Trading is a numbers game more than anything else. Here are seven crucial numbers and statistics that a serious trader needs to set expectations around and know. Some can be found through historical back testing, some can be controlled, others give the trader a target to aim at. Once a trader understands these numbers and does the work to understand how they fit into their trading system to closer they are to success. If you are a serious trader you will do the work to know the numbers as best as you can.
Winning percentage: What percentage of trades to you expect to be profitable? You can still be profitable with less than 50% winning trades if your winning trades are bigger than your losing trades.
Longest expected losing streak: What is the maximum amount of trades you expect to lose in a row during a losing streak? Most systems can have up to 10 losing trades in a row each year, can you survive that?
“R” multiple/risk per trade: This is the dollar amount you are risking to lose if you are wrong about a trade. Can you mentally and emotionally handle this number when you are wrong?
Percent of total trading capital at risk per trade: This is the percentage of your total trading account you are willing to risk per trade if you are wrong. Risking 1% to 2% of total capital per trade through the right position sizing and stop losses will prevent the trader from blowing up their account.
Risk/Reward Ratio: How much are you risking compared to how much you expect to make if you are right? A 1:3 risk/reward ratio is very good because you can be profitable even with less than a 50% winning percentage.
Expectation of maximum draw down: The maximum percent of capital you expect to be down off your equity peak at any given time. The lower the draw down the less stress with dealing with having to make it all back. It is harder to come back from a draw down because a 20% draw down takes a 25% gain to get back to even, and a 50% draw down takes a 100% return to get back to even, better to avoid draw downs in the first place.
Expected annual return: What annual return are you aiming at? The higher the targeted return the more risk that will have to be taken on and the possibility of a bigger draw down to get to those returns. Remember the best money managers in the world do good to average 20% a year long term and the best traders in history have had 50%-60% returns in the best years on average. A target is crucial to guide your trading to achieve it.