The 2 Formulas You Need Before You Start Trading Forex with Your Money

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Why would anyone give you any tips anyway? To help you trade better? Maybe. To help you become the next millionaire in town? Definitely not!

I am sharing these true winning tips with you to help you reduce your emotions during live trading. Imagine stepping the acceleration pedal and brake at the same time, you will not be able to accelerate fast enough. Emotions in your trading are just like the brake that slows you down (in a game of quick decision).

Some people transited from their demo account to live account and saw their consistency fell and losses mount. Why? Their emotions took over them when they traded real money! The money they had in their demo account has no feelings attached. They did not work and earn it. Thus, they were able to make good decisions without the interference of their emotions. How can you reduce them when trading live?

  • Record the reason(s) why you enter and exit a trade: When trading with your demo account, treat it like your own money and record every single decision you made. Create a spreadsheet and note down the reason(s) of entry and exit, the price you entered and the position size traded.
  • Be confident about the reasons recorded: This is important as it will calms you down even when market goes 200 pips against you as long as your reasons to be in trade is still valid! In order to be confident about your reasons to be in trade, they have to provide a three characteristics:

 

o Large Average Win Amount

o Low Average Lose Amount

o Opportunity

Remember this formula as you approach the market:

Your expectancy= (Average Win Amount x Win %) – (Average Lose Amount x Lose Rate)

Imagine rolling a dice. If you get 1-3, you have to pay $1. However if you get 4-6, the dealer will pay you $5. Over the long run you will make money playing this game. If the situation of payout is now opposite, you will lose money (may be in the first place you will not even play this game!). If I change the scenario again, if you get 1-5 you win $1 but if you roll a 6 you loses $10 – will you play this game of High % Win ratio but low Average Win amount? No! A high % win does not ensure profitability over the long run. It is the average amount of win that matters.

That are the points I am trying to say. Many people entered into Forex without knowing how well their reason(s) or system performs over the long run and start jumping into the bandwagon of quick rich scheme to lose. Thus, you need to first record the underlying reasons of your decisions, measure the performance of your decisions in order to be confident.

Next formula:

Your Profit = Expectancy x Opportunities

After we derive a positive expectancy, we look out for opportunities. How often do your reasons realise itself in the market? Or how often a trade is activated over the course of a year? This will decide on your profit. You can have a sure proof expectancy but the opportunity comes once every 5 years, you will not be able to maximise your profit in the market.

Back to point 2: Record the reason(s) why you enter/exit a trade AND Measure the effectiveness of your system or reason(s).

  • Risk what you can afford to loss: This is not simply saying you can risks $50 and dump that $50 dollars in, sure you can do that. Start by analyzing your monthly expenses and make sure you have savings that can cover you for 6 months in the event you lost a job. Whatever savings you have left, decide on a portion that losing it entirely has no impact to your family and lifestyle. That is the amount you can afford to risk.
 
 

To conclude my points, have a documented system to trade, measure it and decide smartly and confidently whether to enter live trading with this system and finally decide how much you can afford risk. These 2 formulas are all you need before you start a live trading account as they created a framework of discipline and system performance perspective.

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About: Gareth Tade Mansfield

A Euro Dollar Trader for the third year!

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