RISK SMALL AND LET YOU WIN BIG

HOW TO SET FOREX TRADING OBJECTIVES THAT KEEP YOUR RISK SMALL AND LET YOU WIN BIG

“The only thing that disturbs me is poor money management.”

~ Bruce Kovner

It’s far too easy to take this Forex thing casually. You can open an account with a broker in the blink of an eyelid, and in two more blinks, you can be trading Forex. But Forex is a game of skill, played by some of the most sophisticated, intelligent, well-connected men and women in the world. Every time you trade, it’s like playing chess against a chess master (not to burst anyone’s bubble!).

So do you think that having sloppy objectives for what you are trying to achieve is

going to cut it? 

Nope…you are right—they sure won’t.

The good thing is that once you do understand how to craft proper objectives, a number of nice things happen:

You stop losing money (even if you don’t always make any)

You stop over-trading

You trade with a much greater sense of purpose and control

You improve your discipline

You start to hold on to your positions instead of cutting your winners short

Objectives are the first and most crucial step in system development and where we now shift our focus.

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WHAT IS POSITIVE EXPECTANCY?

WHAT IS POSITIVE EXPECTANCY?

“The expectancy is really the amount you’ll make on the average per dollar risked. If you have a methodology that makes you 50 cents or better per dollar risked, that’s superb. Most people don’t.”

~ Van Tharp

Note that the work below on expectancy and “R-multiples” is based on the original work of Van Tharp and is repeated here with his permission.

Expectancy is how much on average you are likely to make or lose when you place a trade in terms of your risk/reward ratio. An expectancy above zero means you have positive outcome.

For example, if you make on average $1.20 for every dollar you risk, then your expectation of profit would be 1.2 times your risk. In this case, you have an expectancy of 0.2 (positive). If you make .80 for every dollar you risk, then your profit would be 0.8 times your risk. In the second case, your expectancy would be -0.2 (negative).

You calculate your expectancy of your entire trading strategy by averaging the risk/reward over a series of trades, but before we get to the equation, it helps to understand what Tharp calls “R-multiples”.

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THE EXPECTANCY OF YOUR TRADING STRATEGY

HOW TO CALCULATE THE EXPECTANCY OF YOUR TRADING STRATEGY

Now that you know what an R-multiple is, we can get back to calculating your expectancy. I know you may not have a system just yet, but don’t worry; just keep this formula in mind as something to come back to down the track.

To calculate your expectancy, first, you add up the total R-value of your Forex trades, and then you divide this total by the number of trades you have made.

Here is the formula:

(total R) / (number of trades) = expectancy

For example:

If you had placed 30 trades and earned 45R in the process, your equation would look like this:

45R /30 = 1.5

In this case, your system has an expectancy of 1.5R (which is very good).

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SIMPLICITY WILL PAY YOU REWARDS

“Don’t trade until an opportunity presents itself. Knowing when to stay out of the markets is as important as knowing when to be in them.”

~ Mark Weinstein

One of the best ways to master the art of trading is to pick and choose a limited number of techniques first, and get to grips with them. Select one or two entries you like, and practice them. Be patient when you hunt for your entries, and keep them simple, too, so you can act decisively when the time comes.

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STALKING YOUR TRADE

ONLY THEN MOVE ON TO STALKING YOUR TRADE

Wait for your exact pre-planned entry criteria to be fulfilled before entering a trade, and act decisively as soon as they are. At this point, it should all be quite simple as your entry has been triggered, and you have a plan for how you are going to trade it.

It is just a matter of executing accurately. Failure in this area results in an execution gap. You can be a great analyst but a poor trader by failing to implement your trades in the correct manner or by acting indecisively.

After the trade is entered, you then need to observe the market, and respond appropriately to what is going on. This is where you run your trade management plan (more on this in coming chapters).

If an exit condition occurs for any given trade, you simply follow the steps you have outlined in your analysis phase (again, based on your system trading plan). Anything else that happens, as far as you should be concerned, is just noise to be ignored.

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