Because I get to work with new traders in our DailyFX Trading Course, I get a pretty good idea of why new traders lose money. One of the reasons is that these traders do not have an idea of what they want to achieve. Sure, everybody wants to make money, but we need to have realistic expectations to get to that level.
I like to compare trading to flipping a coin. If I paid you $1 every time the coin landed on tails and you paid me $1 every time the coin landed on heads. We could flip all day and night and most likely break even after every 100 flips.
So how is this information useful to a trader?
I like to recommend to new traders that they think in terms of winning half of their trades. If you trade with the trend and only take solid setups, this can be done. But that is only half of the battle.
If we win $1 when we are right and lose $1 when we are wrong, how can we make money?
The answer is that we either have to win more often or win more when we are right. The idea then is to not win $1 when we are right, but to win $2 when we are right and still only lose $1 when we are wrong. That is our 1:2 risk:reward ratio we talk about in trading. If you are risking 50 pips on the trade, you should look for twice that in profit, which is 100 pips.
Now we can look at that coin toss differently.
If I paid you $1 every time the coin landed on tails, but you had to pay me $2 every time the coin landed on heads, I would want to flip that coin 24 hours a day for the rest of my life. Even if I lost five flips in a row, I would still want to bet on that next flip because I know that after a series of 100 flips, I would still win about half of the time and lose about half of the time. So no matter what happens on the next flip, I would consider myself a winner because after a series of flips, I would most likely be profitable.
Heads I win…and tails I win too.
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