"The ones who make the most money lose the least when they are wrong"
Let's use a scalping trading style for example
Say you have a set risk reward ratio of
-10 pips for being wrong
+30 pips for being right
Start trading
Loss
Loss
Loss
Win
Loss
Loss
Loss
Loss
Loss
Win
Loss
Loss
Loss
Win
Win
Loss
Loss
Win
Loss
Loss
Wow, a lot of losses, but hold on.... You have the same amount of money you started with, minus maybe a small bit on commission.
How does that happen?
Let's put the running total (pips) next to each trade
Loss -10
Loss -20
Loss -30
Win 0
Loss -10
Loss -20
Loss -30
Loss -40
Loss -50
Win -20
Loss -30
Loss -40
Loss -50
Win -20
Win +10
Loss 0
Loss -10
Win +20
Loss +10
Loss 0
Final for the day = 0 ( -1.5 - 2.5 pips for commissions)
Accuracy rate: 30%
So in simple terms, by just using a simple risk management set up that allows you to win more than 1x the risk, you do not have to have a very high accuracy rate in order to make even a small profit.
It is very difficult to keep your mind in check about this simple math, because we look at each trade on it's own, instead of looking at a series of trades (for a day/week/month) to judge performance. Keeping the overall picture in mind, and just making sure you do not allow more risk on a position than you planned, and most cases you will begin to see an improvement on trading.
By not using stops, losses can quickly mount up, because losing streaks happen. Stick to the plan, and let your mind just sit in the corner mad about the stop rules (Ignore the feeling, like a 2 year old that didn't get ice cream, or because they weren't right, & just remember the math).
*If you move your stop, one of two things apply:
You are either finding more support for the idea, just a bad entry. Move the stop to what you would risk as an additional position had you taken the trade from the spot you decide to move the stop from, and count it as two trades.
If you had a small stop, but not the maximum risk you allow on the idea, then move it no further than you planned to risk as a maximum for a single trade.
Moving a stop because you have a reason is OK, just COUNT IT, and MAKE SURE you have a REASON to do so.
DO NOT just move it because you don't want to lose, or you will take out your own account very quickly.
Let's use a scalping trading style for example
Say you have a set risk reward ratio of
-10 pips for being wrong
+30 pips for being right
Start trading
Loss
Loss
Loss
Win
Loss
Loss
Loss
Loss
Loss
Win
Loss
Loss
Loss
Win
Win
Loss
Loss
Win
Loss
Loss
Wow, a lot of losses, but hold on.... You have the same amount of money you started with, minus maybe a small bit on commission.
How does that happen?
Let's put the running total (pips) next to each trade
Loss -10
Loss -20
Loss -30
Win 0
Loss -10
Loss -20
Loss -30
Loss -40
Loss -50
Win -20
Loss -30
Loss -40
Loss -50
Win -20
Win +10
Loss 0
Loss -10
Win +20
Loss +10
Loss 0
Final for the day = 0 ( -1.5 - 2.5 pips for commissions)
Accuracy rate: 30%
So in simple terms, by just using a simple risk management set up that allows you to win more than 1x the risk, you do not have to have a very high accuracy rate in order to make even a small profit.
It is very difficult to keep your mind in check about this simple math, because we look at each trade on it's own, instead of looking at a series of trades (for a day/week/month) to judge performance. Keeping the overall picture in mind, and just making sure you do not allow more risk on a position than you planned, and most cases you will begin to see an improvement on trading.
By not using stops, losses can quickly mount up, because losing streaks happen. Stick to the plan, and let your mind just sit in the corner mad about the stop rules (Ignore the feeling, like a 2 year old that didn't get ice cream, or because they weren't right, & just remember the math).
*If you move your stop, one of two things apply:
You are either finding more support for the idea, just a bad entry. Move the stop to what you would risk as an additional position had you taken the trade from the spot you decide to move the stop from, and count it as two trades.
If you had a small stop, but not the maximum risk you allow on the idea, then move it no further than you planned to risk as a maximum for a single trade.
Moving a stop because you have a reason is OK, just COUNT IT, and MAKE SURE you have a REASON to do so.
DO NOT just move it because you don't want to lose, or you will take out your own account very quickly.
Note
How to handle the price coming back:Lets say you don't use a stop, you sit in drawdown the entire time, and have way more risk than necessary on the trade. If you just cut the loss, and wait for another entry, it may even be 100 pips lower for a buy example. When it stops and turns, now your trade is profitable, where just holding and praying you will be in drawdown the entire time.
Let's say it never comes back, just keeps going. If you used the risk managment rules, you only lost 2 units of risk in this situation, but had you just held on from way above, now you have maybe 4 times the original risk, and could even have your account in trouble by that point, especially if it just keeps going against the position.
Also, while you are locked in to the losing position, your mind may not see other opportunities available, and because of the drawdown and margin, may not even be able to take that trade because of the drawdown position still on.
"Trading is primitive. Once we make it sophisticated, it will work against us "
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.