So the point of this series of articles is about understanding and developing a strategy to trade smarter not harder (or more often).
As stated in the Part 1; “One thing to consider is our ability as traders and our emotional downfalls in our decision making.
Anyone who has been in this game long enough, will understand that the majority of the time we lose, it is not because the market didnt do what you thought it would, in fact a lot of the time YOU got in your way and freaked your self out.
Panic selling the dips, fomoing into the tops, or sitting on the sidelines angry you talked your self out of what would have been a great trade.
This is the opportunity cost of human interaction, some times we are just flawed operators and in most cases, over trading will end with poor results.”
Now this isnt to say, “just dont trade cause you might screw it up” thats just self doubt or limiting beliefs, and isnt true at all.
The point is some times OVER trading or over ANALYSING can lead to poor results over time, specially if your in a un-healthy state of mind.
The idea is to build a profitable trading system based on controllable variables like risk management, positions sizing and risk to reward then you only needing to focus on your WIN RATE as the only variable to your performing outcome.
Really want I want to do here, is to outline and help you understand and develop a strategy to have the desired outcome as easily humanly possible, using the theory of trading time for money.
I like to use a ratio of Trade:Reward, this is to give us an overall idea of how much time we are trading for money to see how efficient we are at extracting money from the market or how well oiled we are as a money making machine.
“Trade” essentially equals the amount of time we spend either charting or analysing the trade, placing orders, managing those positions, setting stop losses or take profit points, closing positions and documenting our results.
As an example 1 trade may require a total of say 1 hour of your time.
“Reward” is basically the profit or money you make from each trade based on a $ value, to keep this nice and simple lets work on a value of $1, where 1 rewards = $1.
There for a Trade:Reward ratio of say 1:10 would interpret to 1 hour of work to make $10 profit, therefor you are earning roughly $10 an hour.
Lets look at this from a different perspective of a traditional job where you get paid say $30 an hour, your ratio will be 1:30
The downside to a traditional job, is its very hard to scale that ratio.
As I mentioned in the last article, you either have to upskill for a promotion to get a pay rise, or find a better paying job, because working over time is just like trading more often.
If the ratio is the same you are simply just trading more of your time for the same results and we only have so much time in a day to hand over.
So now we have the concept of the Trade:Reward ratio (which we are now going to refer to as TR) and how to evaluate our performance in an hourly rate, lets put this into practice and see how we can scale this for our desired outcome in trading.
Lets say your account size is $10,000 and you use a consistent 1% risk per trade which we denote as 1R there for 1R = $100.
If you use a consistent Risk:Reward ratio of 2:1 then that means every trade you win you will make $200 profit and every trade you lose will be a loss of $100.
If you where to win every trade your TR would be 1:200 ($200 an hour, not bad)
But lets say you dont win every trade and in fact you have a 50% win rate. there for every 2 trades you take, you will win one and lose one.
The trade you win, you will make $200 and the trade you lose will be a loss of $100.
That is still a net profit of $100, out of 2 trades.
There for our TR is now 2:100 or 1:50 ($50 an hour).
make sense?
Lets do some more examples with some more realistic figures.
Lets say you take no less than 2.5:1 RR trades but your win rate is only 40%.
That means out of 10 trades, 4 of them you will make $250 per trade or $1000 total profit and 6 trades will lose $100 each with a total of $600 loss. This is still a net profit total of $400 from 10 trades, therefor your TR is now 10:400 or 1:40 ($40 an hour)
Our pay rate is dropping pretty fast at this rate…..
So how do we fix it?
Well there are really only 2 variables at play here, either taking higher minimum RR trades or having a higher win rate.
Lets say we have the same win rate of 40% but we now take a minimum RR of 4:1 trades.
That means out of 10 trades, 4 of them will make a total of $1600 profit and 6 will make a loss of $600, thats a net profit of $1000 from 10 trades or a TR or 10:1000 or 1:100 ($100 an hour)
If we can stick with a min of 4:1 RR and increase our win rate to 50% then our total profit will be $2000 and a total loss of $500 which equals $1500 total profit from 10 trades
10:1500 or 1:150 ($150 an hour)
Thats a damn good pay rise for simply having a higher win rate…
Lets look at another example in a less desirable situation.
Lets say someone uses a minimum of 1.5:1 RR and has a win rate of say 45%.
and maybe they are doing 100 trades in a week.
45 x $150 = $6750
55 x $100 = $5500
Net profit = $1250
That works out to be a TR of 100:1250, this trader is still making $1250 a week which seems descent, how ever if they have traded 100 hours to get that result then they are essentially paying them selves about $12.50 an hour and working more than twice the hours of your average day job to get the same result.
In other words, you are terribly underpaid.
One way you could fix this, it to maybe be more efficient with your time in setting up trades.
If you can develop a time efficient way of trading and get your trade times down to say 30 minutes instead of 1 hour, well then you just gave your self a 50% pay rise, as those 100 trades now convert to 50:1250 or 1:25
Combine that with higher RR trades and a higher win rate strategy and your back on the path to a high paying job.
The purpose of this article was just to highlight a way to track or monitor your performance based on a trading time for money theory.
A lot of people wander through there trading journey with no real overview or tracking of there performance, and although they may be making really good money they may not consider how much time they are really trading for there reward.
I’m not here to give you a winning formula or tell you what you should be doing. But I do believe its an important piece of the puzzle, that you should be aware of and maybe it will help you to tweak your strategies to be a more efficient Money Printing Machine.
Stay tuned for Part 3 where we look at some charts and figure out some ways to be more efficient and have a higher TR.
Peace
