I decided to develop short manual of day trading strategies, especially how to trade forex or futures, how to build trading strategy from A to Z. All requirements and things needed to know while building your strategy.
This whole serial is about 5 mid-long articles where we dive to the deepest aspects of trading to understand this entire business to the bone.
Firstly, trading is not rich quick scheme allowing tons of money every single day without sweaty, frustrating hard work. Trading as others businesses needs to be taken seriously, not as clicking game with high rewards. (as many people think) Anyway being full time is maybe the best job ever. Your office suits bag during traveling or moving from place to place. Once you find the strategy that really fits your strengths that lets you mentally in calmly zone, you are on the way.
Day trading strategy
As a day trader I will aim on building day trading strategy on 1M Timeframe and instrument E-Mini Nasdaq 100.
Firstly before we even start collect pieces of puzzle into big one you need to know some basics.
Stop loss is the most important thing in whole trading, not due protecting your capital but because of determination risk reward ratio – an important aspect of money management.
That’s why everyone risks 1-2% per trade. Because everyone says that. Lol. You need to understand deeper importance of this. The size of stop loss in opposite of profit target shows how much reward you can potentially achieve. For example risking 10$ to reach 10$ is worse than gambling from my view. The fact of need more than 70% long term win ratio is really hard to reach, especially for newbies.
Listen to me. My personal RRR is about 3 and higher – it means I risk 10$ to get 30$ or more but the point is that I am consistently profitable even if my win ratio is about 35%. Not flaunting.
I highly recommend you to use the same approach as I do and apply it as yours. It absolutely changes your trading and move into new world. Once you realize trading and risking one buck to reach one buck is not the way to become millionaire or full time trader. Be smart. Use math and statistic as an advantage.
Tab below opens your eyes
Recommended: Download and print it, it’s insightful to see the point behind.
What did I say? Do I trade only 3 RRR and higher? Well, required win ratio for me is about 25%, but it’s personally about 45-50%.
What does that mean?
It allow my account to grow exponentially. Its true math and statistic, for nerds – formula is 1/ (1 + RRR, P.E.: 1/(1+3RRR) = 1/4 = 0,25 = 25%)
Think about that. Think about high RRR. It may brings results you never dreamt about.
How to boost and growth your account exponentially
There is only one way how to correctly and step by step let your account grow up. It’s called position-sizing.
What’s the magic?
Once you are trader with consistently growing curve up, risking 1% may look like bad choice due to this. 1% in $1000 is 10$, it’s fair and adequate. But risking 1% in 2000$ needs 20$, but you usually take trades with required 10$ stop loss so instead of leveraging your stop loss size and starting take more risky trades with higher RRR I recommend increase a position. Instead selling 1 contract just sell 2 contract with the same size of stop loss.
Then you’ll risk 20$ on 2000$ (still 1) but your potential reward is not 30$ (in RRR 1:3), but 60$ and it’s the simplest way how to let account grow exponentially.
In practice it looks similar to this example:
Your average size of stop loss is 5 ticks (5pips) – 1% so if your RRR is about 1:3 with 50% win ratio, the capital is going to grow up really fast and within few trades 5 ticks or 5pips become less than 1% of capital. It means your account won’t grow as it did in past, but instead of risking 1% it’s about 0,5% to earn to 1,5%. Nobody wants to stay on the same place. The solution is simply. Add a contract or increase your position (in forex). So if you add one contract or one another position in different instrument – you’ll be risking 1% to earn 3% as you did in past. This whole thing repeats so many times until you trade millions or hundreds of thousands $$$..
Those two tabs should open your eyes. Basics about nobody talks about. Math and probability.
In next articles in this serial we are going to move to practice. Stay in touch!