Trading Essentials Framework
Money Management & Trade Sizing
™2.0
Money Management: The most critical aspect of your trading plan
Money management represents the administrative side of your trading plan.
It addresses the question of how best to use the capital available to you in the most effective manner
possible with the goal of MAXIMIZING your PROFITABILITY while at the same time PROTECTING your
CAPITAL by MINIMIZING the RISK of ruin.
The True Essence of Money Management Is Managing Risk:
Wise money management is the basis of any good trading methodology and is what ultimately will help
distinguish a consistently successful trader from the trader that consistently loses.
Many traders have fallen to the wayside trying to make a lot of money on a single trade – trying to hit that
‘home run’ – when they would have been better off making small (singles and doubles), steady
gains. Once you start doing this (and thinking this way), you will see your account consistently starting to
grow.
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Money Management & Trade Sizing
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Money Management includes consideration of the following factors:
Deciding on the OPTIMUM amount of money to commit to any one trade relative to your total
available trading capital.
PROTECTING your PROFITS from erosion.
Avoiding (at all costs) turning a small losing trade into a huge losing trade.
If you keep your losses small, your profits don’t have to be ‘home runs’ to earn a good living.
Knowing when and how to increase the size of your cash commitment when the odds are more in
your favor (i.e. risk to reward is really tilted in your favor, etc.).
Recognizing the importance of taking some of your winnings off the table after a winning streak.
Always Know Your Exit Before You Enter
One of the cardinal rules of good trading is ALWAYS to have an EXIT point before you even enter
a trade.
If you know your initial risk, you can express all your results in terms of your initial risk.
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Money Management & Trade Sizing
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Choosing a different E-Mini futures contracts to trade will
have a different impact your risk management strategy:
While a sound trading methodology will produce consistency in any market, a trader must consider the
volatility of each market he/she is looking to trade so as to size his/her positions accordingly based on
his/her individual risk tolerance and trading capital.
The four most popular E-Mini futures are:
the E-Mini S&P 500 futures contract,
the E-Mini NASDAQ-100 futures contract,
the E-Mini Dow, and
the Russell 2000 Index Mini futures
Trading is trading, whether one is trading the E-Mini S&P 500 or Light Sweet Crude Oil; it’s all basically the
same. However, there are some differences, such as margin, leverage, times of day the markets are open,
limit locks, and volatility. While each market does have it’s own “personality,” if you can trade one, you can
trade the other. A determining factor in which market to trade is based primarily on your individual
risk tolerance and trading capital.
If the volatility of a market is a determining factor in position sizing accordingly, how does a trader define
the volatility of a market?
Trading Essentials Framework
Money Management & Trade Sizing
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What is Volatility?
Most traders will define volatility in terms of market price action.
If a market is inactive, it is considered non-volatile.
If a market is very active, it is considered volatile.
It is easy enough to look at a chart and point out a very volatile or a non-volatile market, but…
How can volatility be defined for each market?
The one thing that is directly proportional to volatility is RANGE.
RANGE is defined as the distance the price moves
(minimum price fluctuation) per increment of time
or simply the distance from the HIGH to the LOW of a
price bar.
How can volatility be defined?
Average True Range (ATR)
Average True Range is an indicator, developed by J. Welles Wilder, that measures volatility. It is
based on the high-low range of a price bar; however, it also captures volatility from a gap or
limit up/down move.
RANGE
HIGH
LOW
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What are the differences across the E-Mini futures contracts
that a trader must know to position size accordingly?
In defining the volatility of a market using the Average True Range (ATR), a trader also must know the
profit/loss of each tick for each market he/she considers trading.
E-Mini S&P 500 Futures (ES)
Price Fluctuation: 0.25 index points = $12.50 profit/loss per tick size or $50 profit/loss per index point
Daily average volatility (daily ATR x index points): 24.25 index points = $1,212.50 (as of 11/30/2011)
E-Mini NASDAQ-100 Futures (NQ)
Price fluctuation: 0.25 index points = $5.00 profit/loss per tick size or $20 profit/loss per index point
Daily average volatility (daily ATR x index points): 48.50 index points = $970.00 (as of 11/30/2011)
E-Mini Dow Futures (YM)
Price fluctuation: 1 index point = $5.00 profit/loss per tick size / index point
Daily average volatility (daily ATR x index points): 221 index points = $1,105.00 (as of 11/30/2011)
Russell 2000 Index Mini Futures
Price fluctuation: 0.10 index points = $10.00 profit/loss per tick size or $100 profit/loss per index point
Daily average volatility (daily ATR x index points): 20.1 index points = $2,010.00 (as of 11/30/2011)
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Trade Sizing
Most traders, as well as many top professional traders, do not realize the most important, non-
psychological component of trading/investing success, Trade Sizing!
A Trade Sizing Strategy:
Helps you determine how much equity to risk on every trade you take:
Its purpose is to help you meet your objectives. You could have the world’s best trading
method (for example, one that makes money 95% of the time and in which the average winner is
twice the size of the average loser), and you still could go bankrupt if you risked 100% on one of the
losing trades.
Helps you determine how much equity to risk given several inputs:
Your trading strategy’s risk, your personal risk tolerance, the kind of returns you want to
make, and your own personal definition of ruin – whether that’s bankruptcy or some level of
equity drawdown.
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Trader’s
Objectives
Position
Sizing
Method
Trader’s
Psychology
3 Components of Trade Sizing
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3 Components of Trade Sizing
1) Traders’ Objectives: everyone has different objectives when he/she trades.
You must determine what your personal objectives are.
2) Trader’s Psychology: this influences the first component (the trader’s objectives).
What are your beliefs about your trading?
What emotions come up when you’re trading?
What’s your mental state?
3) Trade Sizing Method: for a lot of traders, this is intuitive. In other words, they really don’t have an
actual method or particular algorithm.
You really need an exact method of trade sizing.
A trader with NO objectives and NO trade sizing guidelines will trade size TOTALLY by emotions.
Let me give you what I personally use…
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Money Management & Trade Sizing
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Trade Sizing Model
A simple model for determining HOW MANY POSITIONS involves risking a percentage of your equity
on every trade. You need to know three distinct variables:
The CPR Model for Position Sizing
1. How much of your equity are you going to risk? This is your total risk, but we will call it cash (or C)
for short. This will be the C in our CPR formula. For example, if you were going to risk 2% of your
equity, C would be 2% of your equity. If you have a $25,000 account, C would be 2% of that, or $500.
2. How many units do you buy/sell (that is, what is your position sizing method)? We call this
variable (P) for position sizing method. Which futures contract are you trading and how many
contracts do you buy/sell?
3. How much are you going to risk per unit that you trade? We will call this variable (R), which
stands for risk. For example, if you’re going to buy the E-mini S&P 500 at 1239.50 and your risk is
3.00 Points or 12 Ticks (1236.50), then your risk R in this particular trade is $150. We will use this in
our CPR Formula below.
Use the following formula to determine how many contracts to trade:
P = C / R
(P) Position sizing = (C) total Cash at risk / (R) Risk (# of ticks * value of a tick)
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Trade Sizing Model Example (P = C / R)
Let’s say, for example, with a $100,000 account balance:
You’re willing to risk 2% of your account balance ($100,000 x .02 = $2000), or C = $2000.
You BUY the E-Mini S&P 500 at 1239.50 with a risk of 3.00 ES index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $155 (3.00 ES index points x $50 +
$5.00). IF P = $2000 / $155, THEN you can trade up to 12 E-Mini S&P 500 futures contracts.
You BUY the E-Mini NASDAQ-100 at 2294.25 with a risk of 5.00 NQ index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $105 (5.00 NQ Index Points x $20 +
$5.00). IF P = $2000 / $105, THEN you can trade up to 19 E-Mini NASDAQ-100 futures contracts.
You BUY the E-Mini Dow at 12026 with a risk of 25 YM index points, AND your broker charges a
commission of $5.00 round turn per contract, or R = $130 (25 YM Index Points x $5 + $5.00).
IF P = $2000 / $130, THEN you can trade up to 15 E-Mini Dow futures contracts.
You BUY the Russell 2000 Index Mini at 725.5 with a risk of 1.7 TF index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $175 (1.7 TF Index Points x $100 +
$5.00). IF P = $2000 / $175, THEN you can trade up to 11 Russell 2000 Index Mini futures
contracts.
Trading Essentials Framework
Money Management & Trade Sizing
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Trade Sizing Model Example (P = C / R)
Let’s say, for example, with a $50,000 account balance:
You’re willing to risk 2% of your account balance ($50,000 x .02 = $1000), or C = $1000.
You BUY the E-Mini S&P 500 at 1239.50 with a risk of 3.00 ES index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $155 (3.00 ES index points x $50 +
$5.00). IF P = $1000 / $155, THEN you can trade up to 6 E-Mini S&P 500 futures contracts.
You BUY the E-Mini NASDAQ-100 at 2294.25 with a risk of 5.00 NQ index points AND your broker
charges a commission of $5.00 round turn per contract, or R = $105 (5.00 NQ index points x $20 +
$5.00). IF P = $1000 / $105, THEN you can trade up to 9 E-Mini NASDAQ-100 futures contracts.
You BUY the E-Mini Dow at 12026 with a risk of 25 YM index points, AND your broker charges a
commission of $5.00 round turn per contract, or R = $130 (25 YM index points x $5 + $5.00).
IF P = $1000 / $130, THEN you can trade up to 7 E-Mini Dow futures contracts.
You BUY the Russell 2000 Index Mini at 725.5 with a risk of 1.7 TF index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $175 (1.7 TF index points x $100 +
$5.00). IF P = $1000 / $175, THEN you can trade up to 5 Russell 2000 Index Mini futures
contracts.
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Money Management & Trade Sizing
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Trade Sizing Model Example (P = C / R)
Let’s say, for example, with a $25,000 account balance:
You’re willing to risk 2% of your account balance ($25,000 x .02 = $500), or C = $500.
You BUY the E-Mini S&P 500 at 1239.50 with a risk of 3.00 ES index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $155 (3.00 ES index points x $50 +
$5.00). IF P = $500 / $155, THEN you can trade up to 3 E-Mini S&P 500 futures contracts.
You BUY the E-Mini NASDAQ-100 at 2294.25 with a risk of 5.00 NQ index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $105 (5.00 NQ index points x $20 +
$5.00). IF P = $500 / $105, THEN you can trade up to 4 E-Mini NASDAQ-100 futures contracts.
You BUY the E-Mini Dow at 12026 with a risk of 25 YM index points, AND your broker charges a
commission of $5.00 round turn per contract, or R = $130 (25 YM index points x $5 + $5.00).
IF P = $500 / $130, THEN you can trade up to 3 E-Mini Dow futures contracts.
You BUY the Russell 2000 Index Mini at 725.5 with a risk of 1.7 TF index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $175 (1.7 TF Index Points x $100 +
$5.00). IF P = $500 / $175, THEN you can trade up to 2 Russell 2000 Index Mini futures contracts.
Trading Essentials Framework
Money Management & Trade Sizing
© Trading Concepts, Inc. 14
Trade Sizing Model Example (P = C / R)
Let’s say, for example, with a $12,500 account balance:
You’re willing to risk 2% of your account balance ($12,500 x .02 = $250), or C = $250.
You BUY the E-Mini S&P 500 at 1239.50 with a risk of 3.00 ES index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $155 (3.00 ES index points x $50 +
$5.00). IF P = $250 / $155, THEN you can trade up to 1 E-Mini S&P 500 futures contracts.
You BUY the E-Mini NASDAQ-100 at 2294.25 with a risk of 5.00 NQ index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $105 (5.00 NQ index points x $20 +
$5.00). IF P = $250 / $105, THEN you can trade up to 2 E-Mini NASDAQ-100 futures contracts.
You BUY the E-Mini Dow at 12026 with a risk of 25 YM index points, AND your broker charges a
commission of $5.00 round turn per contract, or R = $130 (25 YM index points x $5 + $5.00).
IF P = $250 / $130, THEN you can trade up to 1 E-Mini Dow futures contracts.
You BUY the Russell 2000 Index Mini at 725.5 with a risk of 1.7 TF index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $175 (1.7 TF index points x $100 +
$5.00). IF P = $250 / $175, THEN you can trade up to 1 Russell 2000 Index Mini futures contracts.
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Money Management & Trade Sizing
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E-Mini S&P 500 (ES)
*Calculations based on $5.00 round turn per contract broker commission
1.00 Point = $50 or 1 Tick = $12.50 Profit/Loss
$7,500 Account (Risk = 2.25 ES points)
2% of $7,500 = $150 max loss:IF $112.50 Risk x 1 = $112.50 + $5* = $117.50
AND P = $150 / $117.50 (per contract), THEN
trade ONLY 1 ES contract!
$15,000 Account (Risk = 2.25 ES points)
2% of $15,000 = $300 max loss:IF $112.50 Risk x 1 = $112.50 + $5* = $117.50
AND P = $300 / $117.50 (per contract), THEN
trade up to 2 ES contracts!
$30,000 Account (Risk = 2.25 ES points)
2% of $30,000 = $600 max loss:IF $112.50 Risk x 1 = $112.50 + $5* = $117.50
AND P = $600 / $117.50 (per contract), THEN
trade up to 5 ES contracts!
$10,000 Account (Risk = 2.50 ES points)
2% of $10,000 = $200 max loss:IF $125 Risk x 1 = $125 + $5* = $130
AND P = $200 / $130 (per contract), THEN
trade ONLY 1 ES contract!
$25,000 Account (Risk = 2.50 ES points)
2% of $25,000 = $500 max loss:IF $125 Risk x 1 = $125 + $5* = $130
AND P = $500 / $130 (per contract), THEN
trade up to 3 ES contracts!
$50,000 Account (Risk = 2.50 ES points)
2% of $50,000 = $1000 max loss:IF $125 Risk x 1 = $125 + $5* = $130
AND P = $1000 / $130 (per contract), THEN
trade up to 7 ES contracts!
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E-Mini NASDAQ-100 (NQ)
*Calculations based on $5.00 round turn per contract
1.00 Point = $20 or 1 Tick = $5 Profit/Loss
$15,000 Account (Risk = 22 NQ ticks)
2% of $15,000 = $300 max loss:IF $110 Risk x 1 = $110 + $5* = $115
AND P = $300 / $115 (per contract), THEN
trade up to 2 NQ contracts!
$30,000 Account (Risk = 22 NQ ticks)
2% of $30,000 = $600 max loss:IF $110 Risk x 1 = $110 + $5* = $115
AND P = $600 / $115 (per contract), THEN
trade up to 5 NQ contracts!
$75,000 Account (Risk = 22 NQ ticks)
2% of $75,000 = $1500 max loss:IF $110 Risk x 1 = $110 + $5* = $115
AND P = $1500 / $115 (per contract), THEN
trade up to 13 NQ contracts!
$5,000 Account (Risk = 13 NQ ticks)
2% of $5,000 = $100 max loss:IF $65 Risk x 1 = $65 + $5* = $70
AND P = $100 / $70 (per contract), THEN
trade ONLY 1 NQ contract!
$10,000 Account (Risk = 13 NQ ticks)
2% of $10,000 = $200 max loss:IF $65 Risk x 1 = $65 + $5* = $70
AND P = $200 / $70 (per contract), THEN
trade up to 2 NQ contracts!
$25,000 Account (Risk = 13 NQ ticks)
2% of $25,000 = $500 max loss:IF $65 Risk x 1 = $65 + $5* = $70
AND P = $500 / $70 (per contract), THEN
trade up to 7 NQ contracts! 17
E-Mini Dow (YM)
*Calculations based on $5.00 round turn per contract
1 Point/Tick = $5 Profit/Loss
$5,000 Account (Risk = 13 YM Points)
2% of $5,000 = $100 max loss:IF $65 Risk x 1 = $65 + $5* = $70
AND P = $100 / $70 (per contract), THEN
trade ONLY 1 YM contract!
$10,000 Account (Risk = 13 YM Points)
2% of $10,000 = $200 max loss:IF $65 Risk x 1 = $65 + $5* = $70
AND P = $200 / $70 (per contract), THEN
trade up to 2 YM contracts!
$25,000 Account (Risk = 13 YM Points)
2% of $25,000 = $500 max loss:IF $65 Risk x 1 = $65 + $5* = $70
AND P = $500 / $70 (per contract), THEN
trade up to 7 YM contracts!
$15,000 Account (Risk = 19 YM points)
2% of $15,000 = $300 max loss:IF $95 Risk x 1 = $95 + $5* = $100
AND P = $300 / $100 (per contract), THEN
trade up to 3 YM contracts!
$30,000 Account (Risk = 19 YM points)
2% of $30,000 = $600 max loss:IF $95 Risk x 1 = $95 + $5* = $100
AND P = $600 / $100 (per contract), THEN
trade up to 6 YM contracts!
$75,000 Account (Risk = 19 YM points)
2% of $75,000 = $1500 max loss:IF $95 Risk x 1 = $95 + $5* = $100
AND P = $1500 / $100 (per contract), THEN
trade up to 15 YM contracts!
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Russell 2000 Mini Index (TF)
*Calculations based on $5.00 round turn per contract broker commission
1.0 Point = $100 or 1 Tick = $10 Profit/Loss
$10,000 Account (Risk = 2.3 TF points)
2% of $10,000 = $200 max loss:IF $230 Risk x 1 = $230 + $5* = $235
AND P = $200 / $235 (per contract), THEN
NO TRADE!
$25,000 Account (Risk = 2.3 TF points)
2% of $25,000 = $500 max loss:IF $230 Risk x 1 = $230 + $5* = $235
AND P = $500 / $235 (per contract), THEN
trade up to 2 TF contracts!
$50,000 Account (Risk = 2.3 TF points)
2% of $50,000 = $1000 max loss:IF $230 Risk x 1 = $230 + $5* = $235
AND P = $1000 / $235 (per contract), THEN
trade up to 4 TF contracts!
$15,000 Account (Risk = 2.7 TF points)
2% of $15,000 = $300 max loss:IF $270 Risk x 1 = $270 + $5* = $275
AND P = $300 / $275 (per contract), THEN
trade ONLY 1 TF contract!
$30,000 Account (Risk = 2.7 TF points)
2% of $30,000 = $600 max loss:IF $270 Risk x 1 = $270 + $5* = $275
AND P = $600 / $275 (per contract), THEN
trade up to 2 TF contracts!
$75,000 Account (Risk = 2.7 TF points)
2% of $75,000 = $1500 max loss:IF $270 Risk x 1 = $270 + $5* = $275
AND P = $1500 / $275 (per contract), THEN
trade up to 5 TF contracts!
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Multiple Open Positions - Trade Sizing Model
Let’s say, for example, with a $50,000 account balance: You’re willing to risk 2% of your $50,000 account
balance on any one trade, and you have ONE open position. You are looking to put on another position,
and you have to assume the first open position may be a losing trade; therefore, you need to base your trade
size of the second position on an account balance of $49,000.
First trade ($50,000 x .02 = $1000) or C = $1000
Second trade ($49,000 x .02 = $980) or C = $980
Third trade ($48,020 x .02 = $960) or C = $960
First position (based on account balance of $50,000)
You BUY the E-Mini S&P 500 at 1239.50 with a risk of 3.00 ES index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $155 (3.00 ES index points x $50 +
$5.00). IF P = $1000 / $155, THEN you can trade up to 6 E-Mini S&P 500 futures contracts.
Second position (based on account balance of $49,000)
You BUY the E-Mini NASDAQ-100 at 2294.25 with a risk of 5.00 NQ index points, AND your broker
charges a commission of $5.00 round turn per contract, or R = $105 (5.00 NQ index points x $20 +
$5.00). IF P = $980 / $105, THEN you can trade up to 9 E-Mini NASDAQ-100 futures contracts.
Third position (based on account balance of $48,020)
You BUY the E-Mini Dow at 12026 with a risk of 25 YM index points, AND your broker charges a
commission of $5.00 round turn per contract, or R = $130 (25 YM index points x $5 + $5.00).
IF P = $960 / $130, THEN you can trade up to 7 E-Mini Dow futures contracts.
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Money Management / Trading Sizing Tips
Have a written ‘trading plan’; this will help you stay focused on your goal of trading success. In
addition, it will help you learn from your mistakes and successes, which thereby will help you improve
your trading abilities as time goes by.
You should look only to take trades where there is relatively low risk compared to the reward
potential for the trade.
Always use well placed stop-loss orders; this is the only way to limit any damage to your account and
helps ensure your overall trading success.
You need to be willing to short the market as much as you’re willing to buy the market.
Never risk more than 2% of your entire account on any one single trade.
When you have a profitable month, pay yourself by withdrawing some money from your account and put
it in the bank.
Until you know your trading methodology really well, I recommend that you risk a maximum of 1%
of your entire account equity on any one position.
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A Quick Word on Trader Psychology
One huge reason why successful trading can be so difficult to achieve is the emotions that are wrapped up
in the money we trade. If in our minds we are equating the money on the next trade with the money needed
for the car payment, the kids’ tuition money, or the mortgage, we may be on a sure path to trading failure. If
it is money we can’t afford to lose, it is money we simply can’t afford to trade. If we attach emotions to the
money at risk, we are much more likely to commit trading errors, which is as bad as having a bad
trading methodology to follow.
Trading Insight
Something that has had a profound effect on my investing comes from Norman Vincent Peale, author of The
Power of Positive Thinking:
"People become really quite remarkable when they start thinking that they can do things. When they
believe in themselves; they have the first secret of success."
When you feel that you actually can take control of your trading and investment destiny, the
empowerment of that control will take you to the success you are seeking.
“If you think you can...or if you think you can't...you're right.” - Henry Ford
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Trading Essentials Framework
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© Trading Concepts, Inc. 23
No claim is made by the Trading Concepts, Inc. that the futures trading
strategies shown here will result in profits and will not result in losses.
Futures trading may not be suitable for all recipients of this Training
Program. All comments, trading strategies, techniques, concepts and
methods shown within our Course are not and should not be construed as
an offer to buy or sell futures contracts – they are opinions based on
market observation and years of experience. Therefore, the thoughts
expressed are not guaranteed to produce profits in any way. All opinions
are subject to change without notice. Each futures trader/investor is
responsible for his/her own actions, if any. Your purchase of the Trading
Concepts Comprehensive EMINI SUCCESS FORMULA™ 2.0 Mentoring
Program constitutes your agreement to this disclaimer and exempts
Trading Concepts from any liability or litigation.
© Trading Concepts, Inc. 24
All rights reserved.
This Training Program, or parts thereof, may not be
reproduced in any form without the prior written
permission of Trading Concepts, Inc.
© Trading Concepts, Inc. 25
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