Some obvious facts:
You need to keep some capital in your account in order to trade
You want to avoid "reloading" your account equity with fresh cash
You need to gain more dollars than you lose when trading to increase your equity
Some numbers to understand:
Keep records of ALL your trades -- the winners, losers and break-even trades
You need to know the average amounts you win and lose on each including commissions
You need to know the total number of trades you take and the percentage
of each type you have, relative to those totals.
These basic statistics will help you develop important rules, like developing Target and Stop-loss levels as well as tell you how often you should trade.
From these numbers you can derive other important facts such as your Win-Loss ratio,
Basic example of how to use your Win-Loss ratio:
This ratio can be presented as a percentage. A ratio of 50/50 tells you that you win on 50% of your trades. This is the same percentage that heads or tails will show up when flipping a coin over time...it's a break-even proposition which would seem to be antithetical for gaining equity in your account.
But having a 50% Win/Loss ratio can be a very profitable trader's statistic...If your average Amount $Won vs. Amount $Lost ratio is at least 2 to 1, your account equity will increase over time without any need to inject fresh cash.
A break down using 100 trades:
A 50-50 Win-Loss ratio and a 2-to-1 $Win-$Loss ratio
50 Winning trades with an average of $50 gain, 50 Losing trades with an average $25 loss
Winning trade dollars = $2500
Losing trade dollars = $1250
Gross gain/loss = $1250
For simplicity's sake this example does not include trading costs such as commissions.
These costs can have a significant effect on your account's equity accumulation over the long term and should be considered in your statistics.
Think about how changes to any or all of these numbers could enhance your profit...
1) Increasing your Win/Loss percentage
2) Increasing your average Winning trade dollars
3) Decreasing your average Losing trade dollars
