- Most new traders think their win rate is the most important math in their trading. It is not, you risk/reward ratio will determine your profitability more than a win rate. The reason for stop losses is to limit your losses when you are wrong so you cap your risk. Capping your risk makes it easier to have a reward that is multiples of your potential risk. If you risk $100 to make $300 it is a 1:3 risk/reward. If you open yourself to big losses it will be difficult to maintain a good risk/reward ratio. You can have a random 50/50 win rate and still be profitable through letting winners run and cutting losers short.
- “The trend is your friend until the end when it bends.” – Ed Seykota
- An uptrend is measured through higher highs and higher lows in your time frame.
- A downtrend is measured through lower highs and lower lows in your time frame.
- The 10 day EMA can measure the short trend by which side the price is staying on.
- The 200 day SMA can measure the long term trend by which side the price stays on.
- How many losing trades in a row can you survive and not blow up your trading account.
3. Risking a small percentage of your trading capital will help you avoid your risk of ruin If you risk 1% of your capital trading with position sizing and a stop loss you will be down 10% after 10 losing trades. How much would you be down at your current rate of risk? Ten losing trades in a row will happen eventually it is just a matter of when and will you survive the losing streak mentally and financially.