I remember my mind being blown away at my first trading seminar.
There was a lot of new information made available to me.
Like being able to SHORT a stock and profit from falling prices. That’s how some got rich during the recession! (Were you aware of this too? If not, drop me a message!)
The other information that stuck with me was profiting when you have more losing trades.
This is down to risk management…
And being STRICT with your rules!
So, this is what they said….
You enter a trade and set your stop loss (PS if you don’t know about stop losses, and you SHOULD, see this post)
You will also set your VOLUME or £/P (Pound Per Point) – which basically means how much you are willing to lose, or how much you are wanting to gain per point of movement on the chart.
You should calculate your Volume or £/p so that the maximum you would lose if your stop loss is hit is either 1%/2% or 4%* of your total account value. This is your MAXIMUM RISK (called R)
*Different training has suggested different amounts, but never too much, which we will discuss a little further down. I use a 2% value personally.
Lets give some simple calculations:
Account value = £10,000
Maximum Risk (2%) = £200
Lets BUY apple at 135.25 and place our stop loss at 126.16
The difference between the BUY and SL = 9.09 or 909 points.
We want to risk a maximum of £200 over those 909 points:
200/909 = 0.22, or £0.22 per point.
So, if apple price falls by 909 points which causes our stop loss to close our trade, we would lose £200. We would lose our maximum risk.
Why do we only risk 1%/2% or 4%?
Well, believe me, you will always have MORE losing trades than winning trades, possibly many losing trades in a row.
If we risked 10% or more and had 7 losing trades in a row we have lost 70% of our account which is a huge loss!
By risking only 2%, with those 7 losing trades we have only lost 14% which is manageable.
We also only want to limit our maximum risk in ALL open trades to around 20%-25%…
If we have multiple trades open at any one time and there is a huge market change for some unexpected event, it could take out all our trades. We don’t want to risk losing a huge chunk of our account.
OK, so we have analysed our maximum risk (R) and calculated our volume or £/p.
We would aim to gain about 3x our risk (3R) back as profit on the trade.
As I said, we will always have more losing trades than winning, but with this risk management strategy, we can still profit.
Lets take 3 out of 10 winning trades, meaning 7 losing trades. More losses than wins.
Maximum loss = 1R (in the calculation above, 1R = £200)
Profit target = 3R (in the calculation above, 3R = £600)
7 losses, = 7 x £200 = £1400
3 wins, = 3 x £600 = £1800
Wins (£1800) – losses (£1400) = Profit £400
In reality, losses are likely to be smaller depending on your trading system. Winnings also have the possibility to be much larger too, especially when we catch the big runs (which is why we take EVERY trading signal)
Without this risk management and your trading strategy, you will basically be second guessing. Without the right mindset to accept the losses and still take each trade, you can miss out on the few winning trades and only ever catch the losing trades.
These are the type of tactics that has enabled many “non-traders” to make millions form trading, and enabled trading systems to be taught without the need for trading knowledge, analysing the markets, watching the news and all that other time-consuming, boring stuff…
Hope this helps you out!
Don’t forget our group at: https://www.facebook.com/groups/exftrading
Any questions, just ask away!