Basic Market Math for dummies
1- The number one tool a trader must be equipped with is a trading system, It is important that your trading system would make more profitable trades than loosing trades, i.e. your win percentage should be at least >51%. Remember las vegas casino owners built their wealth using a very slim margin close to 1% edge vs. the customers (i.e. 51% wins vs. 49% loss to customers) This also means that when you pick a system backetest it well its preferable if you backtest it over 10 years worth of data which will validate your results vs backtesting it two weeks and using that as a result.
So you have your system all set up and it has an edge greater than 1% now lets move on to the more important part:
2- The risk to reward ratio, in pips of course, should be 1:1 or better, it must be that the reward number is always greater than the risk number, so that you win more or equal to what you loose not loose more than what you would win, or else you will be a looser in the long run no matter how good of a system you have (and remember there is no such thing as a 100% accurate system)
3- Third, your understanding of the 2% risk rule, many traders out there will tell you “make sure your position is no larger than 2% of your account so you don’t loose more than 2% on any one trade blah blah blah” that’s retarded, it doesn’t matter how big your position is AS LONG AS YOUR STOP LOSS IS EQUAL TO 2% OR LESS OF YOUR ACCOUNT (what ever percentage of loss you are comfortable with), so that in this case you never loose more than 2% on any one trade.
Now you can truly have a mechanical system, where there is no thought process required to make money, lets say you have a system that wins 70% of the time at a ratio of 1:1, so you either gain 2% of your account or loose 2% on any one trade, if you started out with $1000 after 100 trades you would have doubled the account because of compounding (i did the test using a program in the excel file i attached description is below.)
Finally for those that say they can win with less than 50% winning ratio ect. this is only one way I believe one can trade the markets, there are many other ways to make money but I think IMHO this is probably the simplest and thoughtless way to trade you basically use a system mechanically using this type of money management, all u do is take the trade knowing you will either win or loose but you really don’t care weather you win or loose this round because overall you will come out a head. But before you go and act exactly as I described you need to do the math for your self, look at what is the maximum drawdown you can take, look at how frequent your system trades and make sure you don’t use more than 10% of your account at any one time (over several trades that is). also budget your stops so that you don’t loose more than 10% at any one time (over several trades) because you might get hit with 5 losses in a row. you will need to work out some equations at the beginning but after that you will just have to follow your plan blindly knowing that you will come out ahead eliminate any emotions and you’ll be good and save your self lots of time and headache lol!
Attached is an excel file that has a visual basic program that will tell you using a system with a certain win percentage and a 1:1 win ratio what would be the out come after however many number of trades you wish to test.
Feed back is appreciated!
Hopefully this helps out some people out there
G-dogg
Attached File(s)
Money Management Experiment.zip
104 KB
|
502 downloads
Egyptian and proud of it!