Short term traders can actually make money if their winning percentage is only 50% – IF they pay attention to the basic arithmetic of trading.
Trade only when the potential profit is at least two times the risk – and preferably three or higher.
Be realistic about the risk – in trading futures it is hard not to risk about 4 ticks in many markets. The reason is simple arithmetic – you are automatically down 1 tick when you enter the market (plus commissions) as a result of the bid/ ask spread –and price may move a tick or two against you trade before turning in your direction.
Keep in mind that you are not likely to routinely get more than 80% of a move (we call moves oscillations). Therefore, if the price oscillations on the chart you use to construct your trade are 10 ticks your maximum expected profit is 8 ticks. Risking 4 ticks means you are at the minimum risk/reward ratio. Taking such a trade occasionally is okay if you pay close attention to your trade – but as a routine practice it is not desirable. You can work hard and still not make any money – unless your win/loss is greater than 50%.
Think about the basic arithmetic of trading – and try to elevate your trading as far above the minimums as possible.
TBL is oriented to trades that provide more reward versus risk – and properly executed – may produce a winning percentage greater than 50%.
Assuming the above numbers are applied, look at the results for 100 trades (note that we are ignoring commissions in this analysis, but they are paid on all trades – whether you make a profit or take a loss – our commission rate is $5.00 per round turn so the first example with “0” trading units net profit would actually be a loss of $500.00):
Risk/reward ratio 1 and winning percentage 50 % – Net profit = 0 trading units
Risk/reward ratio 2 and winning percentage 50 % – Net profit = 50 trading units
Risk/reward ratio 3 and winning percentage 50 % – Net profit = 100 trading units
Risk/reward ratio 2 and winning percentage 60 % – Net profit = 80 trading units
Risk/reward ratio 2 and winning percentage 70 % – Net profit = 110 trading units
Risk/reward ratio 3 and winning percentage 60 % – Net profit = 140 trading units
Risk/reward ratio 3 and winning percentage 70 % – Net profit = 180 trading units
Obviously, a small improvement in either risk/reward ratio or winning percentage can make a significant difference in net profit.
Multiplying the trading unit count by the appropriate value for the futures market you trade will give you the dollar value for each above scenario. For example, US bonds (our personal favorite market) has a tick value of $31.25 per contract (or trading unit). The widely traded E-mini has a tick value of $12.50.
FOREX is generally comparable, but the calculations are much more complex due to the fact that trades are calculated in pips and the number of pips per tick varies considerably depending on the market, and the spread is dependent on your broker.
Pay attention to the arithmetic – and tweak your system to take advantage of the fact that small improvements can make really big differences in your net profit.
We talk a lot about this in See the Music of the Market, our eBook describing our trading methods – get it at www.tradingbetweenthelines.com.
Exchange rates table is provided by DailyForex.com - Forex Reviews and News
Live currency cross rates is provided by DailyForex.com - Forex Reviews and News
Live indices widget is provided by DailyForex.com - Forex Reviews and News
Live commodities widget is provided by DailyForex.com - Forex Reviews and News
Author & Trader
I trade the US Bond Markets exclusively – amazed at the accuracy of the SRV’s !!George SNew York, NY
Thanks for the method !! Very solid, very logical entry and exit and genius SRV’s !!Denis DRussia
….very impressed with the whole philosophy – both personal and trading, expressed in the book. I will read and revert !!Richard DUSA
Great system – couldn’t trade without it !!Frank YDavid, Panama
“The SRV’s are amazingly accurate”.Tony Texas
the SRV’s are spot on !!Tom CUSA
- May 2017 (1)
- January 2017 (1)
- December 2016 (3)
- September 2016 (2)
- August 2016 (2)
- July 2016 (2)
- June 2016 (5)
- May 2016 (1)
- April 2016 (2)
- March 2016 (1)
- February 2016 (3)
- January 2016 (3)
- December 2015 (1)
- November 2015 (3)
- October 2015 (5)
- September 2015 (5)
- August 2015 (2)
- July 2015 (5)
- May 2015 (1)
- April 2015 (1)
- March 2015 (1)
- January 2015 (1)
- November 2014 (1)
- October 2014 (1)
- August 2014 (1)
- July 2014 (6)
- June 2014 (3)
- May 2014 (5)
- April 2014 (2)
- March 2014 (2)
- February 2014 (2)
- January 2014 (10)
- December 2013 (11)
- November 2013 (20)
- October 2013 (13)
- September 2013 (14)
- August 2013 (10)
- July 2013 (26)
- June 2013 (16)