This article is the result of one comment of one dukascopy community member in one of my previous articles and his article too. This comment and the article made me thinking about some things related about losing vs winning, expectancy and goals . Here i express some of my toughts related with this theme. As some of you already know, i'm a novice, but i'm always ready to learn more, and trying to share what i learn. I don't have the experience of losing (well in trader contest yes but i'm trying...) and winning, but there are some things that are too obvious and are common sense. Maybe all i write bellow don't be useful at all, but the last word about this is yours.
No one like to lose. This is a fact we all agree. We need to know that this business is a zero result business. That means to get some winning value someone else has to lose it. That is true there are some or many traders who have more losing trades than winning ones and the final result for them is positive with profit. This is possible having great discipline on exiting loss trades, and in other hand they can hold the winning ones and exit at the right time with great profit - is the only way to achive this result in this situation. To achieve this the winning value of your trades must be greater than the value of the losing ones independently of number of trades. Knowing how/when exit the trades is so important as entering a trade. Here i don't talk about the act of losing or the psicologic aspects but about the effort needed to restore what we lose to, at least, breakeven. In the image bellow is a table where i show variable percentages of drawdown (percentage of loss) relative to our present available capital and the effort of winning percentage we need to restore our initial capital using the available capital after the drawdown.
Image 1: In column D we have the % value of a possible drawdown and in F column we have the % value of winning effort needed for restore our initial capital agains the suffered drawdown.
As you can easily see, we have a exponential factor of dificulty to win against a eventually sufered drawdown. The greater the drawdown, the hardest is to recover from that loss. The key here is if we have to lose, we need to lose the less possible (personally speaking this is one of my problems in trader contest where i'm trying to learn about forex). Of course we will lose soon or latter and we must be prepared for that. Trying to lose the less possible is one key aspect to be a profitable trader in my hubble opinion. Because of this, we see everywhere the words "never risk more than 2% of your account". Analysing this words i can conclude that they exist taking in consideration a possible sequence of losing trades and after ten (not a fixed value) of them we are certainly in trouble as the effort to recover this losses is getting too high. But don't is impossible to recover with persistence, patience and the most important, discipline.
Winning, goals and expectancy...
Yeah, is for winning we all are here, me included . But when we enter this world to try to win something we must know and understand how this business works and moves and what we can or want to achieve. For me don't is enought to see everywhere that trader A or B made thousands of some currency in X time and get in just to try to achieve same results - the concept "if he/she can do it, i can do it too" don't work here because the existence of a huge number of factors to take in consideration. Same way, when someone says "you can win easily because you have high leverage at your disposal": one thing that came to my mind when i read it is "well, if i can win easily with leverage certainly i can lose the same way if we understand the concept of leverage as is". I feel the need to understand why the winning and losing events occurs (a trading journal is one way as i say in my last article). Also the goals we define ourself to achieve must be realistic. Don't is enought to say "i want to get rich" or "i want to make a quazillion of money". This don't is impossible as some achieved it, but surely what they want to achieve was getting bigger after they achieve the last objective. I don't know, but my experience of live, says to me, if we want to achieve something we need to be realistic, we need to know everything possible about what we want to achieve, if possible split it in small steps and everytime we finish a step we can fell a winning sentiment where we can find the strenght to go forward in the easiest way. If you say "i want to get rich" maybe you can't get there, and you live with some frustration as you can't achieve it... Anyway, is good to know what mean for you "be rich" as not always this means "have a lot of money". But lets finish the philosophical part and beggin the useful one.
Do you know what you expect from be a trader ? If not, maybe now is the time to think about it...
Note: bellow i writte the values $us/€ but we can use any currency for that. Eventually we need to adjust the values taking in consideration the exchange ratios related to the currency we will use.
Let's suppose you want to be a trader at full time. Let's suppose you have a initial capital to beggin with of 5000$us/€ or 10.000$us/€. Let's suppose you fell confortable winning a average of 2500$us/€ every month. Do you know what you need to do to get this values ??? What capital, winning percentage and time you need ??? Let's suppose you have that capital, you are a great trader who wins 5% consistently every month and as measure of security you only withdraw 50% of your winning value to prevent eventual drawdowns and to expand our capital to win more later. I will show you what you must expect in the tables bellow.
Image 2: We can see with a initial capital of 5.000$us/€, a average winning percentage of 5% monthly and a monthly witdrawal of 50% of winnings we need more than ten years to get a expected monthly return of 2.500$us/€ maintaning all conditions referred before. Also, we know with this condiftions we need about 100.000$us/€ of capital to get the 2.500$us/€ monthly return.
In next tables i will show you the time needed without withdrawal and also for 10.000$us/€ of starting capital.
Image 3: Same conditions as last image but without any withdrawal. We need five years and two months to achieve 100.000$us/€.
Image 4: Same conditions as in table on image 2 but for 10.000$us/€ capital. It tooks almost 8 complete years to achieve 100.000$us/€.
Image 5: Same conditions as in last table but without withdrawal. It took complete four years to achieve 100.000$us/€.
Here we can see some examples of what we can expect. But don't go only by the numbers, treat them as is, numbers. This calculations are linear calculations, and the reality don't care about it as we don't live in a linear world - everything changes along the time. Also you can use it to get some more real view about your goals. Use it just to see what may be a expectation and get some fun or not about what you sometimes you hear or read about systems or traders profitability... By them and with this table we are more healthly (in money) than Bill Gates (don't remember the actual number one). If you want to do some calculations i provide this excel table for you in Dukascopy forum. In this excel file you fill the initial capital, the average percentage of monthly winning expectancy and the percentage of withdrawal you want monthly and the table fill the calculations for twenty years. You can get it here.
As usual i hope you like this article. I'm sorry if this article is somewhat confuse... It's only about toughts and some things i think in my learning path.
Trade well and good luck.