The difference between a successful trader and a losing trader has a lot less to do with the successful trader’s ability to pick winners than you easy forex money management think. All traders are going to experience losers and lots of them.
It’s a fact of the business. A winner, however, embraces the understanding that a large element of any one trade is randomness — in effect, any given trade is, on some level, a gamble. Losing trades are inevitable, and the winner takes that inevitability into account. It isn’t necessary to achieve that success rate to profit in the long-term, though. Look no further than recent headlines to illustrate this. Numerous ill-informed analysts have made the point that former MF Global head Jon Corzine could end up being correct on his positions in foreign bonds. When you take a leveraged position, you are not simply speculating on the direction of the market, you also are making a market timing decision and a position on volatility.
You limit how far the market can go against you before you must bail. Consider the assumptions in our table. 2,000, and the losing trades lose half of that amount. About the Author Joseph Stuber began his career in 1972 as a research analyst.
He is an author and lifelong student of risk and risk management. The vast majority of traders obsess over the percent accuracy of their expert advisors. Intuition makes it seem like that the more often a trader wins, the greater the chances or turning a profit. Alas, such an approach ignores a critical variable. The average win-loss ratio plays an equally vital role in determining the net outcome.
I meet a lot of would be scalpers. High frequency trading is incredibly popular, but a lot of traders involved with it only do so because it puts easy points on the board. They don’t pursue a strategy because it has any positive expectation. In other words, they are gambling and not trading. One of the reasons that I love trading so much, and why I generally dislike gambling, is that you are always in control of the potential payout and the payout ratio.
When I play blackjack, I only control the risk and payout. I do not control the ratio of the payout at all. More than likely, my game play will lower the odds below that threshold. When I open my forex account, each trade commences a new round in the game. The critical difference between trading and blackjack is that I control the ratio of the payout, plus I still control the risk and quantity of the payout. The net outcome can still move against me due to random chance. The key distinction is that the typical outcome should shift in my favor with an algorithmic trading system.
One of my favorite trading books is Van Tharp’s Trade Your Way To Financial Freedom. One of my favorite aspects of the book is its emphasis on money management strategies and trade expectation. The term money management connotes many things to many people. The more accurate phrase would be to describe it as a position sizing strategy. What is expected loss as a percentage of the account? What is the expected gain as a percentage of the account? What is the percent accuracy of my trades?