Trading is a numbers game. Whether it’s the currencies price, win percentage ratio, risk to reward ratio, probability percentage or just the size of your win in money terms- you need to know the numbers.
I have always loved maths and playing with figures and statistics and I suppose it was also one of the reasons I was drawn to try currency trading. It’s the season of goodwill so I would like to share some of my findings and thoughts on numbers- and how they might help you to improve your own trading results.
Let’s start with the bigger picture. Ideally you trade to end up with positive results and to make a good return on both and your time and capital. I mention both because if you do plan to trade say full time and say over 30 hrs per week you are not going to be happy just making 20% return a year – unless you have a large multi figure capital account. Similar if you only spend say 5-8 hrs a work and treat as a hobby – you might be delighted with 20% per annum return on any capital account over $10k
Statistics will tell you that if you just trade say 30 times – you might not get a true reflection of how good your system is in a real live market. However if you have say 100 trades or even 500 trades – you will get a proper “mean” percentage result. For example if I use a coin for my decisions to buy and sell on just say 30 tosses – I could have a distorted result rather than a 50 /50 result. So I might end up with heads landing say 19 time and tails only 11 times. However if I tossed the coin 100 times or 500 times I would more likely end up with a 50/50 result or very close to it. Why I mention this is because many systems or methods used to trade are very marginal on big numbers – and only a very small amount can actually continually make 75% over 100’s of trades. You therefore ideally need a very high probability system- I think most of us would agree to that.
The key then must be on making sure you win results (pips and money) are a lot larger than your losses.
This risk to reward ratio must also be linked to the percentage of capital you use on your trade stake. If you were silly to use say 20% of your capital on a trade and your system was only 50/50 it would be quite easy to wipe your account out in just 5 bad trades- many new traders do not seem to realise this and unfortunately find out the hard way. Ideally you only place under 2% of your capital on a trade and then by the law of averages you should be able to make at least 100+ live trades without losing all your account.. In fact if you only have a success rate of 50% as long as your RR is over positive – say your win size is 2 or 3 times you loss size – then you can then go on to make profit.
Check this out – even with a 50/50 win ratio or 50% success probability with a RR of just 2 you should with a 1% stake size see a 50% increase over approximately 100 trades. Are you?? Not many traders will be and that’s because they are not getting a proper risk to return result.
If you have a fixed “static “system etched in stone ( don’t recommend) and you take just as an example trades with stops of say 24 pips and targets of 48 pips ( could have been 25 pip stop and 50 pip target) the RR is not bad (2)- it means you should walk away and you either get an exact loss or an exact profit based on either one of 2 results stopped out at 24 pips or hit target of 48 pips.
If you say yes it works and I have a 60% success rate and therefore I am happy – brilliant well done.
However if you study your losing trades that were stopped out – you would see that many in fact the majority might have gone into profit say 5-or 18 or even 44 pips – but did not make your target and got stopped out – What a waste and a shame - change it
Surely if you had managed it better you would not let a 44 pip profit become a 24 pip loss - or a 88 pip profit become say a 50 pip loss ?
There are so many ways to improve that method – I won’t go into them all but it can be done- you are in an ever changing quick moving “dynamic” market and still using old antiquated methods – that can work – but why trade with the dice loaded against you?
I have mentioned earlier if you have a pretty average method with good RR and MM ( risk to reward / money management) on a 1% stake of your capital you should be seeing 50% average returns after approximately 100 live traders – OK
So how long does it take you to do your 100 real live trades on say just 2 currency pairs with 1% stake and a R R of 2.
Longer term monthly charts – 2 a month say 25 a year – so what say 3 or 4 years to get 100 trades
Daily and weekly charts - Lets say 3 a week – so nearly a year to get to 100 trades
4 hr and daily charts - Lets say 1 a day average and so in 6 months easy 100 trades
1hr and 4 hr charts - I would say 2 trades every day and therefore within easy 3 months
30 min and 1hr charts – more trades now lets say only 3 per day – so within 2 months 100+ trades
5 min to 1 hr charts – even more trades per day – but lets not make it hard work say just 5 trades
So in a month to 6 weeks you have your 100+ trades
Scalping – Very difficult how are you going to get RR of 2 and also 50% win ratio on this dangerous
activity - OK – don’t wear yourself out – lets just do 10 trades – so every 2-3 weeks you
have your 100 trades.
Which category do you mostly fall into ?
Nowadays I actually fall into nearly all of the categories – but I do favour multi intraday trading because I am full time.
Do I therefore make 50% return off every 100 trades? Answer – NO – because I do not place 1% of my capital on every trade. (another complex reason because I multi trade I grade my trades differently)
Do I achieve over 50% win ratios on all my trading methods? Answer – 100% YES – with shorter term giving me a lot higher probability ratio.
Can you average trades over 1to 2 risk to reward ratios on short term trades? Answer – Yes – my best trade in the last 3 months on a trade was on a RR of 1 to 16 – ( 7 pip stop – 102 pip achievement) I can regularly achieve over 3 and 4 results based on stops between 5-10 pips stops. All under 30 minutes normally.
Trading Quiz ?
If you had 1% stake and a variety of trading methods – which is trade gives you the best financial result –
a) 36 pip target with a 7 pip stop?
b) 75 pip target with a 20 pip stop?
c) 120 pip target with a 35 pip stop?
d) 300 pip target with a 140 pip stop?
Also which trades takes the longest and gives you the least % gain ?
Looking forward to your answers?