The 5 Possible Outcomes of Your Trades: How to Manage Them for Better Trading Performance
Strategies to Eliminate Big Losses and Focus on Breakeven, Small Wins, and Big Wins
"The most important thing is to protect your capital. I don't worry about making money; I focus on protecting the money I have. If you can protect your capital and manage your risk, you can survive the inevitable losses and stay in the game long enough to make money."
- Paul Tudor Jones
Welcome to todays read on “The 5 Possible Outcomes of Your Trades”. As a trader, it's essential to understand the possible outcomes of your trades. There are five possible outcomes: breakeven, small win, small loss, big win, and big loss. Each outcome can affect your trading psychology and your trading strategy.
Let's start with the first outcome, breakeven. Breakeven should be your first objective when getting into a trade. You can trail the alligator lips a fast EMA (exponential moving average) on the Alligator indicator to trail your stop loss. This way, you can lock in some profit when the price moves in your favor, and if the price starts to move against you, you will be stopped out at breakeven.
The second outcome is a small win. A small win happens when your trailing stop is hit, and the price moves in your favor, but then starts to move against you. By using a trailing stop, you can lock in some profit while allowing your trade to continue. This can be useful in choppy markets where the price moves back and forth.
The third outcome is a small loss. This should be your initial risk, which means the amount you are willing to lose if the trade goes against you. By setting a small loss as your initial risk, you can limit your downside and protect your trading capital.
Negative RRR
Here's how you can interpret the table:
A 5:1 RRR means that you stand to lose five times the amount that you stand to gain. For example, if you stand to gain $100, you stand to lose $500 if your trade goes against you. To maintain a break-even portfolio, you need to win at least 95.24% of your trades.
A 20:1 RRR means that you stand to lose twenty times the amount that you stand to gain. For example, if you stand to gain $100, you stand to lose $2000 if your trade goes against you. To maintain a break-even portfolio, you need to win at least 90.91% of your trades.
A 10:1 RRR means that you stand to lose ten times the amount that you stand to gain. For example, if you stand to gain $100, you stand to lose $1000 if your trade goes against you. To maintain a break-even portfolio, you need to win at least 83.33% of your trades.
A 4:1 RRR means that you stand to lose four times the amount that you stand to gain. For example, if you stand to gain $100, you stand to lose $400 if your trade goes against you. To maintain a break-even portfolio, you need to win at least 80% of your trades.
A 3:1 RRR means that you stand to lose three times the amount that you stand to gain. For example, if you stand to gain $100, you stand to lose $300 if your trade goes against you. To maintain a break-even portfolio, you need to win at least 75% of your trades.
A 2:1 RRR means that you stand to lose twice the amount that you stand to gain. For example, if you stand to gain $100, you stand to lose $200 if your trade goes against you. To maintain a break-even portfolio, you need to win at least 66.67% of your trades.
A 1:1 RRR means that you stand to lose the same amount that you stand to gain. For example, if you stand to gain $100, you stand to lose $100 if your trade goes against you. To maintain a break-even portfolio, you need to win at least 50% of your trades.
Just like in the Positive RRR breakdown, it's worth noting that these win rates assume that you're not factoring in any trading costs (e.g., commissions, spreads), which can eat into your profits and affect your overall portfolio performance
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The fourth outcome is a big win. A big win occurs when a trade trends and continues in your favor. To capture big wins, you can use trailing stops and let your trades run. For example, you can use the alligator teeth to trail your stop loss and let your profits run until the price hits the trailing stop.
The Win Rate and Loss Rate columns represent the percentage of trades that need to be winners and losers, respectively, to maintain a break-even portfolio. This means that if you have a win rate below the value in the table, your portfolio will have losses, and if your win rate is higher, you'll have profits.
Here's how you can interpret the table:
A 1:1 RRR means that you stand to gain the same amount that you risk. For example, if you risk $100, you stand to gain $100 if your trade goes in your favor. To maintain a break-even portfolio, you need to win at least 50% of your trades.
A 1:2 RRR means that you stand to gain twice the amount you risk. For example, if you risk $100, you stand to gain $200 if your trade goes in your favor. To maintain a break-even portfolio, you need to win at least 33.33% of your trades.
A 1:3 RRR means that you stand to gain three times the amount you risk. For example, if you risk $100, you stand to gain $300 if your trade goes in your favor. To maintain a break-even portfolio, you need to win at least 25% of your trades.
A 1:4 RRR means that you stand to gain four times the amount you risk. For example, if you risk $100, you stand to gain $400 if your trade goes in your favor. To maintain a break-even portfolio, you need to win at least 20% of your trades.
A 1:5 RRR means that you stand to gain five times the amount you risk. For example, if you risk $100, you stand to gain $500 if your trade goes in your favor. To maintain a break-even portfolio, you need to win at least 16.67% of your trades.
A 1:10 RRR means that you stand to gain ten times the amount you risk. For example, if you risk $100, you stand to gain $1000 if your trade goes in your favor. To maintain a break-even portfolio, you need to win at least 9.09% of your trades.
A 1:20 RRR means that you stand to gain twenty times the amount you risk. For example, if you risk $100, you stand to gain $2000 if your trade goes in your favor. To maintain a break-even portfolio, you need to win at least 4.76% of your trades.
It's worth noting that these win rates assume that you're not factoring in any trading costs (e.g., commissions, spreads), which can eat into your profits and affect your overall portfolio performance.
Finally, the fifth outcome is a big loss. To avoid big losses, you should always use a stop loss. A stop loss is an order that automatically closes your trade if the price hits a certain level. By using a stop loss, you can limit your downside and protect your trading capital.
Eliminating the possibility of a big loss is crucial for your trading psychology and your trading strategy. It's essential to understand that losses are a part of trading, but by limiting your downside and focusing on breakeven, small wins, and big wins, you can improve your trading performance.
In conclusion, understanding the possible outcomes of your trades is essential for your trading psychology and your trading strategy. By focusing on breakeven, small wins, and big wins, and using a stop loss to avoid big losses, you can take a big step forward in your trading journey.
- Thanks for reading, Tony