Will You Take The Pill?
The Magic Pill
If I could give struggling traders a magic pill daily – and get them to keep taking it every day, for say 30 days. It would be a pill that would only let them take trades where their reward was at least 3 times their risk. It other words… 3R or greater. So many people downplay this very important point of keeping the math on your side. Sure, later on if you are successful, know your edge, have chained up your trading demons, understand the mental game, and now you want to experiment with lower rewards, then of course that makes sense for you.
That’s it, my advice is to only take trades where you expect to win at least 3 times your risk. See the math is on your side now. Good luck – when it comes your way really pays off. Bad luck – when it comes your way is controlled.
Right now we are in excellent volatility for day-traders, and that provides opportunity to capture a lot of R. So yes, even as a day-trader this is very possible. For myself, what works really well is that I hunt for trades that could give me a 3R gain or higher. I’m looking to scale off some initial risk into a stalkzone, boulder, or stat – and that scale normally needs to be around 2R. So lets run the math, and say I flip a coin that is very unlucky and my win rate is only 30%, and I scale 50% of my position each time at 2R, and close the rest at 3R. 100 trades later, risking $500 per trade here is how it looks…
Loss is $35,000, but the Win is $37,500, therefore a positive gain of $2,500… and that is scaling half at 2R and still losing 70% of the time! 😱
Now what if I didn’t scale, and just took the magic pill. Of course it will be better, your win is now $45,000 giving you a positive gain of $10,000.
See what happened there? I didn’t change the win percentage at all! All I changed was the reward variable. 🚀
Its easy for me to type this out and sounds very simple, but you have to make this your own! You have to play at your own risk! A lot of you are really good at managing your risk. You know the charts. You know the setups. But now you need to get good at managing your reward, and get PAID for all this effort you are putting in.
– Jeff Wagner (@NanaimoTrader, a Head Trader at Convergent Trading)
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