As my virtual mentor regularly states, being a profitable trader is not about how often you win or how often you lose, but how much you make when you win and how much you make when you lose.
What does he mean by this.
He is talking about two things:
– Risk Management – Only risking a tiny % per trade (e.g. 0.5%) so when you lose it does not adversely affect you trading account
– Risk : Reward Ratios – For any trade your reward has to be multiples of your risk (e.g. at least 3 : 1).
So for example, say you have a $100,000 account and risk 1% per trade (I am using whole numbers to keep things simple, but personally in the current political climate I wouldn’t risk more than 0.5% per trade), if you make 10 trades with a R:R of 3:1 and you are right 50% of the time:
Losses = 5 x $1,000
Gains = 5 x $3,000
Profit = $10,000
Say you lose 7 of the 10 trades
Losses = 7 x $1,000
Gains = 3 x $3,000
Profit = $2,000
So I know to become consistently profitable I just need to get much better at being patient and trading only high probability setups to get my win ratio consistently above 30%, as I already only pick trades with a target of at least 3 : 1.
Wow, I made that sound really simple to do which of course it is not. But it is possible and I won’t stop trying until I am successful.