October has been my choppiest month of trading in a very long time. Somehow, I feel like I forgot how to win. Such a weird thing to say when you have been studying the markets for a decade. I think any trader will hit this phase in their trading career where you just can’t seem to win for whatever reason.
This is where being able to look back and review your trades becomes invaluable since you may pick up faulty behaviors in your trading process. For myself, after looking back at all my trades, I realized something changed in my process. I was essentially trading off charts using only technical analysis without taking into consideration all the fundamental macro analysis which I usually review every month then follow how it plays out on a daily basis. I was essentially trading blind and ended up losing almost all my trades and consequently blowing multiple 25,000$ FTMO Challenge accounts.
Once you have identified your faulty processes, you can now grow and become a better trader, that is if you actually apply or correct your errors. I personally decided to go back to one of my earliest systems which was consistently profitable, a system which dates back at least +5-6 years ago and collecting dust ever since.
As you can see from the history, this system is a money maker and I think it is mostly due to having specific trading conditions/triggers while searching for patterns on the market. Using the visual analysis, we realize that using partial close might actually be limiting us in our profit per trade since we won 3 trades and lost 2 trades for a total of 5 trades. By using a 2:1 ratio, 2 units win: 1 unit loss, we would then have 6 units won – 2 units loss, so 4 units in profit. Considering each unit is 50$, we would be at +200$ profit. With using partial close, I ended the week at +80$ in profit. That’s more than 2x our profit left on the table.
An alternative would be to use partial close 70% of the trade once it reaches the 2:1 profit level instead of using 70% partial close at 1:1 profit level or sticking to a 2:1 ratio and no partial close, which would then lead me to a minimum of 1 out of 3 trades in order to be profitable in the long run.
Our goal here is to have a system with a minimum of 35% winning rate. This is the minimum threshold which should be accepted based on extensive Monte Carlo analysis where we are risking no more than 50$/trade with a 2:1 Reward: Risk ratio on a 10,000$ account. We can prove this statement by using the following equity curve simulation tool: http://www.equitycurvesimulator.com/
You can generate multiple simulations using the following parameters and you will find it rarely goes in the negative.
With a win probability of 35%, you almost always end up making money if you stick to solid 2:1 ratio, no partial close.
Provided you are using a system which has an edge on the market, or at least have the perception it has an edge, let’s see what happens when we change the win probability to 40%. After all, you shouldn’t be trading a system which you don’t believe it has an edge on the market. However to be conservative, we will crank up our win probability to 40%. Let’s see what we get:
Using a 50% win probability, you basically cannot lose:
Now, a 60% win rate will take your account to next level, which basically what we have right now using our short history of 5 trades, 3 wins, 2 losses:
In conclusion, if you want to make steady money, use a 2:1 win/loss ratio, no partial close and find a system which actually has an edge on the market with a winrate of at least 35%.