First of all, you need to measure your maximum loss on each trade you take. In my opinion, each loss trade should not cost you more than 2% of your current account value. Losing more than 2% on a single trade can have devastating effect on your ability to recoup the losses later. I’ll call this number to be R. R is risk per trade that you’re willing to take. Loss above R is prohibitive to your account health.
Next, you need to determine maximum loss in a month. I recommend using 3R total los per month is the maximum number. If you reach this level, you must stop trading until the month end. This has to be done to prevent you from destroying your capital base before you can learn more about the market. While you’re not trading, you should use your time to review and study your trades. Try to improve your odds by studying your past trading performance and improve your market knowledge.
Now that you have set the safety net of your account, you also need to measure your individual trades. The purpose of the measurement is to identify your strength and weakness point on the trades. Once you’ve identified strong points, try to improve them. If you’ve found weakness points, try to overcome it.
I measure the entry, the exit and the profitability of my trades.
To measure my entry I use percentage of my entry from the lowest of the day and compare it to the daily range. Daily range determines the maximum range I can get. My entry price will be between this range. So if I buy on the lowest price, I’ll score perfect 100%. The idea is to measure entry, I measure how close I can get to the lowest of that day.
To measure my exit I use percentage of my exit from the highest of the daily range. My exit price should be close to the highest of the day to get the perfect 100% score. If I exit at the day lowest price, I’ll get 0% score.
Measuring the whole trade profitability can point you in the right direction about trading systems that fit your personal traits. I record the entry/exit dates, entry/exit price, and profitability rate. I use the record to point me to the right direction about the market I trade.
Projecting target profit for your trades can be difficult. Setting stop loss is easier said than done.
I watch the price chart carefully to determine possible trend reversal. Sometimes I make the correct decision but other times I cut my trade too early. The point is you need to based your decision on reason that you can explain.
I based my trade decisions based on pure price actions, in effect I set my mental to a stop loss and profit target which are determined by pure technical signal I watched on the price action.
Or you can based your profit projection based on R multiples. Most of successful traders experience shows risk to reward ratio of 1 risk for 2 reward. This is a very reasonable trading tip.