This post originally appeared on TraderPlanet.
I have a real issue with magicians. I put them in the same category with clowns, mimes, and Canadian teen idol singing sensations; they just creep me out. I mean just look at David Copperfield and the late Doug Henning…do I need to say more?
However, just because I don’t like magicians doesn’t mean I don’t like magic. Today I am going to show you some trading magic that will make you profitable even if you lose on two thirds of your trades.
In the last month I have done three posts on three separate stock trades. The first in was in Morgan Stanley ($MS) where I suggested risking 50 cents for a potential $3.00 gain.
Then next was in Chesapeake Energy ($CHK) where the risk was $1.00 for a $5.00 reward.
The last was in Vocaltech Communications ($CALL) which risked $1.00 but didn’t have a specified reward target.
MS did trigger and hit its target. CHK triggered, but failed for a possible $1.00 loss. And CALL didn’t trigger, but let’s just say it did and you lost a buck on it.
But where is the magic O’ Great Lundini?
The magic is in how you size your positions. By taking a set percentage of your account equity, you end up with a fixed dollar amount of risk capital on each trade. You divide that dollar amount by the spread between your entry and stop on each trade ($.50 on $MS, $1.00 on $CHK, and $1.00 on $CALL). That gives you your position size on each individual trade.
You then are risking a standard fixed amount or “R” on each trade.
DO THE MATH
On the $CHK trade you then lost 1R. On the $CALL trade, 1R as well. But you made 6R on the $MS trade, for a net profit of 4R.
So even though you lost on 66% of the trades I suggested, you are net profitable.
See related post The Most Important Concept For Successful Trading.