Every successful trader goes through ups and downs on the road to becoming consistently profitable. It requires dedication, discipline, and mental effort to reach the top. One critical factor ignored by many retail traders is applying and understanding good mathematics to their trading. Crunching through numbers can feel troublesome at first; however, it will pay off quite well in the long term.
For beginners and amateurs, the proper application of mathematics can help them significantly in loss recovery. Let’s go through all the advantages and the proper ways to use math in markets.
Some traders may use mathematics to predict future market movements or construct trading strategies based on mathematical models. Here are a few other advantages you should know:
Traders, who make up 90% of the losing community, ignore one of the important constituents of trading, i.e., risk management. They either take too much risk or let their emotions get the best.
To understand risk management regarding loss recovery, let us consider an example of two traders, John and Emily. Both have an initial account value of $10,000. John, a conservative trader, decides to risk 1% on each trader for the next five trades, while Emily chooses to put on a whopping 50%. They use a stop loss and take a profit of 10 pips for a risk-reward ratio of 1:1.
They lose the first two trades and then win the next three. In the end, John is left with an additional $100, while Emily has lost the whole value of her account.
Ending balance after losses
Percentage gain to restore losses
Balance after gains
The table shows some important mathematical metrics. Can you witness the slight increase in the percentage gain from the drawdown to breakeven? This is due to the spread factor. After losing a certain %age, you may have to gain slightly more in order to compensate for the trading fees.
The win rate and risk-reward ratio have a deep connection with each other. Increasing your R:R value will generally lower your win rate and vice versa.
Profit factor or risk: reward ratio
The table shows the win rate and risk-reward ratios necessary to stay profitable. As your take profit moves near the initial entry or the stop loss moves further, it becomes easier to hit the target. Hence a lower R:R will increase your win rate significantly.
A higher risk-reward ratio can help a trader recover from a loss more quickly. This is because the potential rewards are greater, which can offset the losses. A sufficient knowledge on loss recovery can help you understand the relationship between risk reward and the amount of trades required to stay profitable.
If you are not risking more than 1% on each position, then leverage won’t play a significant role here. Recovery can seem impossible for traders who use big margins and put more on the table after each loss.
Riva FX allows traders to use as much as 1:50 leverage for their trading challenge. The company offers a biweekly profit split and gives traders as much as 70%.
Most professional traders recommend using proper exits to maintain your risk and recover from losses. Some investors lower their position size after facing a significant drawdown. They avoid poor market conditions where their strategy fails to perform successfully. You can exit from execution if it is not working out before it goes on to hit the stop loss.
Accepting that you have lost money and that the trade did not go as planned is important. Take time to reflect on what went wrong and what you could have done differently. Once you have acknowledged your losses and learned from them, it is time to move on. Don’t dwell on the past; focus on the future and plan for the next trading day.
It is essential to stay calm and not let emotions take over after a loss in trading. It can be challenging to do this, but it is crucial to remember that losses are part of the process and cannot be avoided entirely. Set stop-losses at certain levels, take profits more frequently or adjust your overall strategy. By having a plan in place ahead of time, you will be better prepared mentally and emotionally to handle any future losses. Keep a separate mathematical plan to increase your overall profitability. With Riva FX, you can trade risk-free and manage up to 200k in funds. The prop firm allows you to take unlimited retries after failing a challenge.