"The Art of Chips Preservation"
T
WHAT HAPPENS WHEN ONE IS LOSING MONEY IN THE MIDST OF TRADING?
Irrationality takes over and we make one last "make or break" gamble. We all know what happens after that.
WHAT HAPPENS WHEN ONE IS ON THE ROLL AND MAKING LOTS OF MONEY?
Greed gets the better of us and we trade bigger until the size of the position buried us when the market turn sharply against our positions.
IS THERE A WAY TO CONTROL THE ABOVE SCENARIOS WITH A PROVEN METHODOLOGY?
.........YES.....THERE IS !.........
"THE ART OF CHIPS PRESERVATION"
First, we set out the absolute amount that we are ready to lose.
Let's say we set aside $100,000 as trading capital and limit our per-trade losses to 20%.
Hence, we know for the first trade, we can lose $20,000.
SIMULATION (LOSERS)
Budget : $100,000 | Loss per Trade | Funds Available | Next Bet Size (20%) |
Trade 1 | -20,000 | 80,000 | 16,000 |
Trade 2 | -16,000 | 64,000 | 12,800 |
Trade 3 | -12,800 | 51,200 | 10,240 |
Trade 4 | -10,240 | 40,960 | 8,192 |
Trade 5 | -8,192 | 32,768 | 6,553 |
Trade 6 | -6,553 | 26,214 | 5,242 |
Trade 7 | -5,242 | 20,971 | 4,194 |
Trade 8 | -4,194 | 16,776 | 3,355 |
Trade 9 | -3,355 | 13,342 | 2,842 |
From the above, assuming all trades were losers from Trade 1, we will have to stop trading by the time we reached Trade 9, due to insufficient margin. If we follow the 1:3 or 1:2 Risk-Reward Methodology, we should be turning around by the time we reach Trade 6 or 7.
SIMULATIONS (WINNERS)
Budget : $100,000 | Profits per Trade | Funds Available | Next Bet Size (20%) |
Trade 1 | 10,000 | 110,000 | 22,000 |
Trade 2 | 10,000 | 120,000 | 24,000 |
Trade 3 | 10,000 | 130,000 | 26,000 |
Trade 4 | 10,000 | 140,000 | 28,000 |
Trade 5 | 10,000 | 150,000 | 30,000 |
Trade 6 | 10,000 | 160,000 | 32,000 |
Trade 7 | 10,000 | 170,000 | 34,000 |
Trade 8 | 10,000 | 180,000 | 36,000 |
Trade 9 | 10,000 | 190,000 | 38,000 |
In the above Simulation on Winners, we assume a very conservative win of $10,000 per trade for all 9 trades.
( In reality the profit is between $20,000 to $25,000 per win).
You can see that the Bet-Size allowed us a gradual increment which sticks to the 20% of available funds rule.
By following this discipline, we will increase our Bet-Size when we make money but in a controlled manner. This consistent "bet-size" will ensure that we don't go over the top when we are on the roll.