Hey everyone. I've been deep in the lab working out the details of my new spreadsheet and doing finance homework. i hope everyone is doing ok!, check out what this new spreadsheet can do!:
We all know trading is a business, and a damn hard business at that. So just like any other business, we have expenses (losing trades) that are a normal part of working with probabilities. Let me quote a popular trading book Trading in the Zone to help describe the purpose of the xls.
Mark Douglas wrote:Here's the way I scale out of a winning position. When I first started trading, especially during the first three years, I would thoroughly and regularly analyze the results of my trading activities. One of the things I discovered was that I rarely got stopped out of a trade for a loss, without the market first going at least a little way in my direction. On average, only one out of every ten trades was an immediate loser that never went in my direction. Out of the other 25 to 30 percent of the trades that were ultimately losers, the market usually went in my direction by three or four tics before revising and stopping me out. I calculated that if I got into habit of taking at least a third of my original position off every time the market gave me those three or four tics, at the end of the year the accumulated winnings would go a long way towards paying my expenses. I was right. To this day, I always, without reservation or hesitation, take off a portion of a winning position whenever the market gives me a little to take. How much that might be depends on the market.
So, what does this spreadsheet actually do?
It covers your expenses!! Like a good little boy.
How does it do that?? I can hear you say. Well,
You must first know 2 things.
1) out of 20 trades, how many never hit your TP1? and
2) what percent of your expenses do you want to cover?
You fill these values in the top right of the sheet. If you are as good as Mr. Mark Douglas you would enter 2 out of 20 trades are immediate losers. Check your current trading log to find out how many of your last 20 trades were losers. Or just start with 6 and go from there.
SO, TP1 is calculated to give you the TP1 size that would cover 100% of your losing trades if you lose 6 out of 20. Of course, that single TP1 will not cover all 6 of the loses, but the combined TP1 of the 14 other trades will cover exactly 100%. This leaves TP2 and TP3 for your profit.
TP1 is solely to cover your expenses, the TP on the remaining quantity of your position is up to you. Out of the 100% of quantity that remains, you can shift between TP2 and TP3 by using the large arrow buttons. This will also move the pie graph which represents the proportion of TP1, TP2 and Tp3.
This spreadsheet lets you 1) cover your expenses and 2) shift the balance between risk and reward -- even while "in" a trade.
Imagine if you move your stop to BE every time TP1 is hit (never let a winner turn into a loser). All of your losses that do not hit TP1 are covered by the ones that do hit TP1. The trades that hit TP1 and then stop out at BE do not hurt you. What is left are the trades that hit TP1 then TP2 and maybe even TP3.
Remember, the closer your TP is to you entry, the more likely it is to get hit, but you will also have to lump more of your position on TP1 because it is so low in pips. Conversely, you do not need to take much of your position off on TP1 when it has more pips between it and your entry, but it is at more risk of not being hit. This is the part that is up to you! Use TP2 and TP3 for your "profit" targets and TP1 as a sure way of covering your losses.