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Understanding the 6 Outcomes of trading
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Author:  hakuna [ Fri Jan 31, 2014 2:30 pm ]
Post subject:  Understanding the 6 Outcomes of trading
MONEY MANAGEMENT
===========================
Many traders enter the markets with wrong expectations, expecting to have a big win every trade, when these big wins dont come it becomes a psychological problems to them(some trader) thereby causing traders to go against their trading plan leading to excessive losses and huge drawdown.

A great way to trade with the right expectations is to expect your trades to comprise of many breakeven results, many small wins and small losses that largely cancel each other out and slowly grind out a profit, plus, the occasional large winner that really gives a boost to your equity curve. But work to ensure you never get a large loss. Also remember you will have some missed opportunities its is normal.
BUT DONT EVER HAVE A LARGE LOSS BIGGER THAN YOUR NORMAL LOSS SIZE, THESE BIG LOSSES ARE WHAT MAKES MANY TRADERS OUT OF BUSINESS,if your risk per trade is $200 dont ever lose more than $205 because its difficult to overcome large drawdowns
Your last trade might have lost. That's fine. Learn from it if you could have done better.
But as long as you didn't let the loss get out of hand, it's nothing unexpected.
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For every trade we have 6 possible outcomes;

1)Large win
2)small win
3)breakeven
4)No trade(missed opportunity or no opportunity)
5)small loss
6)Large loss.

Of all these possible outcome 1,2,3 and 4 outcomes are Profitable outcomes, 5 is a normal outcome while 6 is the worst outcome and outcome 6 should be avoided at all cost.

The larger losses are what can take you out of this game. If you ensure you never suffer a larger loss, then you’ll get lots of small wins, lots of small losses, lots of breakeven trades, and some big wins, but you should never suffer a big loss, and so you increase the likelihood of surviving to trade another day. We control risk to ensure we do not get big losses.

- Above written by Horlique2 (More on him at http://www.forexfactory.com/showthread.php?t=438663)
Author:  jago25 [ Fri Jan 31, 2014 11:44 pm ]
Post subject:  Re: Understanding the 6 Outcomes of trading
Great point to make. So far I've found that yes, I make profit for a while and then somehow manage to make a larger loss in some way wiping out all that previous work plus a little bit more - fortunately only alittle bit more so far but it's still a killer. I read about this and have always tried to avoid it but still it happened. I think I'm getting better.

One way to correct against this is tight stops of course. Or making sure your TP vs SL is at least 3:1. But I need to change my picture to making smaller profits.

It important to get used to watching the charts and not trade. It's boring. It should be boring.
Easier said than done.

I find thinking stalking for opportunities helps
Author:  SteveHopwood [ Sat Feb 01, 2014 12:24 am ]
Post subject:  Re: Understanding the 6 Outcomes of trading
Guys, there us a lot of rubbish written about money management. To be honest, some of it has been written here already.

If your trading strategy is crap, then don't expect some mythical 'money management' thingy to come to your rescue. It won't.

We have all read the usual stuff - at least those of us who have been around for the long haul have. All you need to be profitable is a strategy that wins 51% of the time etc etc This is a pitiful platitude.

Ok, so find a strategy that wins 51% of the time. React to that challenge and you will win. Eventually. It will take a while. Work it out. Maybe garyfritz can tell you how long it will take - he is the resident maths guru.

Get your trading strategy right and every thing else will follow from there. Anyone doubting this and still resolutely refusing to read Bob's 10.6 stuff deserves everything they they get. It does not rely on some pitiful platitude and will put a blast up the backsides of the conventional money management gurus- I have provided a fair few signposts via my various Welcome and Weekly Roundup messages here, so I am astonished if anyone is still not aware of this thread.

You have been shown the way forward here guys. It is up to you whether you follow it now or in a few years time, following a few blown accounts and thinking, "I wish I had followed the advice here......." Guess how I know, guys? Me and a fair few other admins/mods/bsv's here?

Just stop thinking you know better than those of us who have been around for years guys, and follow the invaluable advice on offer here. I wish it had been available when I started - it would have saved me a small fortune.

:D
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