The key, which is displayed in the table below, is that you limit your losses relative to the gains that you make. Sounds pretty obvious, right? Well, it made a lot more sense to me when I put this table together and played with the numbers to see how the results turned out. The table below show a 50% win/loss ratio, the same average trade size, but the average gains are better than the losses incurred. As a result, the net gains are positive. You can transfer this data to a spreadsheet and play with the numbers to evaluate different scenarios. Maybe your average gains are smaller for your winning trades, but you have a higher win/loss percentage. That also works, if you can stay nimble in taking quicker profits.
Commissions also become a factor if your average trade size drops. You can have positive gains with your trades but as your average trade size drops, commissions stay static and eat into your profits quicker.
Don't get me wrong, win/loss percentage is important, but you are not going to win 100% of the time. However, you can be successful if you only win 50% of the time, even less. Limiting your losses is huge. As your average loss increase, it becomes more difficult stay positive with your overall trading profits. In my own trading, I've gotten into the habit of being more mechanical in sticking with my stop losses between to 2-2.5% of the trade. Also, if the trade is not working in my favor quickly, I'm more apt to accept a break-even trade or less than 1% loss. Instead of looking at a losing trade as a loss, I view it as protecting my capital. There will always be another opportunity in the market. Don't put your money at risk on hope. Protecting your investment capital is key to longevity and success.
~JP
| TRADES | AVG TRADE SIZE | AVG GAIN LOSS % | GAIN LOSS $ | COMMISSIONS | NET GAIN LOSS | |
| WINNING | 50 | $ 2,000 | 5.0% | $ 5,000 | $ 700 | $ 4,300 |
| LOSING | 50 | $ 2,000 | 2.0% | $ 2,000 | $ 700 | $ 2,700 |
| $ 3,000 | $ 1,400 | $ 1,600 |
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