A trading method means discipline
As an old saying in forex market said, the patience is one of the key to success. That’s because many traders don’t have enough patience to wait for the price to reach a certain level, but they chase the price whenever they get the occasion. Another big mistake of the majority of the traders is called overtrade. What does this mean? It means that after 1 – 2 successful trades into a day instead to enjoy their profits, they open more positions that usually turn against them and this is one way to transform a successful trading day into a loosing trading day.
Statistics and probabilities
Everything related with trading methods is tightly connected with statistics and probabilities. Every trader knows that you can’t win every trade that you open and any experienced trader knows that you have to know how important it is to be aware of your trading method performance. Why? Because if you trade with a method that offers only 30% winning rate then you may consider to find another one with at least 50 – 60% winning rate before it’s too late for your trading account. A good trading method offers 70 to 80% winning rate and you can find it here.
When you decide to use a certain trading method the best thing you can do in the first place is to make some backtest for at least 3 to 6 months on your own chart. It’s better to find 2 to 4 instruments which offers you some benefits: 15 – 20 signals / month, enough pips per trade, 70-80% winning rate. It is very important to make this backtest with every method that you use, because in this way you will learn how price react and you will learn to trust your method to open every single signal that you get, to cut your losses and to let your winnings run.
One method per trading account
Another important thing in trading is to use one, maximum two methods on a single trading account. Why? Let’s take an example of two trading methods, both with 70% winning rate. This means that for each method that we use, we know that for every 10 opened trades we will have 3 loosing trades and 7 winning trades. What we don’t know is the order of those 3 loosing trades. So, if we will get 3 loosing trades in a row from each method we will have 6 loosing trades in a row, which is bad for our trading psychology because in this way will appear the revenge trading and there’s an old talk which says: “If you argue with the market, you’ll loose”. This is why is better to use only one trading method per trading account.
Risk only 2 to 5 percent of your equity
I think that is more than clear why it is better to use only 2 – 5% risk / trade / day after what I said earlier. Let’s imagine that we have 6 loosing trades in a row, each with 5% risk. This means 6 trades * 5% = 30% of your equity. So, with only one trading method per trading account we will have 3 loosing trades * 5% = 15 the biggest drawdown of our account. Of course, this is the worst case scenario, but I think it’s better to think about the risk in the first place.
“Never go for broke – you just might get it.”