My Trading Experiment: Is it possible to Make Money when No. of Losing Trades is More than Winning Trades?

I often hear this saying from trading gurus: You can still make money when the number of times that you lose is more than the times that you win! Does that sound like a snakeoil salesman? Actually, it is possible with proper money management.

Money Management

In order to make money when the number of my losses are more than my winners, I would need to apply the same risk reward ratio whenever I place a trade. This would require strict discipline and placing a stop loss and target price for every single trade.

Assuming I am willing to risk losing $150 in order to make $300 for each trade, my risk reward ratio would be 1:2. The table below shows how much money I could potentially make or lose if I apply the same risk reward ratio for a total of 10 trades. From the table shown, I am still making money if I lose 6 times and win only 4 times.

Risking $150 to make $300

So what does the colour in the table signify? In order to make money consistently, the trading strategy just needs to minimally hit the yellow band. Worse case scenario, out of 10 trades and I win only 3 times the overall lose would only be $150. Sounds good but is it really that easy?

1 issue which traders faced is commission fees. Basically, the more we trade, the more commissions we would need to pay. If we trade local stocks on a small account size, the minimum commissions for each buy and sell position could already take a huge chunk of our profits. Another problem with trading local stocks market is the lack of a good stock screener that is free of charge. The subscription fee for stock screener that we could customize based on TA and FA would take another chunk out of our profits. Ouch! Unless you have a great trading strategy which places you in the green band of the table, the additional fees may not be an issue. For the context of this post, I am referring to strategies that have only 50-50 chance of winning and losing, with occasions of  slightly higher or lower win-lose ratio. 

The Experiment

I have embarked on an experiment to test out if I could make money consistently even when there's a possibility that my number of losses could exceed my number of winners.

In order to tilt the odds of success in my favour, my risk reward ratio will be set at 1:2. 

Demo account will be used to isolate human emotions. The purpose of this experiment is to test out my trading strategy + money management strategy without factoring human emotions. In the event that the experiment fails and I could not make consistent profits, there will be no reason to trade using real money. The experiment will be carried out until end of the year.

Trading Instrument

So in order to trade using a small account size of say $5000, I need to trade an instrument that do not have high commission fees and provide a free platform which I could test out my trading strategy without risking any real money.

This instrument also has to be able make money irregardless if the market goes up or down. Both long and short positions need to be carried out easily.

I must be able to trade on a part-time basis.

Trade setups have to occur often such that I have to be able to make at least 10 trades per month. Why 10 trades? From the table above, I would still make $750 per month if only 5 out of the 10 trades are profitable. If my account size is $5000, the growth would be 750/5000 x 100% = 15% in 1 month. Actual gain would be 750/(150 x 10) = 50% in 1 month!!! Why 150 x 10? This is the actual amount that I am risking for the 10 trades.

Can you guess which trading instrument fit these conditions?

It is none other than Forex. I have a demo account with Pepperstone Group which I am using solely for experimenting strategies. 11th of July was the first day of the experiment. I have highlighted the trades which are valid for the strategy which I am currently testing. There is a trade which shows -15.00. I had keyed in the lot size wrongly. The loss should be -$150.

I had completed a total of 5 winning and 5 losing trades. After factoring in the commissions for the 10 trades, the overall gain is $734.05 in 1 month. Different brokers would have different commissions though. There are still 2 open trades that are currently running at the moment.

For the month of Aug, I will be using another demo account with a different broker. The account size would be exactly $5000. I would adhere strictly to the strategies that I had setup with this new account. 

To be continued ...