Short

# [1.3 r=1/5] Waiting for the correction

FX:AUDUSD   Australian Dollar / U.S. Dollar
42 0
Novice traders are generally told not to risk more than 3% of their capital, and that might be a good advice for someone who cannot make themselves listened to by their greed and fear. However, risking 3% in general turns out to be a weak strategy for a professional trader. Then, how much should one risk in what kind of trades?

Simple calculus tricks will tell you how much to risk in the cases where you could say a word about risk-to-reward ratio and odds of winning. Taking the Gartley pattern as an example, analyses has shown that this pattern is profitable more than 60% of the time (source: https://www.fxgroundworks.com/blogs/results-performance/gartley-pattern-statistics). They took those patterns with at least 1:2 risk-to-reward ratio, but let's say we're contented with at least 1:1. Then, it would be a conservative guess that in a long period of time (this is really important as we do not know the variance of the distribution of the pattern's odds of winning), let's say in 100 trades, the pattern will give us 55 wins.

What we have is as follows: 1:1 risk-to-reward ratio and 55 wins out of 100 trades. How much should you risk in such a case? The answer is 10% of your capital. And if you don't want to be conservative but want to believe that you will get 60 wins and 40 losses, then you should risk 20% of your entire capital in each trade to get the maximum profit. This result is insane, and bizarre for the most traders, but that's what calculus says. You may try it yourself; just calculate the compound interest when you risk 3% and when you risk 20%.

Of course, there are many other factors the trader should be aware of. For example, for simultaneous trades, one shouldn't risk the 20% of the entire capital but just assume that all open positions will be losses, and risk the 20% of the remaining capital. Also, pyramiding or Martingale-inspired money management plans should be incorporated into this calculation to have better results.

As a result, I decided to add risk levels to the ideas to expose how sure I am. The risk level will be denoted by "r" in the header. "r=1/5" means, assume that all positions will result in loss, and risk 1/5 of the remaining capital. Let me remind you as well that being right is not always profitable, and what is profitable comes most of the time with how you manage the trade, i.e., how you act upon the changes in structure after a position is opened.

Here we have AUDUSD             approaching a resistance level . The reversal is about to take place, but the target and stop levels are just too far from being able to be cleared. So, just not risk 1/5 with the shown levels here. As I have already said elsewhere, the ideas I publish here are not trading suggestions but just a journal, a showcase.

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