Profitable Trading Strategies
Writing this article considering that if any traders/investors are interested on this platform. If anyone from this forum interested in then must read this.
Two key rations to consider before taking trade:
When any trade or sequences of trades are initiated, two key rations are important. The trader must try and make good guess at the win: loss ratio – the number of times a trade is likely to win versus the number of times it is likely to lose. The second one is return: risk ratio. This is the return on each winning trade and loss against each losing trade. This combination of both ratios determines overall profitability.
To take a simple example a trade with 1:1 win loss ratio (one win in every two trades or 0.5 profitability) and a 2:1 return: risk ratio (2 units return/win for every 1 unit paid out/loss) ratio will offer an overall profitability of 5 units for every 10 trades. Often most of the traders take positions with extremely high risk: return ratios. These kinds of ratios often provide great returns as well as loss. So never overtrade in such kind of stocks. Some traders enter into OTM option call (deep out of money), that will not struck in most circumstances. Of course, if it hit they offer multiple returns that compensate for many losses.
Be Prepared for Losses:
By isolating win: loss rations described above still there will be a random element associated with price changes and in practice even the best analysts find it difficult to generate better than 65% win rates. Means that even great trader like warren buffet also must be prepared for loss in trading at least once in three trades. So in every trade it’s advisable to keep strict stop loss for every trade. If trader set the loss limit per trade as non-negotiable, all he has to seek trades which promise higher returns as and when they do win.
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