Many investors have dreamed of becoming full-time day traders. Setting their own hours, being their own boss, and taking advantage of the daily ups and downs of the market as a full-time job. As many inexperienced day traders soon discover, working knowledge of math and probability are required to optimize returns. Many day traders make the mistake of risking too much money per trade, leading quickly to a disaster. Nexgen Software Services offers these tips to day traders who are just starting out, describing the types of mathematical formulas that can help to control risk and maximize profits while trading the market.
Understanding Risk and Reward
A professional trader will never wonder how much to risk on a trade, a simple mathematical formula will help the investor take the correct risk on trades of any size. When making a new trade or investment, it is important to risk no more than one percent of your account value on each trade. This may seem like a relatively small amount; however, it is crucial to managing risk in absolute percentages. For example, an investor with $10,000 in the capital should only risk $100 per trade. Do you have a system that allows you to make profits while risking only $100 per trade? Nexgen teaches this to its clients during the live class sessions during the market hours.
It is vitally important to place stop-loss orders to ensure that you do not lose more than one percent of your account. Once you have calculated the amount you are willing to risk, set your stop-loss order accordingly. Then you can choose how many shares or contracts to buy or sell. While tracking the results of your trades, you will learn how much money you made or lost on each trade. Risking only one percent of your investment on each trade means that a losing streak will not wipe out your available capital and that losses can quickly be made up with a series of winners.
Reward to Risk Ratio
The reward to risk ratio is the proportion of money you make on your successful trades against the proportion you lose when you are not successful. Ideally, you should shoot for your reward to risk ratio at 2 to 1. This means that when you risk $100, you will see a profit of $200. This is easy to accomplish if you set your profit target at a higher number than your stop-loss order and your system generates these types of risk-reward parameters. If you do not know the reward side of the equation, it will be impossible to know the reward to risk ratio. Nexgen Software teaches trades that are between 2 to 1 and 4 to 1 ratios.
For example, if you have a buy signal that risks $100 worth of your account, you should set your profit target at $200 gain. If you happen to lose on this trade, you will lose only one percent of your capital, and this works out to a reward to risk ratio of approximately 2 to 1.
Your win-rate is the percentage of trades where you make a profit. The higher the winning percentage, the better your chances of making money. When a higher winning percentage is coupled with a high reward to risk ratio, most traders agree, “this is the ultimate day trading system.” Day traders need to keep their win-rate to at least 50-60 percent. If this number falls below 50 percent, you will have a harder time pulling the trigger on the next trades. You can win with less than 50%, but you must maintain a high reward to risk ratio. If you keep your reward to risk ratio at about 2 to 1 and win at least 50 percent of your trades, it is mathematically impossible to lose over the long run.
If your win-rate falls below 50 percent, it is a good idea to take a deep look at your criteria for choosing a stock or commodity. You may need to tweak your stop-loss orders and profit targets to optimize your profits.
Balancing Profit and Loss
When you begin day trading, start with small investments. Nexgen believes you should not start with more than $3000 and prove that you can make money. If you have a winning system, you should be able to profit on $3000. The process of buying and selling stocks takes a great deal of practice. If you are careful to keep your profit-loss ratio and your reward to risk ratio above board, statistically speaking, you will be able to make money. Nexgen Software Services is ready to help new investors learn the ropes and receive the training they need for success.