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In 2016, Nial won the Million Dollar Trader Competition. I am going to present three ideas on money management involving simple maths that you can apply to your trades right now. Here are the concepts in no particular order: 1. Understanding the risk vs reward profit ratio in your trading.
Using pyramiding in a single trade position to magnify gains. This article won’t discuss trade setups in any detail, rather it’s focus is on how simple maths can be applied to your money management. If you don’t have the patience to read and understand this lesson, you certainly are not ready to learn the price action patterns I trade with. Winners need to be bigger than losers. Sorry to repeat what you already know, but it’s an unavoidable fact that to make money over the long-run, your average winning trade needs to be bigger than your average loser. In a nutshell, the only way to achieve this is having your risk be small on each trade and your profit objective being larger than your risk, usually two to three times or more.
Over time, you will average around 1. 5 to 1 and 2 to 1 across a large sample of trades if you’re doing well. Here is a table that presents 10 hypothetical trades, each with a constant risk of 1r and various targets. Some trades lost and some trades won, the end result shows the average winner at approx. Easy as an example but in the real world harder to do obviously.
Pyramiding in a single trade The power of snowballing position size inside a single trade. We can turn an initial 1R risk into potentially a huge R profit by adding a new position onto the trade as it moves in our favour, which essentially allows us to trade with the markets money since we are not taking on any new risk. The result is a snowball effect which builds a small trade into a much larger winner if the trade continues in your favour. For a greater understanding of this, check out this article on pyramiding trades for big profits. If you’re in the market long enough you will know when you’re on a winning streak and when a market is ripe for the picking. Yes, that statement is arbitrary to the technical minded and gut feel is definitely applied to this concept.