No. of Recommendations: 10
Hi Halon,

Great post!

Before doing anything I would suggest you read this:
http://www.therealtimetrader.com/understandingriskreward.htm


Cath,
ALSO... when trading as a business (rather than investing as a gamble,) keep in mind your "Costs Of Doing Business."

Every trade has commissions.
ALSO, every trade has bid/ask slippage.

THUS... you must plan on a theoretical minimum positive profit on each trade of "X" (slippage plus commissions) in order to merely break even!

Since you can't count on every deal being profitable, you must then trade so that your expectable percentage of winners earn a minimum average enough to cover ALL of your CODBs across ALL trades (winners AND losers.)

THEN (again, if trading as a business) you must budget in your business overhead (office, equipment, market-access (broadband, etc.) insurance, etc.)

THEN (yadda, "as a business,") you must budget your costs of inventory... i.e. the carrying costs of the cash (your inventory) you use to fund your trading account. Money is not free (as you very well know,) so don't steal from yourself... ad an expense line item to your budget for carrying-cost interest on the liquid cash you are using as your trading inventory.

Looking at ALL of this, you'll see your "monthly fixed nut" and your "average trade nut" that have to be covered. ONLY YOUR WINNERS will have to pay the bills on your fixed overhead, ALL of your marginal trading costs (commissions and slippage,) AND ALL of your LOSSES.

THUS.... you must methodically hammer out your specific trading strategy so you know approximately;
A) What percentage of your trades will close at profit? At a loss?
B) Of the losers, at your systemic stops, what is your average loss? (including comms & spread.)
C) Of the winners, at your systemic stops (including trailing trend-following stops,) what is your average profit? (including subtraction of comms & spread.)
D) Based on these numbers, how many bullets (trades) can you pull the trigger on before you run out of ammo ("blow up.")
E) Based on your available account funds, what is the maximum loss-risk per trade you can put on without blowing up (given the gaming laws of statistics)?
F) Does your chosen market allow you to make the kinds of trades you desire, with sufficiently reliable stops to diligently limit loss-risks, with the amount of account funds you have available?

Remember... it's the investor's/ganbler's mindset to focus on entries...

It's the professional trader's mindset to focus on surgically managing risks and extending profits, in a way that survival is of the highest percentage.

Luck!
Dave
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