Finding an appropriate trading system is similar to finding a compatible spouse. If your partner has completely alternative interests and aspirations to you then the relationship is doomed from the start irrespective of how intriguing the person is.
Without undergoing too much analysis and completing too many personality profile tests, you just need to ask yourself one question: what will make me react more aggressively – many small and frequent losses or irregular substantial losses? This will assist in defining which trading system is most suited to your personality and for your needs.
There are two types of trading systems available. The first is a system featuring more frequent losses than gains; however the gains will be greater than the losses. The second type of trading system presents consistent, yet small gains with few losses; however, these losses are substantial and will eliminate many gains. Of course, you will find that the profits and losses will be of different sizes; but it must be remembered that no system will be in the middle of this gray scale – it will always be skewed to one or the other side.
The practical question to determine which trading system is best for your needs looks at which extreme causes more anxiety: a large amount of wins, but with large losses; or large losses with greater amounts of wins. It has been noted that the majority of other features in a trader’s profile do not apply to these practical situations.
One of the most critical components to consider when finding the most appropriate trading system is that of system trade expectancy. The majority of traders feel that having a high risk/reward ratio leads to successful trading, however this is not so. In order to be successful you must have positive expectancy and expect a positive gain from each trade you complete using your trading system.
System trading expectancy is calculated using historical data of all trades completed. This is done by multiplying the average historical loss by the losing percentage, then subtracting that number from the average historical profit multiplied by the profit percentage.
To clarify, the system trading expectancy formula is as follows:
Expectancy = Average Gain (% of winning trades) – Average Loss (% losing trades)
The primary purpose of this system trading expectancy formula is to identify how much can be made on a trade using a particular sample size of trades. To encourage future trading, the result should be (ideally) positive and of a large amount. It should also be noted that this formula can be applied to binary trading options.
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