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Mr Ace trader 1 has a 50% winner to loser ratio, and has an excellent risk reward ratio of 2.1 : 1
Mr Average trader has a 50% winner to loser ratio but his risk reward ratio is a moderate 1.9: 1.
So the expectation is that Mr Ace trader will make higher profits than Mr Average, so lets see what happens.
Mr Ace trader has no knowledge of optimal risk, and just uses an arbitrary 10% fixed percentage to size his risk amounts.
Mr Average trader however has decided to use optimal risk formulas to improve his profits and calculate his trade size.
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Mr Ace Trader who risked 10% on each trade has 5502 equity after 40 trades (Red line) Mr Average Trader used the optimal risk formula to calculate his size to 23.68% and has 7579 equity after 40 trades (Blue line) Its interesting to note that a trader with inferior statistics made more profit because he optimized his trade risk. But its more interesting to note that while Mr Average extracted the maximum profit his statistical performance allowed, Mr Ace could have made equity of 14752 ( more than double Mr Average ) if only he had employed optimized trade risk. Whatever your trading style, and regardless of whether you trade stocks, futures, currencies or options, you can improve your long term trading performance by using this formula, and assuming you have the intelligence to understand that optimizing trade risk is far more important than where you enter and exit then the $10 cost of this formula will be repaid many times over.
Most professional traders struggle to achieve a winning trade percentage of more than 40-50% and a risk reward ratio ( average winning trade profit / average losing trade loss) of more than 1.9 - 2.0 : 1. But how the pro's achieve incredible returns year after year, is more to do with how they manage the risk on their accounts. This is the main reason why so many new traders either fail to make healthy returns or wipe out their accounts all too often, but the seasoned pro traders are their in the market year in year out.
Depending on your own unique trading statistics, you can rest assured that the values you input into the Excel spreadsheet will calculate your optimum risk amount EXACTLY. All the finer points of how to use this formula are set out in clear and simple form in the word document that accompanies the Excel formula spread sheet.
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