This article will answer two questions asked by students: the first about risk management, and the second about the execution of 3:1 trade criteria on TradeStation.
The first question came from a doubting Thomas who questioned the possibility of being profitable even with an extremely low win-loss ratio of 30 – 40 percent. Once it was pointed out to him that if the reward was greater than the risk, things started to make sense. For the sake of simplicity, first we will look at a 3:1 reward to risk and then at 2:1. Starting with a 30% win-loss ratio and 3:1 reward to risk, an example of one hundred equal trades are used. Assume that out of the 100 identical trades 70 were losers of a dollar, causing a hole in the pocket $70 deep. Meanwhile only 30 out of those 100 trades were profitable making the win-loss ratio 30% winners versus 70% losers. Those 30 winning trades had a reward of three dollars; therefore (30x$3) there was a profit of $90 on those trades. The aggregate of both winners ($90) and losers ($70) still produces a profit of $20 which is not much but it is profit nonetheless.
Disclaimer: commissions were excluded from this calculation.
Moving on to a lower reward to… Continue Reading
