Limited Capital. How do I know how much I can afford to lose?
Given I have 100,000 to trade with, if I lose 100 dollars on one trade and make one hundred dollars on another, I'm at break-even and even slightly negative because of the slippage and the commissions. Not every trade is a winner. The truth is I think I have a spell on me, because no matter what I try, I still guess it right only 35-50% of the time. What a bummer!
Thus, I probably, must target to make at least three hundred dollars profit on every trade. Then, over the large number of trades, even if I guess it right only 30% of the time, all my losers are covered and I'm at break-even and 50% winning rate brings me money.
A very short sample, twenty business days with one trade per day. (Let's look at the best case scenario - 50% winning rate, because 30% = 0) Over that sample then, 2,000 dollars total will be at risk. Half of it will be lost and another half will bring $3,000. $1,000 will be used to cover the losers and 2,000 is left as profit minus commissions.
And you call it money, you may ask. Well, can I put $1,000 at risk then? Let's see if it's possible.
Suppose you know that you can risk $0.20 based on the setup you can see on the chart. (Forget about the setup word, let's simply say it's the point in price per share where you entered and the point where you know you are absolutely wrong to stay in the trade if it goes against you and must exit with a loss). How many times $0.20 fits into $1,000 - that's the number of shares you need to buy. = 5,000 shares.
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The desire to maximize the profits led me in the past to several mistakes: trading a lot on margin, and fooling around with money I made and stop loss levels.
- I would put a lot of money at risk and to make up for losses I had to use the margin to go in with a proper size.
- a winning streak would boost my confidence and instead of putting $100 at risk I would put $1,000 from the money "I have made".
- the consuming desire to make more on every trade would force me place a very tight stop loss, not where the stop would belong.
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The main lesson that I've learned the hard way (despite the fact that the answer was there all the time) is that the amount at risk must remain constant!
(Until you double your entire trading capital! And if you don't take anything to the bank, (silly, I know), you can double the amount at risk on any given trade.)
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Things that I've studied but failed to figure out a solid answer for myself yet:
- do I trail the stop loss or not,
- despite the fact that I try to hit the profit target that is three times my loss, I'm still not sure if this is the only solution.
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If I could only know what the "Obvious" is and "Why the obvious is not so obvious?" it would give me the remaining 10% required to master the trade. I imagine, at least, being on the right side 50-70%
of the time and still hitting 1/3 Risk:Reward Profit Targets.
Happy trading to everyone! Cheers,
rossky
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