The pink line was the technical that I was watching. If we closed above it, I would get long with a stop under the last major swing low and a target at level D (see last post). We did close above the pink line, so an entry was made on the opening of the next day, at $152.00. The next 2 days saw some sideways action at this level, and then we rallied for 4 days. This past week we mostly corrected, but so far, the trade is still intact. We are far from the target, but this is a long-term trade, so I am just going to sit with it. On the chart below, the we entered at the blue arrow.
On this particular trade, reward/risk ratio is roughly 4/1. Meaning I am risking $1 to make $4. Over a long serious of trades, you don't need a very high winning percentage of trades to make money with a reward/risk ratio like this. It allows more room for error in making trading decisions. I think measuring your risk is key to being able to make less emotional trading decisions and being able to stick to your game plan in times of draw-down.
Every trading system or method has a different level of reward/risk. System A might have winning trades 80% of the time. With a rate this high, your winners can actually be smaller than your losses. I think achieving this level of consistency is very difficult, if not impossible. System B might have winning trades only 20% of the time. With a rate this low, you need to be making $5 for every $1 that you risk, at the very least, or else you will not be profitable over many trades. It takes a certain level of mental fortitude to stick with a system in which you are losing money on most of your trades. For example, in System B, your risk of having 3 losses in a row is 51.20%. Your risk of having 5 losing trades in a row is 32.77%, and your risk of 10 losing trades in a row is 10.74%. Meaning if you trade System B long enough, you will have 10 losses in a row at some point. However, if you understand your trading system and know that this is just a matter of probability, then you will more likely be able to tough it out.
I want to use this as an opportunity to look at my own trading metrics. My sample size of trades at the moment is small. Over the past 3 weeks I have made 20 trades. Some days I make 0 trades, some days I make 3. Out of those 20 trades, I have had 5 winners and 15 losers. So my winning percentage is 25%. That is lower than I would like, but I am working on getting it slightly higher. 35%-40% would be my sweet spot. My average win to average loss is 3.72. Based on this, I made the following spreadsheet:
The first thing is the Account, which is irrelevant in this case. What matters is the Risk Cap, which is what I am stuck working with right now. With this $2,000, I decided I do not want to risk more than 5% per trade. That means I am not risking more than $100 per trade. I can further deduce that the maximum number of losses in a row I can have starting at the initial balance is 20. This is just the Risk Cap divided by the Per Trade Risk.
I know my W/L ratio is 3.72. I have a separate spreadsheet containing more data that I am drawing this from. Same goes for my W/L rate, which is .25, or 25%. Based on this, I know my average win (Avg W in column D) is $372. Dividing my Avg W by average loss (Avg L), I know my expected value per trade is $18.00. So over 100 trades, I can expect to be up $1,800.
I also know that my risk of 3 losses in a row is 42.19%, so if I have that many, I'm not going to worry too much. However my longest losing streak so far has been 6. I calculated that the change of 6 losing trades in a row is 17.80% (not shown) so also not a huge deal. So overall, I think this strategy is performing decently. But like I said, I want to increase my winning percentage of trades by a bit. In trading, incremental improvements can have large and lasting effects on the bottom line. If I increase my winning percentage to 35% and my W/L Ratio to 4, this is how things would look:
There is no need to go through every single metric again, but it is obvious the results have improved dramatically with a few small tweaks.
I believe that having a good understanding of the risk in your strategy is important. It gives you a road map for what to expect. It helps to reduce the impact of losers on your trading psyche. If I know that every trade I put on has a 35% chance of being a winner, by default I am expecting each trade to be a loss. Which is great! Because then I don't care or get emotional when I take that loss. I know that it is simply the cost of doing business, and over time if I stick to the strategy, I will make money.
