Page 7 - Module 6 Costly mistakes

Module 6 – How to avoid costly trading mistakes

trades and have a mindset that, seeing that their equity is already down, losing a bit more won’t be
such a big deal. On the contrary, taking losses early can improve your trading system.

7. adding to a position as a money management tool

Adding to a losing trade
This is bad methodology and should be avoided in 99% of all situations. Whereas on paper it may
seem like the logical solution, the reality is that it destroys emotional capital and wipe out entire
trading accounts. Adding to a losing trade does not really improve the situation as the trader now
has 2 positions which have to move much further to reach Take Profit level.

Adding to a winning trade
Opening a new position with the same Stop Loss and Take Profit order as the initial position, after
prices has moved into your favour reduces the expectancy of
the trade. The Reward Risk: Ratio of the second trade is
Adding to a winner reduces the smaller compared to the first one.
overall Reward:Risk Ratio and the
expectancy. Scaling into a winning trade can be a good strategy if it is done
with care and forward planning. Traders who add to an
already profitable trade can end up with a loss much faster
because price must reverse only a little bit to wipe out their profits.

8. the magical combination

The Reward:Risk Ratio measures the distance
from your entry to your Stop Loss and your Take The reward of a trade is always uncertain
Profit order and then compares the two distances. and potential. The risk is the only thing
When you know the Reward:Risk Ratio for your you can control about your trade.
trade, you can easily calculate the required
Winrate (see formula below). You can quickly see
whether the Reward:Risk Ratio is large
enough for your historical Winrate or if
you should skip that trade when the
General Formulas Reward:Risk Ratio is too small.

Minimum Winrate = 1/(1+Reward:Risk) Example 1:
If you enter a trade with a 1:1
Or Reward:Risk Ratio, your overall Winrate
must be higher than 50% to be a profitable

Required Reward:Risk Ratio = (1/Winrate) - 1 trader:
1 / (1+1) = 0.5 = 50%

Example 2:
If your system has a historical Winrate of 60%, you need a Reward:Risk Ratio of 0.6 : 1 to achieve
a long-term expectancy:
(1 / 0.6) – 1 = 0.7

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