Let us say I made you a guarantee in your trading. Over the span of your life if I guaranteed you $1,000 ninety percent of the time you made a trade and a loss of $150 the other ten percent of the time. Let us say I also presented you with a guarantee to make $1,750 seventy-five percent of the time with a loss of $1,250 the other twenty-five percent of the time. Which would you choose? In both scenarios, you can only take one trade per day.

There are approximately two hundred days a year you can trade. By guaranteeing you $1,000 a day with such a low risk of $100, you can make a clean $177,500 annually. That is over three times the average income in the United States. High reward. Extraordinary win rate. Low risk. How can you go wrong?

 Now, let’s take a look at the other option. Seventy-five percent of the time you will make $1,750. However, twenty-five percent of the time you will lose a whopping $1,250. Days, perhaps even weeks, could roll by with continuous loses. However, you could just as well have incredible runs making a respectable $1,750 a day.

Given the same two hundred days, it would be feasible to say that you would make $262,500 annually. However, keep in mind the twenty-five percent losses. That amounts to a stunning $62,500 annual loss. Your net profits would be $200,000. Despite the heavy losses, the gains kept you way ahead. Even more so than the high return, low risk from the previous option. The second option would have been more profitable by a well deserved $57,500.

In both cases, both traders came out winners. Therefore, there truly is no right or wrong answer to this question. Just looking at plain numbers, most traders would have opted for the first option. It looks like a clear winner. However, the financial beneficial choice would have been to take the second option.

The purpose of this presentation is to get your mind wrapped around odds. A lot of times I see traders think they can guarantee themselves an easy five pips a day. Their argument being that they will pretty much assure themselves profit and come out ahead in the end with ease. Let’s put aside the obvious flaw in this ideology. Even given the small amount of trades, it is never a guarantee when you enter the markets.

Price moves in directions. And a trader can place himself or herself in a position to take advantage of these moves. So instead of looking at a small daily gains or a high win rate, perhaps focus on a larger gain with a respectable stop loss. While you might lose more times than going for the easy pips, in the end it is possible for you to come out ahead. However, the differentiating factor is the stop loss. If it’s too wide, your losses could eat into your profits.

When devising your trading plan or, be sure to ensure that in the end your gains will always outweigh your losses. Every trading plan should include losses.  Therefore, a trader should never be afraid to lose.

The FX Trading Network has recommended trading plans that have been shown to be profitable. Just know, that despite any loss, the winning combination will be a success in the end.

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