Tek Wee sent me an interesting Equity Curve Random Generator. So what is this generator about? It is for you to calculate your profitability in the long run, with a specific risk reward ratio per trade. In other words, how many times can you be wrong, yet you can grow your capital continuously. I try to simplify as much as possible:
Fact number 1 – you do not need to be right on every stock/investment to be profitable. Yes, you can lose. But the next question is how much can you lose?
Risk Reward Ratio (RRR) – we know that we need to take risk to gain reward. To be a sensible trader/investor, you should be looking for at least 1:2 RRR. This would mean that you risk $1 to earn $2. For example, you buy a stock at $10, and you are willing to risk $1. You will sell if the stock goes to $9. For the upside, you are looking at $2 gain and will profit take when the stock price goes to $12. Hence, your RRR is 1:2.
Let’s say you always follow this RRR for every trade/investment you make. And you are only right 50% of the time. How sure are you that over 10 years, your account will end up higher than you started? Take a look at the chart, which I generated based on these parameters. Read more…