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Percent of Their Trades - What Exactly Does This Mean?

I've Heard Traders Say that 90 Percent of Their Profits Are Made on 10 Percent of Their Trades - What Exactly Does This Mean?

This is one of the most profound statements you will encounter in the futures markets. Understand it, internalize it, and believe it. I'll explain it to you as succinctly as I can. The simple fact of life that characterizes all commodity trading is that about 90 percent of all trades will eventually balance themselves out as neutral. After subtracting commissions, slippage, small winners, small losers, large losers, and medium-sized winners, the net result, or bottom line, will often be zero.

What's left will be 10 percent of the trades whose sum total must be profitable if the overall outcome of your trading is to be positive. It would, of course, be preferable if the 10 percent of trades consisted of large profits. This is what ultimately makes the difference between winners and losers. Winning traders are able to amass a certain number of highly profitable trades. But these trades are in the minority. They will nevertheless prove to be the backbone of the system.

In back-testing trading systems we find that most systems base their success on only a relatively few large winning trades each year. It is important, therefore, that the position trader or the day trader ride each winning trade to its maximum potential or its ideal exit point as determined by the system that is being used. To exit too early may cut your profits short. The idea is to cut your losses short while maximizing your profit.

How Much Money Do I Need to Begin Day Trading?

Here is a case in which more is clearly better. The less money you begin with, the less likely you are to be profitable. The reasons are simple to understand. If you begin with $3000 and you lose $1000 three times in a row, you are out of the game. It is not unusual to lose three times in a row. In fact, it is usual to lose three times in a row or more. Even losing on seven day trades in a row would be fairly typical.

In addition, you must also make certain that you have sufficient margin money for the markets you want to trade. While some brokers will allow you to day trade with relatively little capital in your account, most brokers want to protect themselves from potentially uncollectable customer deficits and will therefore require you to have enough money in your account.

Finally, the amount of money you will need to get started will also depend on how volatile the markets are. The more volatile a market, the more money you will need to have, since the price swings and potential losses will be fairly large. There is, therefore, no quick and easy answer to the question of how much money you need in order to get started. The only thing I ask you to be certain of is that you do not lower your odds of success by starting with a small amount of capital.