2.16. Trading Profit-Loss Formula.
I have told you all my basic principles of my trading system. Study them and change your perspectives of trading Forex. If you change your perspectives then you will automatically change how you approach the market. Let’s put all together in designing your trading system.
These principles will be your guidance and your goals when designing your trading system:
- Safe and profitable that last forever regardless of the market condition.
- Simple and clear that you can trade without guessing case by case and hesitation.
- Winning all the time.
- Make profit regardless of market conditions.
- Not based on prediction.
- Not very demanding physically and mentally.
- Use proper leverage in order to maximize profit and stay safe.
- Spread risks by having multiple trading systems that are based on risks; low and medium risk trading systems.
These are underlying assumptions you need to make regarding Forex Market. You need these assumptions when designing your trading system.
- You can not predict the price movement. So stop to predict.
- Probability of price movement is 50:50; 50% price going up and 50% price going down.
- The smaller your Target Profit or Stop Loss, the higher the probability and the more frequent it will be hit; the bigger your Target Profit or Stop Loss, the less the probability and the less frequent it will be hit.
- Value of a currency can not go to zero.
- Price will move within certain range, because price of a currency can not be too high or too low. The government of a country will try to balance its currency value relative to other currencies value.
- Whatever goes up will go down, and vice versa.
If you compare with assumptions for 95% of traders:
- I can predict where the price is going to be by using fundamental or technical analysis. But the fact is nobody can predict where the price is going to be in the short term.
- If my prediction is wrong, I can stop further loss by using cut loss. But the fact is stop loss is not guaranteed to be executed. If there is a gap or extreme volatility your stop loss or margin call can not save you. You can ended up with negative balance.
So, if your underlying assumptions are all wrong from the beginning, how can you be successful?
Now, you need to break down and dissect every elements and variables of Forex Trading. Everything can be calculated in Forex.
Profit of Closed Trading = Total Lots x Target Profit Points
Loss of Closed Trading = Total Lots x Stop Loss Points
Profit from Swap = Total Lots x Positive Swap Rate x number of Days of your open position.
Loss from Swap = Total Lots x Negative Swap Rate x number of Days of your open position.
Trading Cost = Total Lots x Spread Cost
True leverage = Capital that supposed to be used / Capital you actually use
ROI is influenced by leverage. The higher your leverage, the higher your ROI will be.
Total winning trades or total losing trades are influenced by probability of your Target Profit or Stop Loss being hit
When you breakdown those formulae above, you will get all the variables influencing Forex Trading:
- Total winning trades.
- Total losing trades.
- Trading profit per trade.
- Trading loss per trade.
- Probability of Target Profit or Stop Loss will be hit.
- Target Profit.
- Stop Loss.
- Pip value.
- Total lots per trade.
- Positive Swap Rate.
- Negative Swap Rate.
- Time (number of days of your open position).
- Probability of price movement.
- Mentality and Attitude.
There are 18 variables of Forex Trading. You can add more by yourself. But no matter what you add, your ultimate goal is to maximize your ROI and stay safe. You need to tweak every variable to achieve optimal balance among variables.
I will discuss in more details how to optimize each element in my mentorship program.