Profit Management: 3 numbers to protect your account

Profit Management: 3 numbers to protect your account


Hello, this is Kei and in this video, I
will talk about the 3 numbers to protect your account as your strongest life guard. These
are the 3 important and critical numbers to keep in mind for your profit management
and improve your trades overtime. And this is something that I use everyday and my
trade improved much better after learning it.  
The numbers are based on some simple calculations and I will explain how to do it, but for those
who don’t want to calculate, I created a form so you can  download it 
from my blog. I will put the link on the description below. 
So let’s begin. OK, I will explain based on the slides about
profit management, 3 numbers to protect your account as your strongest life guard. First
of all, you might have heard of this but there is a principle of 20:80 ratio. It’s one of
the law of numbers that almost everything is composed of 20% and 80% ratio. This is
called Pareto principle. In the world of forex market, there’s no exact
stats but it’s said that among all the traders, 10% have positive results, 20% are break even,
and the rest of 70% have to leave the game. And you don’t want to leave the game, right?
Otherwise, you wouldn’t be interested in this video. So in order for you not to become
a part of this 70%, you need to learn to protect your account and your profit.  
Let me tell you one important thing. Especially if you are still a beginner in forex trading,
you have to remember that you have to survive the game. Surviving the game means you do
not leave the game. If you do not end up with leaving the game but keep learning, then your
result will be break even at some stage, then eventually you will become profitable. Of
course you started the trading to win and make money but you cannot keep making money
from the beginning, even advanced traders, it’s impossible, there are still times that
they lose. So the first thing you have to remember is
to learn to survive. In other words, you cannot survive unless you lean, learn both fundamental
and technical skills to be able to read a chart and place orders, but the point is you
need to learn these things to survive, not to keep winning. Technical tools are just like a sword to win
the battles. In contrast, profit management is a shield. In forex trading, you cannot make profit unless
you risk your own money. So you need something to protect it. Both requires techniques, and
whether it’s technical tools or profit management technique, you need a skill to be able to
use it in real trade. And when you have these technical skills and managing skills, then
you will have a chance to be break even, then start making profit constantly afterwards. And these are just the tools and then, your mind is also an important factor because
you are the one who use those tools. I often talk about mind on my videos. And on my blog,
I created free personality tests for all the forex traders so that you know what mental
state you are in. I will put the link below so if haven’t tried it, you better do it
because they are all based on the psychological researches at universities and institutes
and they are all free. Anyways, today I am talking about this one, about how to manage and protect your account.
One of the important factors for your successful trading is the position sizing, like how many lots you will put into a market,
or what is the right size of trading lots? If you are correct on the position sizing,
you can increase your earning. Position sizing is just like a bullet, so to speak.
If you want to survive in a battle field called Forex, you never want to run out of bullets
because that’s going to be the end of battle because you cannot fight anymore. So, you
need to know how to keep fighting without running out of bullets.  
And what you have to decide and manage first is how much the right loss is. It depends
on your account size. And regardless of your account size, in each
trade, the position should NOT be exceeded more than 2% of your whole account. Actually,
I recommend you to start with 1% of loss cut for the first time, 2% might be too much for
beginners. And if you don’t know this kind of stuff, what’s gonna happen is it’ll end
up with leaving the game. You cannot survive from trading in a long run. For example, what
usually the beginners do is let’s say someone starts trading with $1,000 and because he
is ambitious and he’s gotta full of dreams to win and gain money, if he’s been trading
with 0.5 lots and end up with negative100 pips in the end of the month let’s say, how much does
he lose? minus 100 pips with 0.5 lots, how much does he lose in the end? It’s $500 and if he starts with $1,000,
it’s already half of his account. That’s a lot! And because he’s lost half of it,
he lost half of his bullets and still has to fight, he wants to get it back, right? Or he wants
to make it break even. But when you think about it, if his winning rate is low, and
when his lot sizing is too much, the chance of winning back is very low because the fact
is that he loses overtime. If you do the same thing like this, that’s something that you
need to realize it first. I mean, imagine when you are in that kind of situation, you had $1,000 and lost $500.
You might feel, oh my god, what should I do?? And you’ve gotta mental pressure to win
back and that’s also making you difficult to bring it to break even because you become
worried, start to see things emotionally, and try to take chances rather to follow your
own strategy. In contrast, think of someone who starts trading
with $10,000 in his account and does the same thing, trade with 0.5 lots and end up with
losing 100 pips which is $500? He still has $9,500 in his account, right? Or when someone has
$5,000 in his account, he just loses 10% in that case. He’s gotta still $4,500 left in his account.
So here is the question. Which one do you think is psychologically difficult to keep
trading? The answer is obvious, right? It’s this person right here. Yes, if you increased the lot
sizing to 1 to 2 to 3, then you might have an image that you can make money faster, but
at the same time, it means you will lose your money faster. But in reality, people tend
to trade with over-sized positions and puts lots and lots of pressure when they lose like
half or two thirds of their account. So what is the right position size? First of all, I want you to calculate your own average
loss. Let’s say you trade for a month and you had some loss. What you need to do is
you add up all the losses and divide them into a number of trades for a month. And it depends, depends
on your trade style, like scalping looking at 1min chart or swing trade looking at daily
or weekly charts, but let’s say you are a day trader and you trade a couple of times
within a day. And when you calculate the average loss, let’s say you found it 10 pips. That means
every time you lose, you lose 10 pips in average for each trade. And if you start with $1,000
in your account, you wanna manage 1% of a loss on each trade, and in that case, you
need to trade with 0.1 lot on each trade so that your loss cut will be $10 on each trade
which is 1% of your whole account, $1,000. Now let’s say you start with $5,000 and if
your average loss is calculated to be 10 pips and wants to keep 1% of loss on each trade,
in that case, you can manage $50 loss on each trade, meaning on each trade can be with 0.5
lot. If you start trading with $10,000, and if your average loss is also 10 pips, then
on each trade you can place 1.0 lot to make it $100 of loss on each trade, and you will
be psychologically safe. Alright, now I will talk about today’s main topic. What 3 critical numbers that protect your
account are, number 1, Winning Rate, number 2, Profit
Factor, and number 3, R-multiple. And I want you to keep these 3 numbers in your mind as
you keep trading. Winning rate is simple. You divide your number of wins by the total number of trades. And
if it’s 0.5, that means 50% so if you try 10 times, you win 5 times and lose 5 times.
It’s pretty obvious, right? And what Profit Factor is that you take all the profits you have been making and divide
it by all of your loss. And if the result is 1, that means it’s break even, you are
not winning but you are not losing money. Finally, R-multiple. This is another critical number to know but you take average profit
and divide it by average loss. This is in pips, not the profit how much you made, but
make sure it’s in pips, but so for example, when your average profit is 10 pips, and your
average loss is also 10 pips, then that’s 1R, your R-multiple becomes 1. And if you have
1R, and if your winning rate is 0.5, 50% then it becomes break even. 
And based on these 3 numbers, look at this table. Just to make it simple, I made profit factor to
be all 1.0 here. And what I want to show you here is that when the number of R-multiple becomes
bigger, you can have less winning rate. For example, when R-multiple is 3, meaning when
your average profit is 3 times bigger than your average loss, then your winning rate
can be 25% to be break even. In contrast, when your R-multiple is low, like 0.1, then
your winning rate has to be 91% that is pretty unrealistic, but it has to be 91% to be the
PF to be 1, which is break even. To improve and raise the R-multiple and if
you keep trading the way to maximize your R-multiple, then your trading will be very
stable. Winning rate is, well, this is just my idea but you don’t have to improve the
winning rate so much, 50% is ok. But if you keep increasing your R-multiple rate to 2
or 3, then you can trade in very stable and safe way. And this is the key to be successful
in a long run. So how can we improve the R-multiple? What you need to focus on is the risk-reward
ratio. I recommend you to trade where the risk to reward ratio can be 1 to 2. When you
try to buy in a chart like this, focus on a place like this kind of situation and aim
to take profit at this point as it shows on this green line, and place your stop loss
at this red line. In this case, from this position, the distance of take profit line is about
twice longer than to the stop loss. Risk to reward can be 1 to 2. If you determine to
find a place like this and focus only trade when you see this kind of situation, it makes
it way easier for you to trade with small loss, and with big profit because you can
always expect 1 to 2 ratio on every trade you execute. Now, look at a trade in this kind of situation.
In this case, the price goes up and down, and at this price level, when you buy or sell,
either way, the ratio is 1 to 1 because the price is right in a middle of the range. The risk to reward
ratio is 1 to 1 and you cannot expect small loss with big profit and you cannot improve
your R-multiple in this kind of situation. Now, of course you can raise the winning rate
instead of raising R-multiple, but this time on this video, I recommend you to look for
where small loss and big profit can be expected. Like I mentioned earlier, I created a profit
management sheet on excel format and uploaded in my blog so you can download the form if
you would like, and monitor your current trade status. Look into your trades, look into the
current situation of how you trade recently by checking 3 numbers, winning rate, PF, and R-multiple.
If you cannot use excel, then you can just calculate by yourself because they are not
so complicated. In this excel sheet, when you put numbers where it’s grey, then it calculates
R-multiple and winning rate by itself. And if you keep losing, your target is to make
winning rate to 0.5, which is 50%, and R-multiple to be 1. But if you have R-multiple more than
1 already, that’s great, you are already a great trader and focus on increasing the R-multiple even
more. But like myself, when I just started the trading, usually people don’t have R-multiple
1, usually it’s below 1 at first. So I think it’s better to focus on hitting R multiple to be
1 first and that’s why I created this form. So if you would like, download it and take advantage
of it. You know, especially for the beginners to
forex trade, don’t focus on winning too much. If you can survive from the market, that’s
already awesome. Survive means break even and if you can be at that state, then the
way to become a profitable trader is right a mile ahead. So I want you to have this mindset
and keep trading in this manner. Alright, that’s it! Thank you for watching my talk and please press a good button if
you liked this video and make sure to subscribe for my future videos. Cheers, bye.

1 thought on “Profit Management: 3 numbers to protect your account

  1. What is your current risk management skill? Take FREE personality test for all the trades and find it now!
    https://forex-kei.com/fms-risk-management

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