Do you have the right return

You may or may not have ever thought about your RR when a trade is taken. When I first learned how to trade I knew nothing about it. I was risking 80-100 pips to make 10, 20 or 30 pips and thought that was normal. Put you stop above/below support or resistance and get paid. It worked for bout 3, 4 trades but one failed trade and my account is below break even. God forbid that next trade fail, if it did I would now have to take 4-5 trades that HAVE to pay perfectly just to get back to par. you can see how this can affect your account significantly.

Negative ratio:
I personally think there is no way you can be profitable over time with a negative ratio like stated above. -5:1 return (risking 100 pips to make 20) is just not wise. Lets think about it this way. If I said “I got this perfect investment idea. Its going to cost you $1000, you might lose all of it, but you can make $200.” Does that even make sense, even COMMON sense? Not to me, at least not any more. lol. With a negative ratio you have to be right 100% of the time to be successful.

1:1 ratio:
Ok, now we are talking, kinda. A 1:1 return is not bad at all.  ”I got this perfect investment idea. Its going to cost you $1000, you might lose all of it, but you can make $1000.” I can manage that, but the questions that arise are:

How accurate is the trade?
Do I have to take every trade when it sets up to be profitable?
What is the success rate of the trade?

To be profitable on a 1:1 risk trade you need to be around 51%. Not to say this isn’t possible or that there aren’t trades like this, but you have to be pretty spot on. What if you have to scale out of a position BEFORE you hit 1:1? Now if you have a 35 pip stop and have to take profits at 20 pips, that just made it a negative ratio trade instantly.

2:1+ ratio:
Now we’re talking.  ”I got this perfect investment idea. Its going to cost you $1000, you might lose all of it, but you can make $2000+.” The only time I came close to this in the real world was when I did real estate. Buy a house, put $10k into the deal and walk away with $20k+ when the house is sold. That is right up my alley, I understand those returns. How does this relate to trading? Well, with a 2:1 ratio you only have to be right 33% of the time to be profitable. Think about that.

W L L          W L L          W L L         W/L = w (small win, but a win none the less)
+20-10-10   +20-10-10    +20-10-10  +20-10= +10

I hope the above makes sense. We have ten trades here, 3.3 winners and 6.7 losers. Because the losers are half the size of the winners, it takes two failed trades to bring the account to break even. So at the end of ten trades the account is still profitable which is all that matters at the end of the week, month or year.

Hope this shines a little lite on trading ratio’s. Hope you are in the right area.

Out of the mouth of babe’s

As you may or may not know, I have been teaching my 9 year old son about trading. Throughout this last school year, whenever he had the assignments of “What do you want to be when you grow up,” he always wrote about being a trader. As a father, there is nothing I would love more then to see my son grow up to be successful, more successful then me in anything that he does.

For a son to want to be like his dad is nothing new. When I was doing real estate investing there was one morning Tao, who was about 3 at the time, comes and has me sit down at his playschool table. He says “I have this property here, and this property here, which one do you want?” As I pick my jaw up off the floor I couldn’t help but notice that he pays attention to EVERYTHING that I do and wants to be like me.

So now that he is older, and see’s some of the monetary benefits that trading affords our family, he wants to learn how to make his own money. I give him $5 a week right now for doing his chores and cutting the grass. It’s not much but my folks spoil their only grand kids. So I set him up with the mini account I have that has $125 in it and he will trade mini’s. His goal of 20 pips a day will make him $2 a day or $40 a month not taking into account % risk and compounding. I will manually take care of that for him.

I don’t want you to think that I’m forcing this on him, but I am taking advantage of him. How? By teaching him my basic rules and the rules for the trades, it FORCES me to follow the rules. If you knew my son, you would know he is big on right and wrong and never breaking rules which is a very good thing for a trader to have. He also has Zero fear of losing money or making money. Yes, I think at times traders can be scared to make money, taking full losers and half winners. I’m guilty of it ALOT and I feel like teaching him to stay in until your profit target is hit is making me do the same, and believe it or not I have made more money with him sitting next to me then me sitting by myself.

How committed is he to his trading? I woke up Saturday morning around 7:15am, and I found him sitting at his computer looking at charts and says “Nothing’s moved yet.” Another jaw dropping experience. “Tao, markets are closed on the weekend son.”

I will keep you all informed on how @MiniPipTee’s trading is going.

Egg timer will make me $$$

I am finally tired. Fed up. Can’t take it any more. What has me so disturbed?