Many people trade irrationally, they try to trade the next flavor of the week stock. What is in the news or forums without a game plan. This lack of planning will only discourage you and incur constant losses to your portfolio. Here is the best example I can give people that are losing money on their picks. If you stay focused on 10% profits and 2% losses, your monthly gains will out-pace your losses and your portfolio will go up every month without fail.



EXAMPLE:

Starting with a trading amount of $10,000 invested into 5 different stocks consecutively. Calculate your share price, costs (Commissions) incurred for buying (Entry Position) & selling (Exit Position) calculating profit or loss. The amount of money paid per share is not factored into this and does not need to be. What we are doing is tracking percentages on your trades. Here is a trading summary of your actions.

First trade you invest $10,000 on a stock you buy in at a desired price, price rises and your get out on a 10% profit of $1,000.

Second trade you re-invest $10,000 on a stock you buy in at a desired price, price rises and your get out on a 2% loss of $200.

Third trade you re-invest $10,000 on a stock you buy in at a desired price, price rises and your get out on a 10% profit of $1,000.

Fourth trade you re-invest $10,000 on a stock you buy in at a desired price, price rises and your get out on a 2% loss of $200.

Fifth trade you re-invest $10,000 on a stock you buy in at a desired price, price rises and your get out on a 10% profit of $1,000.

Summary of executed trades:

First trade $1,000

Second trade -$200

Third trade $1,000

Fourth trade -$200

Fifth trade -$200

Sub-total $2,000 in gains

-$600 in losses

Total =$1,400 in Profits

So you can see that if you have one winner on five picks you will still come out profiting. 3 or 4 winners will increase potential profits even greater by monitoring your losses. This is key strategy which is overlooked by many, everyone wants to make money but hates to lose it.

To make money at the stock market you have to have the mind set that you will lose money a greater percentage of the time than showing positive gains. Even though you are having losses you can still profit by controlling the amount lost or gained using percentages. Now having incremental percentage gains are only amplified when the dollar value goes up. Instead of a dollar stock, look at the gains on a ten dollar or a hundred dollar stock. Increased profits mushrooming in your trading account by the shear volume of positions that you hold. Think of owning a dollar stock and having 1,000 shares, now add a couple of zeros to that and having 100,000 shares and then ratcheting up profits in your account

PRIOR TO MAKING A TRADE.

Mathematical Expectation of the 10/2 System Formula:

ME = [{1 + (AW / AL)} * PW] ? 1

WHERE:

ME is the mathematical expectation.

AW is the average winning amount.

AL is the average losing amount.

PW is the percentage of winning trades for the strategy.

EXAMPLE:

Even if you only have a 20% winning average on one out of five trades, you will still have positive cash flow by averaging out your winning trades minus your average losing trades. Investing a generic $10,000 on every trade, following the 10/2 rule, taking a 10% profit or a 2% loss.

ME = [{1 + ($10,000 / $2,000)} * 0.20] ? 1

ME = [{1 + (5.0)} * 0.20] ? 1

ME = [6.0 * 0.20] ? 1

ME = 1.20 ? 1.00

ME= 0.2

Giving you a positive mathematical expectation on 1 win out of every 5 plays.

EXPECTED RETURN

Average amount of P/L expected for each trade using the 10/2 rule.

ER ? (PW * AW) ? (PL * AL)

WHERE:

ER is the expected return.

PW is the probability of the winning trade.

AW is the average winning amount.

PL is the probability of a losing trade (1 ? PW}.

AL is the average losing trade amount.

EXAMPLE:

If you have a 20% winning average, the average winning trade is $1,000(10% profit) and average losing trade is $200(2% loss).

ER = (0.2 * $10,000) ? (0.8 * $2,000)

ER = ($2,000) ? ($1,600)

ER = $400

This article was done by our own stockhideout.com member mouser57

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