Next we focus on the average percent gained per winning trade and the average percent lost per losing trade. In order to stay profitable we want our average gain to be 100% more than our average loss. For example if our average gain is 50% per trade, our maximum acceptable average loss would be 25%.
1. We want this ratio because we are assuming that 50% of our total trades will be losses thus in order to remain profitable our winning trades must outperform our losing ones. By using this ratio we will still remain profitable only winning 50% of the time.
2. Then we figure out how much to invest per trade. It’s important to decide how much capital you will use per trade, and to stick to that amount as strictly as you can. The reason the above information is important is because a trading system won’t work properly if you greatly vary the amount used each time you trade.
3. Finally we need to figure out the average amount of trades in a certain time period. The most common time periods to choose from are weekly, monthly, quarterly, or yearly. For penny stock trading purposes we prefer a monthly time period because it gives us ample time to see our trading system work.
To find a rough estimate of your average amount of trades for the time period of your choice you simply add the amount of trades you made within the last 3 months and divide by 3. This should give you your average monthly trade number.