How can you be wrong about a trade and still make a profit?

My main points of reference are the daily charts, the four hourly, and maybe the hourly chart when my trade has been entered to manage the exit. So scalping really isn't something that I consider as a part of my strategy, or something that even appeals to me at the moment.

However, if you look over my trading statement on the page www.mt4pips.com/lasoi you'll find that there are quite a few trades where the profit or loss is only a few pips. Those trades are not my attempts to scalp the market (that much is clear simply because of the period of time some of the trades are open; if I was trying to scalp the market for 1 or 2 pips, leaving the trade open for several hours would just be maddest!). What they represent are my decision to get out of the trade because it did not react in the way that I thought it would. I find this useful because it can mean that even if I was wrong about what I thought the market was going to do, I can still make a profit, or reduce my loss to less than 1R and preserve capital.

That last point about not losing more than 1R is very important to me. Typically my objective is to make a minimum return of greater than 1.1 times what I am risking (mostly a lot more than 1.1R). What that means is that for every unit of risk (or 1R), I would expect to have the potential to make at least a return 1.1 times that risk. So, if I am risking losing £100 on a trade, at the very least I would need to have a reasonable probability of achieving £110.

The monetary value of what the 1R will be depends on what percentage of capital I have decided to risk. For example, when getting into a trade I know that the maximum I'm willing to lose is roughly between 1% and 5% of my capital (the exact percentage amount depends on my confidence in the probability of the trade set-up being successful; but the risk is never more than 5%). So if I was going into a trade trade where I was willing to risk 3% of my £5,000 capital, it would mean that the 1R would equate to £150 at risk. Going from that, it would mean that I'd be looking for a profit of greater than £165 (i.e. £150 x 1.1). Nevertheless, I would still consider getting out at less than that or at a loss less than 1R if I thought that the dynamics of the trade had changed i.e. the market did not move in the way I thought it would.

Tracking my progress with MetaTrader 4

I have just set up this blog and configured my MT4 demo account with a free app from www.mt4pips.com which is used to show a MT4 statement on-line. You can track the progress of my account on the page http://www.mt4pips.com/lasoi . It shows all of my progress so far since around September 2009.

There was a lot of experimentation with this account over the 6 months or so I have been running it (bare in mind that I am still holding down a full-time job while doing this so I'm not trading nearly as often as I would like to!).

If you look over the statement you will see that there are much smaller position sizes September through to December 2009, but in January 2010 I became a little more confident with my observations as to how the market moved and decided to increase my position sizes. Of the £5,000 account, the maximum I would risk on a trade was less than 1% to begin with, but since January I would risk a maximum of up to 5% depending on how well I knew the currency pair and how likely I thought the trade was to meet my profit target (typically I would be risking between 2%-3% of capital).

I hope to write some more about my thoughts on position sizing and the characteristics of the different currency pairs in the posts to come.