingview.com. Simple, easy and offers everything most people need. You

don't need a paid version. The basic free version is enough

Uptrend - a price is said to be in an uptrend when it is making higher highs

and higher lows

Value Area - the range of price levels in which a specified percentage of all

volume was traded during the time period. Typically, this percentage is set to

70 percent, but I use 68 percent

Value Area Low (VAL) - The lowest price level within the value area

Value Area High (VAH) - The highest price level within the value area

Volatility - it is the percentage movement in price of an asset over a period.

Volume Weighted Average Price (VWAP) - incorporates price and volume. It

is a S/R line. When price is above VWAP, it is above value and when it is below

price, it is below value

Walls - Extremely Larger orders at a range

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1.4 Candlesticks
Candlesticks are a very basic concept that you should know. While the

subject of Candlesticks is really vast, there are only a few basics you need to

understand.

The candlestick is used instead of a line chart because a simple line chart

doesn't tell the high, low, open, and close at a given time period.

Additionally, candlesticks can also give you clues about the strength of a

particular move when we analyse the candle structure or the pattern formed

by a sequence of candlesticks. Here are the 4 elements of a candlestick:

Figure 1.7: Anatomy of Candlestick

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The body of the candle represents where the most interest has been while the

wicks represent where the price attempted to go but failed.

Tip: There are 100s of types of Candlesticks, don’t get stuck in memorising the

names of the Candlesticks. You need to understand the LOGIC behind their

formation and use that understanding to predict the future prices.

General assumption: the longer the candle body is, the more intense the

buying or selling pressure. Conversely, short candlestick bodies indicate little

price movement and represent consolidation or uncertainty. Smaller candle

bodies means the buyers and sellers are at an impasse with no side currently

exerting dominance over price movement.

Wicks plays a really important part in understanding the STORY behind the

candlesticks. It shows the fight between the buyers and the sellers and who

won it.

1.4.1 Long upper wick Vs. Long lower wick

Candles with a long upper wick and short body below denote that even

though the bulls tried to push the price higher, the sellers took control, and

there was just too much supply at this point to push the price up. Candles

with a long lower wick (tail) indicate that the bears tried to push the price

down but the selling pressure was absorbed and the price managed to go

up.

Figure 1.8: Long upper wick Vs. Long lower wick

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If these candles appear on areas of support or resistance or at the top or

boom of a trend, it usually signals a reversal. Check examples below.

Figure 1.9: Long upper wick

Figure 1.10: Long lower wick

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 ● Spinning top and Doji

Spinning top has a long top and bottom wicks and a narrow body. On

the other hand, a Doji is generally identified as a candle where the price

closed and opened at almost the same price.

Figure 1.11: Spinning top and doji (A)

These two types of candles are generally considered to imply indecision in

the market. If they ever appear at the top or bottom of a trend, this means the

trend might potentially reverse. The example below has both.

Figure 1.12: Spinning top and doji (B)

● Bullish engulfing Vs. Bearish engulfing

The engulfing candles are one of the most important candles to showcase a

trend or simply the strength of the move down or up. The smaller the wicks

the highest buying or selling pressure there is thought to be.

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Check the example below from the daily BTC chart. You will see how all of the

common candlestick types are telling a story and providing context about

what is happening in the exchange between buyers and sellers. The context is

more important than memorising patterns as there are hundreds of

candlestick types and thousands of patterns. I am not a candlestick trader, as

my decisions can never be solely based on what kind of candle formed in the

last hour or day, however, everything discussed above are few of the most

important points that any novice trader must know.

Figure 1.13 : Bullish engulfing Vs. Bearish engulfing

Conclusion:

1. Long candle body: more intense buying or selling pressure.

2. Short candle body: consolidation.

3. Long bottom wick: sellers trying to push the price down but not

succeeding.

4. Long top wick: buyers trying to push the price up but not succeeding.

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1.5 Understanding market dynamics
Now that you understand what candlesticks are, you are one step closer to

taking your first actual trade. However, we must first form or reform your

perception of the market and why and how markets move first. The number

of participants, whether they are buyers or sellers is not the primary driver of

price movements.

It is the level of desperation or urgency among market participants to enter

or exit positions that truly influence market behaviour.

Figure 1.14: Market Dynamics

Let’s understand this concept by using the analogy of a car for sale.

Example: Imagine a scenario where there is only one seller and multiple

buyers vying for the same car. As more buyers enter the market with a

desire to own the car, the value and price of the car naturally increase due

to the increased demand. However, a crucial turning point occurs when

one of the buyers begins to question whether they are willing to pay the

inflated price for the car. This hesitation initiates a range-bound price

movement as the buyers reassess their willingness to meet the higher

price.

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Now, let's consider a scenario with two sellers and no buyers who can

afford the offered price. In this case, buyers will naturally hold back, and

sellers will need to lower their prices to attract potential buyers. This

example demonstrates the constant pursuit of finding value in the market,

as both buyers and sellers adjust their positions based on their

assessment of the current situation.

Figure 1.15: Both sellers must lower the asking price to attract buyers.

It is helpful to view market movements as traders making decisions rather

than simply observing price fluctuations. The most lucrative profit

opportunities often arise when traders find themselves trapped in

unfavourable positions and attempt to bail out. Identifying these trapped

traders can provide valuable insights into potential market reversals or

major price movement.

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1.6 Risk Management
Risk in trading refers to the possibility of incurring financial losses due to

adverse market movements or unforeseen events. Financial markets are

influenced by a lot of factors, such as economic indicators, geopolitical

events, and market segment, which can lead to price fluctuations. These

fluctuations can result in significant gains or losses for traders. 90% of the

traders lose money due to lack of risk management. Everything that we will

discuss in this PDF will aim at possibly making you part of the remaining 10%

who don’t lose all their money.

1.6.1 Invalidation:

As a trader, the market is the first and foremost authority that will rate your

performance.

Let’s discuss the most important piece of information in trading - to know

when you’re wrong or your trade invalidation point.

Figure 1.16: Knowing when you’re wrong

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For example, with reference to the image above, a good analogy for

invalidation would be a passenger on a bus. He wants to get some ice

cream, the bus goes through multiple paths and the path it will use

today is not clear. There is one stop with ice cream on each route as

discussed above. The moment he reaches the stop with ice cream, he

has to get off, regardless of which route it was, he can’t stay on the bus

and hope that the next day the bus will take him to the other shop.

Similarly, as a trader, you are supposed to exit the trade at either target

or your stop, regardless of where the trade goes first, it needs to get

closed. Invalidation is a critical concept in trading that helps traders

manage their risk and make more informed decisions. Think of it as a

safety net or an emergency exit in a building. If things don't go as

planned, you know where to exit to minimise damage. In trading terms, if

your trading idea or hypothesis doesn't work out as expected, the

invalidation point is where you acknowledge this and exit the trade to

minimise losses.

Now, why is invalidation important?

1. Risk Management: Invalidation is a cornerstone of effective risk

management. By defining an invalidation point, you're essentially

setting a stop-loss level for your trade. If the market hits this level, it

means your initial analysis was incorrect, and it's time to exit the trade

to prevent further losses.

2. Emotional Control: Trading can be an emotional rollercoaster. By

setting an invalidation point, you're making a premeditated decision

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 about when to exit a trade. This can help reduce the influence of

emotions like fear and greed on your trading decisions.

3. Account Preservation: Regularly hitting your invalidation point without

managing your risk can lead to significant losses over time. By

respecting your invalidation point and exiting trades when necessary,

you can preserve your trading account balance and live to trade

another day.

Now, let's look at the different types of invalidation:

1. When
2. Where
3. How

Invalidation can sometimes be simple, for example, if the BTC price reaches

$20,000 before reaching $30,000 then our long trade idea is wrong. Often, it

might not be so simple, HOW and WHEN the price reaches that $20,000 mark

also plays a part as your trading plans get more and more sophisticated.

CryptoCred has covered these concepts in an excellent and short manner in

his tutorial series. The above classification is elaborated below with some

examples:

1. Where: There is when a specific price level that you expected to act as

support or resistance doesn't hold. For example, if you thought $50

would act as support for a stock, but the price falls to $49, your idea has

been invalidated.

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 Figure 1.17: Where

Example: If price goes below the blue level, then my long trade idea is no

longer valid.

2. When: Here, the invalidation is tied to a specific timeframe. For instance,

if you expected a coin to pump after an airdrop announcement or the

entire market to pump after a bullish CPI but it doesn't, your idea is

invalidated.

Figure 1.18: When

3. Combination of Where and When: This is when you expect price to

reach a certain price point within a specific time frame after an event

(like a news release), but the price doesn't move as expected.

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 Or the reason can be technical, like if we have a 4-hour candle close

above $100 today, then that is a breakout from that level and we go

long.

Example:

Figure 1.19: Combination of Where and When

4. When and How: This occurs when the price movement is less than

expected within a certain time frame after an event. For example, if you

expected a 5% price move after a range low sweep but price moves

only 2 percent and shows weakness, your idea is invalidated.

Or you expected a 10% price swing after Elon Musk tweet but price only

moves 2% then you know that effect was not as expected and your idea

is invalidated.

NOTE: Trade ideas can get invalidated even when you are in profit.

Invalidation of trade especially when factoring in the How and When factors

does not always mean your trade has to be in a loss, the idea can be proved

27
wrong even in profit so the best path forward in such a scenario is to close the

trade in profit and move on to the next one.

Remember, these are just examples. The actual invalidation point will depend

on your trading strategy, risk tolerance, and the specific market conditions.

A common question amongst new traders is whether they should have a

fixed stop loss percentage, for example: 5 percent.

Stop loss should be based on TA alone. Every setup is different and fixed

percentage stop loss will not work.

Figure 1.20: Different charts === Different Stop Loss

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Now, let's anticipate some potential questions you might have:

Q: How do I set an invalidation point?

A: This will depend on your trading strategy and the technical analysis tools

you're using. Some traders might use support and resistance levels, others

might use technical indicators like moving averages or Fibonacci

retracements. The key is to have a clear rationale for your invalidation point

and to stick to it once the trade is live.

Q: What if my trade hits the invalidation point but then reverses in my

favour?

A: This can happen, and it's one of the challenging aspects of trading.

However, it's important to stick to your plan. If you start ignoring your

invalidation points, you can end up holding onto losing trades for too long,

which can lead to significant losses.

Q: Can I adjust my invalidation point after the trade is live?

A: Generally, it's best to stick to your original plan. However, there may be

situations where it makes sense to adjust your invalidation point. For example,

if there's a major news event that changes the market conditions, you might

decide to adjust your invalidation point. But be careful not to adjust your

invalidation point just to avoid exiting a losing trade.

I hope this gives you a clearer understanding of invalidation in trading. It's a

crucial concept that can help you manage your risk and make more

informed trading decisions. Remember, the goal isn't to avoid losses entirely

29
(which is impossible), but to manage your losses effectively so that you can

stay in the game over the long term.

1.6.2 The Importance of Risk Management

Risk management is essential for every trading strategy or approach, as a

trader cannot achieve profitability if they suffer significant losses from a few

unfavourable trades. Safeguarding your capital is crucial, as it guarantees

your survival and enables you to recover from challenging periods, whether

they last for a week, a month, or even a year. Now, let's address the first

question: What should be the size of your trading account? Without a doubt, it

is important not to invest all of your money into your trading account. Instead,

it should be substantial enough that losing the entire account would have a

significant impact, yet not so substantial that it would lead to financial ruin.

The table below shows how much profit is needed to recover your losses

during a drawdown. Therefore, it’s important to cut your losses. For example, if

you lose 80% of your capital, you need to make 400% just to breakeven.

Table 1.1 : Risk Management

PERCENTAGE (%) REQUIRED TO GET

LOSS OF CAPITAL
BACK TO BREAKEVEN

10% 11%

20% 25%

30% 43%

40% 67%

30
50% 100%

60% 150%

70% 233%

80% 400%

90% 900%

1.6.3 Trading Trident

This is the most important rule of thumb. I can't stress enough how crucial this

is to your trading. I recently talked about it in a Twier thread called the

“Short-Term Trading Mistakes I wish someone had warned me of 7 years Ago”.

Make sure to check it out here: https://shorturl.at/hoADS

Figure 1.21 : Trading Mistakes

Before entering a trade, you need to determine your “Trading Trident”, which

is a combination of 3 things:

1. Entry Triggers as per your trading technique

2. Established invalidation levels (Stop loss)

3. Defined reversals (Profit-taking)

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 Figure 1.22 : Trading Tridents

1. Entry Triggers: Entry triggers are your reasons for entering a trade.

Typically, a combination of reasons, also known as confluence,

increases the likelihood of a trade's success and provides a

comparatively more secure point of entry. In the example below, our

entry trigger was the retest of a resistance level that has turned into

support.

Figure 1.23 : Entry Triggers

2. Stop Loss: The price in the opposite direction of the trade where the

trade is exited, at a loss. At this level, the reason for the entry becomes

invalidated according to TA and the price can then move in the

opposite direction, probabilistically. The next example shows the

importance of a predetermined invalidation level. The entry was made

32
 on the retest of a resistance that has turned into support, but the price

failed to hold above that level and eventually broke down.

Figure 1.24 : Stop Loss

3. Target: It is the possible price level that the asset might touch based on

previous trends or confluence AND where a possible reversal could

occur. Target is the next path of least resistance from where the price

might reverse.

Figure 1.25 : Target

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1.6.4 Risk to reward: (R: R)

The combination of the three key components of the Trading Trident forms

R:R. This ratio denotes how much money you make on a successful trade vs

how much money you lose on being unsuccessful on the same trade.

(𝐸𝑛𝑡𝑟𝑦 𝑝𝑜𝑖𝑛𝑡 − 𝑆𝑡𝑜𝑝 𝐿𝑜𝑠𝑠 𝑃𝑜𝑖𝑛𝑡)

RISK/REWARD RATIO = (𝑃𝑟𝑜𝑓𝑖𝑡 𝑇𝑎𝑟𝑔𝑒𝑡 − 𝐸𝑛𝑡𝑟𝑦 𝑃𝑜𝑖𝑛𝑡

Let’s take an example:

You buy an asset for $100; you have a target of $200 and a stop loss of $50.

What is your R/R for this trade?

(100 − 50) 50 1
R:R = (200 − 100 = 100 = 2

A risk/reward ratio of 1:2 signals that you are willing to risk $50 to make double
Here is an example of the R:R ratio on a chart:

Figure 1.26 : Risk to Reward Ratio

1.6.5 Risk per trade

Most traders agree that it is advisable to limit the risk to 2-5% of the total

account balance per trade. My personal preference is 2-3% risk per trade as I

mostly scalp and the number of trades per month is high.

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Some people stick with 1%. The following table demonstrates that even if your

win rate is 60%, there will come a point when you will face five consecutive

losing trades.

It is crucial to survive these situations with enough capital to remain

unaffected, and this is where the calculation of position size and risk per trade

becomes essential.

Table 1.2: Probability of a losing streak based on your strategy win rate

Probability of X consecutive losing trades within a 100 trade sequence

Win 1 2 3 4 5 6 7 8 9 10

rate

5% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

10% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

15% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

20% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

25% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99%

30% 100% 100% 100% 100% 100% 100% 100% 100% 98% 93%

35% 100% 100% 100% 100% 100% 100% 99% 95% 85% 71%

40% 100% 100% 100% 100% 100% 99% 93% 79% 61% 42%

45% 100% 100% 100% 100% 99% 93% 76% 54% 35% 21%

50% 100% 100% 100% 100% 95% 78% 52% 31% 16% 9%

55% 100% 100% 100% 98% 83% 55% 30% 14% 7% 3%

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 60% 100% 100% 100% 92% 63% 32% 14% 6% 2% 1%

65% 100% 100% 99% 77% 40% 16% 6% 2% 1% 0%

70% 100% 100% 93% 55% 21% 7% 2% 1% 0% 0%

75% 100% 100% 79% 32% 9% 2% 1% 0% 0% 0%

80% 100% 98% 54% 14% 3% 1% 0% 0% 0% 0%

85% 100% 89% 28% 5% 1% 0% 0% 0% 0% 0%

90% 100% 63% 9% 1% 0% 0% 0% 0% 0% 0%

95% 99% 22% 1% 0% 0% 0% 0% 0% 0% 0%

Now a question that you might ask yourself is how do traders with low win

rates turn out to be profitable?

Profitability relies on two main factors: R:R and win rate. The win rate is

calculated by dividing the number of winning trades by the total number of

trades and then multiplying the result by 100 to get a percentage. For

example, if a trader executes 100 trades and 60 of them are profitable, the

win rate would be 60% calculated as:

(𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑖𝑛𝑛𝑖𝑛𝑔 𝑡𝑟𝑎𝑑𝑒𝑠)

Win Rate = 𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑡𝑟𝑎𝑑𝑒𝑠
X 100

The following table illustrates how much R:R is needed for a certain level of

win rate. For instance, if your win rate is 50%, you would break even with an R:R

ratio of 1 : 1.

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Your Historical Win Rate Minimum Risk: Reward Ratio

25% 1:3

33% 1:2

40% 1:1.5

50% 1:1

60% 1:0.7

75% 1:0.3

Now let’s say you have an R:R equal to 1: 2, but you don’t know which win rate

percentage would be needed for you to breakeven. The formula is as follows:

1
Breakeven Win Rate = 𝑆𝑢𝑚 𝑜𝑓 𝑅:𝑅 𝑟𝑎𝑡𝑖𝑜 X 100

1
= 2+1
X 100

= 33%

Hence a win rate of 33% is needed for a breakeven at 1:2.

Note: Always find your win rate then choose trades with R:R that suits your win

rate.

1.6.6 Position Sizing

Position size in trading is calculated based on several factors, including risk

tolerance, account size, and the specific trade setup. The goal is to determine

the appropriate size to trade in order to manage risk effectively.

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Here's a common formula for calculating position size:

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑎𝑡 𝑅𝑖𝑠𝑘
Position size = 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒 𝑜𝑟 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑡𝑜 𝑆𝑡𝑜𝑝 𝐿𝑜𝑠𝑠

Example 1: Let's break down the components of this formula in the next

example: You have $10k and choose to risk 3% of that amount. Your stop Loss

is 5% below your entry.

300
Position Size = 0.05 = $6000

If you wish to engage in trading with a position size of $6k, you have two

options. The first option is to long or short using the full $6k without employing

leverage.

Example 2: Alternatively, you could choose to utilise leverage, such as 5X

leverage, which would require a margin of $1,500. By doing so, your potential

loss would be limited to 3% instead of 60%.

Example 3: Another example is if you have a capital of $1k and are willing to

risk 1% per trade, which is $10. Stop loss is 5% from entry; what’s your position

size ?

10
Answer: Position Size = 0.05 = $200

Q: How do I determine the right position size for my trades?

Answer: The right position size can depend on several factors, including your

risk tolerance, the size of your trading account, and your trading strategy.

Some traders use a fixed percentage of their account for each trade. For

example, you might decide to risk no more than 2% of your account on any

single trade. Others might adjust their position size based on the specific

trade and market conditions.

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Q: Can I change my position size after a trade is live?

Answer: Yes, you can typically adjust your position size after a trade is live by

adding to or reducing your position. However, it's important to have a clear

plan for managing your trades and to stick to that plan. Frequent changes to

your position size during a trade can increase your risk and make it more

difficult to manage your trades effectively.

NOTE: I have discussed the basics of position sizing and provided examples

for the same. However, after you have gained some experience as a trader or

simply have been consistently trading for more than a year then you can

increase your position size and take more risk (greater than just 1-2%). This

can be done for high conviction trades, or in cases where you might have

some insider information as you learn more and network more.

1.7 Leverage
Warning: Trading on high leverage is extremely risky and is not

recommended for absolute beginners before you finish this tutorial.

Having said that, leverage trading is also known as margin trading, it allows

you to trade with a larger position size than you have available. Leverage in

trading refers to the use of borrowed funds to increase the potential return of

an investment. It allows traders to open positions that are larger than the

amount of capital they have in their account.

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Example: if a trader has $1,000 in their account and uses 10x leverage, they

can take a position worth $10,000. The broker lends the trader the additional

$9,000 to take this larger position.

1.7.1 Connection between Leverage and Position Size

Leverage and position size are closely related because leverage allows

traders to increase their position size without adding more capital to their

account. However, while leverage can amplify profits, it can also amplify

losses.

If a trader uses leverage to take a larger position and the trade goes in their

favour, they can make a significant profit. But if the trade goes against them,

they can incur a significant loss. This is why it's important for traders to use

leverage carefully and to manage their position size appropriately.

1.7.2 Leverage pros and cons

Figure 1.27 : Pros and Cons of Leverage

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Example: If you are trading at a leverage of 3x, and if you make a loss then

your loss is going to be 3 times larger than if you would’ve traded without

leverage. The more leverage you use the closer your liquidation price will also

be to the price where you have entered the trade. Liquidation means you

have lost in some cases your entire position in the trade or in the worst-case

scenario your entire account balance. If you really insist on using leverage

then I would really recommend to never really go above 5.

Example of 1x leverage: You have $1k as position size, price increases by 1%.

This means you have made 1% of the $1k as profit which is $10. On the other

hand, if the price drops by %1, you lose $10.

Now let’s look at the 3x leverage example: This means now you have $3k

position size, $1k from your own capital and $2k borrowed from the exchange.

If the price increases by 1%, you gain 3% profit on your own capital instead of

1% which is $30. If you close your trade, the $2k will be returned to the

exchange and you keep the $30 profit. On the flip side, if the trade goes

against you, then you pay back the $2k to the exchange, and you lose $30 of

your own capital which is $1k in this case. Never enter a trade with your entire

account size and always use the correct leverage to meet the position size

relative to your own portfolio.

Example 3: Real World Example

Let's say you have a trading account with $10,000, and you follow a risk

management rule where you risk only 2% of your account on any single trade.

41
This means the maximum amount you're willing to lose on a trade is $200 (2%

of $10,000).

Now, suppose you want to buy a stock that's trading at $50 per share, and

you've set a stop-loss order at $45. This means you're willing to risk $5 per

share.

To calculate the number of shares to buy (your position size), you would

divide the total amount you're willing to risk by the risk per share.

In this case, that's $200 divided by $5, which equals 40 shares. So in this trade,

your position size would be 40 shares.

These examples illustrate how leverage and position size come into play

when taking a trade. By understanding these concepts and using them

wisely, you can manage your risk and potentially increase your profitability in

trading.

1.8 Introduction to Principles of Price Action

NOTE: Price Action is the fundamental of all trading. Hence, it is necessary to

understand price action before all other forms of technical analysis. The basic

premise of technical analysis is that all of the fundamental developments

can be seen on the chart, the price is the culmination and summary of how

the asset class has been viewed by the public rather than taking the news at

face value.

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 Figure 1.28: Most important book excerpt for new traders.

Principle 1

Price Action trader relies on a simple rule, if a trade can't be spotted easily, it

doesn't exist. There are no riddles to solve, no conflicts to evade. There is

nothing cluttered. Trade should be obvious. Easily Visible.

Principle 2

Low understanding of market mechanics will lead to higher tuition fees in

the form of losses.

Understand market mechanics like it's an auction and a living thing.

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Principle 3

You can't enter a trade without preparing and waiting for it.

Impulsive trades are losing trades, almost always.

Entering a trade doesn't take time, preparing and waiting for it SHOULD take

time.

Principle 4

Having clear concepts and techniques won't make you a trader. Charting is

theory

The first 1,000 trades after you've studied are also just studying.

Trade more, live a lot.

Study price action live.

Principle 5

Adopting the methods of a successful third party is a common method,

which will only lead to failure.

This is a shortcut to education and won't hold on the market.

Don't copy methods or strategies. Gain insight and experience from other

traders, not their strategies

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Principle 6

You have to find your own Edge, your own system.

Build your own method, this is of utmost importance.

If you've not taken the time to build your own personal method, you'll fail.

You can't have a successful restaurant business with a stolen recipe.

Principle 7

Price Action techniques can't be haphazard.

You make money by just one thing, playing the pattern repetition.

Same patterns occur, you employ the same methods and take the

bet. Money is made on pattern repetition. There's nothing new to do

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1.9 The Psychology Of The Range
Multiple swing points create a range-bound market, signifying a significant

level of support or resistance. Let's examine the behavior of traders who

anticipate a market downturn and enter short positions. Typically, they would

set their stop loss orders just above the swing high.

However, if the market begins to move back up toward the swing high,

these short traders start to question their position, realizing they may be

wrong.

Simultaneously, another group of traders observes the market making

new highs and decides to enter long positions. As a result, the price ends

up touching their stop loss and taking both groups out of the market.

This tug-of-war between the two groups is what leads to the formation of

liquidity pools at key swing points. This is why it’s important to watch out

carefully levels like daily highs, daily lows, and weekly highs and lows.

Traders often make critical decisions at these levels, determining whether

to initiate long or short positions.

Figure 1.28 :Psychology of range

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However, professionals tend to avoid buying when everyone else is buying.

Instead, they aim to accumulate positions without significantly impacting

prices. To achieve this, they adopt a counterintuitive approach by pushing the

market down through selling at what others perceive as support levels on

charts. As a result, unsuspecting buyers who entered at the support level face

stop-loss orders triggering, while professional traders begin accumulating

positions. This aggressive buying eventually propels the market back up, often

leading to a false breakout above the range.

Examining the chart example, we can observe the consequences of a false

breakout. Traders who went short based on the breakdown find their

stop-loss orders hit, resulting in a sharp upward movement. The market then

reaches the resistance area and creates another false breakout to trigger

stop-loss orders of short traders.

1.9.1 Difference between false and genuine breakouts

These false breakouts, also known as Swing Failure Patterns (SFP), are

characterised by a candle that goes above the range, surpassing the

previous high, but subsequently closes below the range high. The candle

itself can take various forms, such as a Doji, Pinbar, or bullish/bearish candle.

What matters is that it signifies a high probability of the market moving

upward or downward. SFP patterns primarily occur at levels of support or

resistance.

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 Figure 1.29 : False and genuine breakouts

It is crucial to distinguish between genuine breakouts and false ones. Always

question whether a breakout is genuine or fake. The presence of an SFP

indicates a false breakout. Conversely, a genuine breakout is characterised

by a candle that closes convincingly away from the specific area.

To avoid falling into traps, it is advisable to wait for the candle to close

above the resistance level, preferably without an immediate retest. This

approach ensures that you enter a position alongside other buyers,

minimising the risk of being caught in a false breakout.

1.9.2 Laddering

Laddering refers to a strategy where you can place multiple buy or sell

orders when wanting to enter a trade setup and get an average entry

price.

Price ladder trading requires the use of limit entry orders to maximise

profits. Limit entry orders are used when traders intend to buy or sell at a

specific price, known as the limit price.

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Example: Let’s say according to your technical analysis, you think the BTC

price is going to bounce back up from an area of support and you want to

place a buy order of $10k.

Instead of placing a single buy order at the price BTC is currently trading at,

you can use price ladder trading to distribute 5 different buy orders, each

valued at $2k, across a price range of $25k to $26k.

This approach allows you to lower the average buying price and potentially

maximise your profits.

Figure 1.30(A): Laddering

If you are not sure about the entry or where exactly the price might bounce

from, then you place multiple buy orders in the ladder format as shown.

Even under normal conditions, laddering is more beneficial than having one

entry because it allows you to manage risk more efficiently.

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 Figure 1.30(B): Laddering

Example: Under the following situation, you can enter long at support, but

price might go below it for some time and reach the second or third dotted

lines as well. If you place 1/3rd of your total buy orders at each dotted line,

then you have a much better average buy-in price than if you would have

placed the entire order at the top dotted line.

Question: What if the price doesn’t fill all orders and reverses to move up?

Answer: Does not matter, in case price fills only one of the orders and then

moves up to target, that implies that you still made profit. It is much better to

miss out on more profits sometimes than to lose more money in case your

trade idea is wrong.

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1.10 Trade Management
Trade management refers to the strategic decisions and actions taken

throughout the lifecycle of a trade.

In the next examples, we will explore trade management at its best.

Example 1: Deciding to get out early

In this example we took a short trade at a 3-touch level. Before the price hits

our target, it reversed back up but still did not hit our stop loss.

Figure 1.31: Deciding to get out early

We notice how the price reacts sharply to the level flipping it as support. So,

we get out without taking the full loss.

Now our original trade idea of shorting resistance has been invalidated.

Just remember that having a fixed stop loss doesn’t mean you take the

full loss all the time. You get out when your idea has been proven wrong.

Example 2: When to get out early, Evolving R concept.

The concept of evolving R was popularised to perhaps everyone by Trader

Dante. When they're in profit (and want to bank it as fast as possible),

novice traders are terrified, and when they're in the red, they're hopeful

51
(Unrealised loss makes them hope that the trade still works out).

You want to do the inverse of amateurs; thus, psychology is quite crucial

for trade management.

Consider this sample trade:

Figure 1.32(A): Evolving R concept.

In these scenarios, traders move their stops to entry and then sit on their

hands hoping for 1 more R. The thinking is that it is a free trade now.

Evolving R is a concept that explains that your Risk: Reward ratio is

always changing when you’re in a position.

Figure 1.32(B): Evolving R concept.

The above figure shows Evolving R visualised for you. You're up 6% after

52
 risking 2% on the trade, and now you’re risking that 6% to make 2% more.

This is when you place a market order and then exit the trade with a large

profit.

Beyond the entry, goal, and stop-loss, there is a certain degree of planning

that goes into making a trade. The evolving R notion does not imply that

you should exit all your trades as soon as you make a small profit. When

the trade seems to be slowly reversing on you and the evolving R is less

than 0.5, that’s when you START TO CONSIDER an early exit and secure

profits.

Example 3: Not having a fixed stop loss

Figure 1.33(B): Fixed stop loss

“You must have a fixed stop loss at any cost.”

This makes sense for beginners who need to stay away from high leverage

and blowing up accounts, but as you venture deeper into trading, you’ll

realise that sometimes it is not in the trader’s best interest to do that.

Stop-loss orders will exit a trade at a predetermined price; once that price

level is reached, your trade will be realised at a loss.

53
This frequently results in situations like this.

In these situations, you might want to have a mental stop loss that if said

candle closes below the SFP candle, then I’ll take a loss.

So, you can’t place a fixed stop here and it makes sense to not do so. How

do you handle such situations?

We make use of Trader Dante’s ATR technique.

In choppy Price Action, we sometimes must wait for a sweep of a sweep

(sort of like a 3 tap) and can't enter because we might just get wicked out

and obviously can't have a manual stop because we can't position size

accordingly.

In this situation, we can employ a trick I learned from Trader Dante, using the

ATR to have a safety stop.

Settings need to be modified to 24, but just look at the ATR value of the

"sweep" candle and then place your stop that much above the high/low.

This way you can position size properly.

Figure 1.34: Fixed stop loss

If a candle closes above your SFP high, of course you close manually, but this

is the option to not get stopped out on that one extra sweep while also having

fixed invalidation.
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1.11 Conclusion
Dear Friends,

The aim of this tutorial is to strengthen your fundamentals in trading. If you

read this slowly and with time, you would have mastered it after practicing it

a few times.

My aim after the release of this article is to provide cost free and open to use

best trading tutorials which can be used practically to trade, make the money

and also beat the market at times.

I somehow feel inspired by Dr. Andrew Huberman who chooses to change

the world by giving away all this knowledge, free of cost, because he really

cares for people. Free education, at least, should be easily available.

P.S. I was late in publishing this tutorial as I have much more content and

projects in the making for this wonderful community. This is the first chapter

of the NEW MENTORSHIP SERIES, we will be releasing new chapters every week

with new examples and more concepts.

Please share the doc if you like it and practice well before the next lesson.

Love,

EmperorBTC

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