Let Profits Run And Only Trade Positive Expectancy Systems
Let your profits run
This rule is undoubtedly the key to being a successful FOREX trader. It is in these three simple words however that are easier said than done.
When we get a profitable trade going it is our natural fear of losing the unrealized cash starts and we truly want to close it out now and quit while we are ahead.
Most trading actually consists of long periods of small winners and losers, that is quickly followed by a few huge winners that make the difference between overall profitability and simply breaking even or even losing thanks to the trading costs such as commissions, spread, and slippage.
It is our ability to let the huge winners become huge. This is what determines how we will perform overall during the course of the year. The key here is in letting a winning streak run is to have trailing stops that are generally outside the daily noise of the market so that they are not so tight as to get stopped out during "normal" trading process.
This means that you need to be prepared to give up a relatively large portion of a winning trades open profit and it is also the thing that makes this so hard to implement. In fact, we should be adding to a winner and widening stops rather than trying to figure out how tight our stops can be to capture the largest amount of profit.
The trade has already shown you if it intends to be a winner, and the chances are it is a low-risk idea if you were to add to the position now rather than 'strangle it' with stops that are too tight.
It is very important that your management rules leave room for large winning trades, and that the rules are pre-defined and understood before you place the trade in the first place. This will allow you to stick to your rules when you do get the big winner.
Only trade positive expectancy systems
If you have a positive expectancy trading system, the only factors that will decide how much money you will make per year are the number of trades the system actually makes, how much capital you allocate to the system, and how accurately you use the trading signals.
If you do not know whether your trading system is positive expectancy then it makes no sense for you to be trading it in the first place.
Expectancy is calculated using the profit or loss on each trade; divided by the initial risk, and then taking the average of this number of a series of trades. Systems that have positive expectancy will make money most of the time and those with negative expectancy will lose money.
Successful traders only trade systems when the odds of success are in their favor so that they know that making money is the final result of accurately implementing the system and not just pure luck.