Rule Number 3:Do the math
We often go into a position and then close it, looking for reasons not to be right. In fact, this is a normal defense response of our brain trying to protect us from loss. To calm down these impulses, we need to make a formula that we will apply to determine if the strategy we use is profitable or not. For this purpose, I recommend using the metric 10 trades. To the 10 metrics, we add 1% risk per trade and 3% expected a profit per trade. So you get that you risk no more than 10% and will have a 30% return that gives you a 1: 3 risk/reward ratio.
My formula is the following:
5 deals x 1% risk = 5% loss
5 deals x 3% profit = 15% profit
=> 15% profit – 5% loss = 10% profit for 10 trades.
From this, I understand that 50% of successful trades are enough to achieve my goal, but even 4 successful trades will be enough for me to lose nothing in the next attempt.
Knowing that I will risk no more than 10 pips in a trade, then for my 10 trades, I will need 100 pips risk. I also calculated that in order to achieve the desired goal I need 30 pips profit per trade, I.e. 10 deals x 30 pips = 300 pips profit.
Thanks to this simple mathematics at first glance, I can calm down my senses and stay in the trade I’ve opened until one of the two parameters is reached.
To make it even easier for you, AFX shows the stops and targets that we will use in our trade and trade- ideas. This way, you can quickly assess whether the risk suits you and matches your formula or not.