Core Approach
Simple maths has lead me to the conclusion that spectacular returns can be made by trading and risking much less than most people think. Below are a few 'concepts' that are banded about and I am sure you have heard them before.
1) Do not overtrade
2) Never bet the farm
3) Select trades that have potential for high reward
So I added realistic numbers to these concepts as below:
1 trade per month
2% risk per trade
3:1 Reward/Risk ratio (or 3R)
Nothing earth shattering here. But this is where the maths is impressive:
12 trades per year, risking 2% on each trade and returning 3R = 101% return on account.
Sure, this assumes we are compounding our wins based on our total equity (fixed fractional money management) and we are correct 100% of the time.
Let's assume various % Win rates and their corresponding returns:
100% = 101% return per annum
66% = 47% return per annum
50% = 25% return per annum
25% = -0.7% return per annum (roughly breakeven for the year)
So with a 50% Win rate we get 25% ROI. If you do not feel this is spectacular then you need to quit trading. The best traders/investors in the world average about 25% ROI over their careers.
My approach to achieving this type of result is:
1) Identify a market that is vulnerable to a reversing i.e. has diverged significantly from the 'mean'.
2) Wait for that market to begin moving back toward the mean (trend change)
3) Then look to enter the new trend when you can set realistic 3R reward.
Steps 1 and 2 are the key, they require a lot of patience. This is hard to do in real time.
If you look at virtually any single market there would be at least one or two big moves in a year. If you are looking at a basket of say 30 markets, that's a minimum of 30 trades on offer per year. I would say that one trade per market per year is pretty conservative and not exactly overtrading.
So hypothetically, 30 trades per year, with a 50% win rate at 2% risk = 80% ROI.
Surely my point is made here?
In summary, the idea here is not necessarily to only take 12 trades per year, risk 2% on every trade and exit after 3R. It is merely highlighting that you do not need to "make a lot of trades" and "risk a lot of money" to make very good returns.
Disclaimer
This is a quick disclaimer on the methods and/or terms I use. I do not claim to have invented any of them. They are combination of the many things I have read, watched and experienced over the years. The terminology I will use may be the same/similar to the group or person I picked it up off and by calling 'it' something different is in no way me trying to brand it as my own.
My reasoning behind any opinion I have about the market is probably something I have read first and experienced second. This is how we build our own methods.
I think Al Brooks summed it up best in his book (Reading Price Charts Bar By Bar) it is paraphrased below:
"The most important message that I can deliver is to focus on the absolute best trades, avoid the absolute worst setups.......I freely recognise that every one of my reasons behind each setup is just my opinion and my reasoning about why a trade works might be completely wrong. However this is irrelevant.......I am comfortable with my explanations and they give me confidence when I place a trade, but they are irrelevant to my placing trades, so it is not important to me that they are right.....I can also reverse my opinion if I come across a reason that is more logical or if I discover a flaw in my logic......I am providing the opinions because they seem to make sense."
Simple maths has lead me to the conclusion that spectacular returns can be made by trading and risking much less than most people think. Below are a few 'concepts' that are banded about and I am sure you have heard them before.
1) Do not overtrade
2) Never bet the farm
3) Select trades that have potential for high reward
So I added realistic numbers to these concepts as below:
1 trade per month
2% risk per trade
3:1 Reward/Risk ratio (or 3R)
Nothing earth shattering here. But this is where the maths is impressive:
12 trades per year, risking 2% on each trade and returning 3R = 101% return on account.
Sure, this assumes we are compounding our wins based on our total equity (fixed fractional money management) and we are correct 100% of the time.
Let's assume various % Win rates and their corresponding returns:
100% = 101% return per annum
66% = 47% return per annum
50% = 25% return per annum
25% = -0.7% return per annum (roughly breakeven for the year)
So with a 50% Win rate we get 25% ROI. If you do not feel this is spectacular then you need to quit trading. The best traders/investors in the world average about 25% ROI over their careers.
My approach to achieving this type of result is:
1) Identify a market that is vulnerable to a reversing i.e. has diverged significantly from the 'mean'.
2) Wait for that market to begin moving back toward the mean (trend change)
3) Then look to enter the new trend when you can set realistic 3R reward.
Steps 1 and 2 are the key, they require a lot of patience. This is hard to do in real time.
If you look at virtually any single market there would be at least one or two big moves in a year. If you are looking at a basket of say 30 markets, that's a minimum of 30 trades on offer per year. I would say that one trade per market per year is pretty conservative and not exactly overtrading.
So hypothetically, 30 trades per year, with a 50% win rate at 2% risk = 80% ROI.
Surely my point is made here?
In summary, the idea here is not necessarily to only take 12 trades per year, risk 2% on every trade and exit after 3R. It is merely highlighting that you do not need to "make a lot of trades" and "risk a lot of money" to make very good returns.
Disclaimer
This is a quick disclaimer on the methods and/or terms I use. I do not claim to have invented any of them. They are combination of the many things I have read, watched and experienced over the years. The terminology I will use may be the same/similar to the group or person I picked it up off and by calling 'it' something different is in no way me trying to brand it as my own.
My reasoning behind any opinion I have about the market is probably something I have read first and experienced second. This is how we build our own methods.
I think Al Brooks summed it up best in his book (Reading Price Charts Bar By Bar) it is paraphrased below:
"The most important message that I can deliver is to focus on the absolute best trades, avoid the absolute worst setups.......I freely recognise that every one of my reasons behind each setup is just my opinion and my reasoning about why a trade works might be completely wrong. However this is irrelevant.......I am comfortable with my explanations and they give me confidence when I place a trade, but they are irrelevant to my placing trades, so it is not important to me that they are right.....I can also reverse my opinion if I come across a reason that is more logical or if I discover a flaw in my logic......I am providing the opinions because they seem to make sense."