Secret #4 - How To Maintain A Winning Edge
It's often said that if you don't know your edge, you probably don't have
one. In fact, one of the main reasons most people lose money in stocks is the
lack of a reliable trading advantage.
-- Know Your Edge
Your "edge" is made up of a combination of factors. While you can gain an edge
through all sorts of elaborate methods and complex systems, it's best to keep things simple. The list below
includes the most important elements:
~ Choosing the best stocks
~ Exposing hidden trends within your chosen time frame
~ Locating high probability setups
~ Applying specific entry triggers that confirm your expectations
~ Following an Exit Strategy to minimize losses and lock in profits
~ Controlling Risk
-- Track Performance
Win/Loss Ratio - The number of Winning Trades compared to the number of
Losing Trades. For example, if you win six out of ten trades, your Win/Loss Ratio
is 60/40 - 60% winners, 40% losers.
Cost Per Trade - How much you pay your broker for each completed "round trip" - in and out.
Many traders mistakenly think they need a huge advantage that gives them a
very high percentage of winning trades. In fact, the opposite is true.
A review of the top ten mechanical trading systems of all time revealed that the best winning rate was 57.5%, while several were less than 50%. The key to the success of these systems is that profits from the winning trades offset losses from the losers by a significant margin.
Trying to maintain a high Win/Loss Ratio usually results in taking small gainers too early, long before they can develop to full potential. This sort of "winning" has an extremely negative effect on the Profit/Loss Ratio.
Understanding the relationship between Win/Loss and Profit/Loss allows you to
find the balance that best matches your personal style of trading.
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