So after taking a swing down to @TradeViper Store, I got to thinking about risk.
My plan coming into this trading business was to get good (win rate > 50% with 1:1 risk reward, or win rate > 40% with 2:1 risk reward) and then open a small live account. I planned to start with $2,000 but the more I think on it, the more I think starting with $100 or $500 might be better off. I can always add more money later, right?
With a $100, and allowable total risk capped at 2%, that gives me $2 to risk at any time. If I trade a $.10 pip value, that gives me 20 pips for risk. That is certainly not enough to withstand market retracements at any level, well, maybe trading on the 1 minute chart. The problem with the 1 minute chart is that the spreads kill you unless you are trading large positions.
Let's say average move on the trades I would take is 10 pips (1:1 risk reward) either direction. Let's say the spread is 1.4 pips and commission averages around to another pip. So that is 2.4 pips against me the second I open a trade. I don't know if commissions are charged round trip, but let's assume they are so I give up another pip to close the position. If I am trading $.10 pips that means on an average move I give up $0.34 cents per trade, leaving only $0.66 profit per trade. When I lose, I lose the whole $1.00 at risk.
This means that I should only take 2:1 trades. With a 2:1 trade in the above scenario, I would risk 10 pips to gain 20. 20 pips would be $2.00 gross profit - $0.34 trading costs = $1.66 net profit. A losing trade would be $1.00 loss.
Assuming I take 20 trades a month at this setup, and win 60% of the time, I would gain gross profit of $24, gross losses of $8.00 and total trading costs of $6.80. Net profit would be $17.20 or average of $0.86 per trade.
Since I know that I need a minimum of 2:1 risk reward now to be profitable at a 60% win rate after figuring in spread and commissions, is starting with a smaller account around $500 worth while? 2% risk limit would be $10 spread across all open positions. If I limit myself to 1 trade, then I get to risk 100 pips, whereas with 2 trades I would only get 50 pips, and 4 trades I would only get 25 pips.
100 pips would make it easier to swing trade, but 4 trades at 25 pips on the lower time frames might give me a better chance of being profitable because my win rate percentage would have a bigger impact.
Am I even thinking about this right or is something in my analysis flawed?