Why is Forex filled with so many scam teachers? Because these teachers realize that taking exorbitant fees for their classes is like taking candy from a baby. Few people ask the critical questions we recommend to determine a teacher's credibility before signing up. Why? Because most of the forex teachers are selling the dream of easy money, and the allure of making so much money drowns out the voice of reason and caution. Their sales pitch fuels our dreams of finding an easy way to get rich and our hope makes us blind to the failings we would otherwise see.

Before signing up for your next course, you need to extricate yourself from the blinding effects of that yearning long enough to ask all of these questions that we are outlining for you. That way you can tell the difference between the true forex mentor whose intention is to give you the tools you need to successfully trade forex from the "miner" who focuses on harvesting your class fees as their personal gold mine.

(We began this series of questions two issues ago. Here are the links in case you missed them or want to refresh your memory.
Forex Mentor or Miner? Which Is Your Forex Teacher?
How Forex Teachers Scam You - Revealed Here"

In this issue we want to point out how forex teachers often say one thing and then do something else, particularly when it comes to money management.

7. How much of the teacher's instruction covers money management?

If the answer is 0-30 minutes, you know right there and then that you are talking to a "miner" and not a mentor because that reveals that they are not thinking of your long term success, which has to be based on understanding the principles of money management. They just want to get you in the door, get your course fees and wish you well. When you turn around and lose your money trading, don't worry, they have lots more students waiting in line to take your place.

If your teacher says they teach money management and then hands you a spreadsheet or handout that simply shows you how many lots to trade at different equity levels (ex: 0-$10,000, trade 1 lot; $10,000-$20,000, trade 2 lots, etc.), do not think that you've just been taught money management. Just the opposite! Your teacher is revealing that they don't understand adaptive position sizing and they don't think you're smart enough to notice that different stop sizes drastically impact how much you might make or lose on a trade by trade basis. To use the same position size regardless of the stop used or currency pair traded is "Money Management for Dummies".

A good position size calculator makes it so easy and fast to accurately adapt your position size to your trade. Think about why your teacher wouldn't want you to be using this kind of tool?!!!

On the other hand, if your teacher spends time discussing money management, tip your hat to them, because it’s not easy to teach. Trust us - We know from our own experience that making people aware of its importance is an uphill battle! People struggle with the idea that first they have to know how much money they might lose before they can move on to how much they might gain by using correct position sizing. It’s definitely not the sexy part of trading. If your teacher spends time explaining it, then they must really have your best interest at heart.

A forex miner who is just out for your money will never touch money management education because they're all about attracting "fresh meat" and this part of trading is not the glamorous part, even though it's the most critical component along with psychology (they usually won't touch upon this subject either).

[By the way, if you don't have that foundation of education in money management from anyone else yet, be sure to spend extra time on the videos we offer as part of our private membership area of the Forex Smart Tools site, and please - make sure you are using the Calculator before you place a single trade.]

8. Cross-check that the recommended risk matches the actual risk shown in the teacher's trades.

If your teacher passes out one of their own trading statements or one of their student's statements showing unusually high returns, remember that they're trying to get you to look at the bottom line profit. They're manipulating your attention right where they want it and pandering to greed. Pull out your Forex Smart Tools position size calculator and quickly figure out what kind of money management is being used. You can reverse engineer their trades to see what percent of their account they are risking per trade (risk profile). If it's in line with what they are recommending in the class, that's great and highly commendable. This kind of honesty is also very rare.

We mention this because reverse engineering is something that we always do. Almost every time we've been given a statement from a teacher, it turns out that an outrageous risk was being used to generate the profits being bragged about. One time we went over each and every trade that had been listed on a statement like this and saw that the trader was only 2 pips away from a margin call on more than 1 trade and was only able to pull off the phenomenal returns shown because they were on a 500:1 broker. Many of their trades would have blown up their account on any broker offering less aggressive leverage.

Not sure how to 'reverse engineer' a trade?  It's an important skill to have, so let's walk through this example.  If you were presented a statement like this:

Sample MT4 Statement showing wonderful profits

The teacher wants you to see how profitable the trades are.  But what risk was used to get this 'great' trade?

Step 1: Locate the same trade on your chart. If the entry and exit times don't line up with the prices you see on your own charts, then you know that the GMT offset must have been a little different for the broker that was used. Simply shift the entry and exit times a few hours to the left or right until the candles or bars match up or see if you can open a demo account on the same broker that was used and plot the trade there. Here is the trade shown in this statement - click it to expand it larger:

The trade shown in the accompanying statement

Step 2: Look at the chart and measure how many pips the trade went in the opposite direction (drawdown) before profit was seen. In this particular trade we see that a buy was entered at 0.8810 and price dipped to 0.8730 before going up to take the profit shown on the statement.  Remember that the statement hides critical information like how much the trade went against you before going to profit. This particular 80 pip drawdown doesn't show up on the statement does it?! You have to look at a chart and measure the candles in order to see it. There are many strategies that use large stops, so just seeing an 80 pip move against the trade is not a problem in and of itself. What you have to determine is what risk was used. For that, go to the next step.

Step 3: Back out the profit shown to know what the equity was before the trade was taken.  In this example we see an ending balance of $14,316.  If we subtract the $3,796 profit we see that the balance before the trade was taken was $10,520.

Step 4: Open your position size calculator or spreadsheet and do the math so you can see what risk was taken for the given lot size shown.  If you own the Forex Smart Tools Calculator, this is easy to do.  Begin on the Setup tab and enter the starting equity, $10,520.  Then go to the 'trade plan' tab - We show a condensed version of it here (click it to see the full sized version):

Click this image to see the full trade plan tab of the Calculator

First enter the same number of lots you see on the statement you are analyzing, and then the entry price. You may not see a stop price on the broker's statement, and even if you do, it may not be the stop used when the trade was first taken.  The broker prints the stop loss at the time the trade is closed and the stop might have been moved during the trade many times - or perhaps a stop wasn't even used! So for the stop value, use the most extreme point of the drawdown, which in this case was 0.8730.

The column in red at the bottom of the trade plan tab reveals the truth. If the trade had triggered a margin call or been closed by the trader at the extreme point of drawdown, it would have blasted a 21% loss in this trader's account, instead of the attention-grabbing 36% gain the teacher was eager for you to see. Is that a level of risk that you would be comfortable taking? Is that a level of risk that this teacher would condone?

This is the kind of deep research you need to do on any teacher you are thinking about studying with.  Don't be scammed!

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