This truth always pains me, because I know that taking risk in the markets can be TOTALLY controlled…

Meaning that you can choose your level of interaction and thus the amount of money you put at risk…

When I teach beginners, I recommend that they never start out with more than $500 in their account.

This limits their risk on any losing trade to $10 or less…

Does the thought of losing $10 make you break out in a cold sweat?

I thought not…

You see…

The beauty of the markets is that they don’t know or care that you exist!

They will do what they do no matter if you are invested or not.

And while there can be liquidity concerns if you are trading an 8 figure account…

(Meaning you might want to buy more shares than are currently available for sale at the moment you decide to enter)

For “normal people money”, your behaviors should not change at all as you scale your account up from $500 to $5,000, $50,000 or $500,000.

If you can trade successfully with a $500 account, the only difference between your profits at that level, and profits once you scale up will be between your ears.

That said...

There is a “glass ceiling” that I have observed once traders start making $10,000-$20,000 per month.

At that level, they are likely taking $1,000-$3,000 risk on any individual trade…

And this seems to trigger the following thought process…

“Wow, I just took a loss and it cost me $3,000…

$3,000 is what I used to make in a month with that old job I had…

That means that I just lost A MONTHS PAY!

Ugh, now I feel terrible!”

This negative emotional state will infect your analysis process as you move forward.

I have made a specialty in my career of helping to coach traders past these performance issues…

And what is fascinating, is that once I can get them thinking in terms of behavior and NOT about money…

They make these sudden radical jumps in profitability…

From $10,000 per month to $50,000 or more!

You see, if you have a profitable edge in the markets…

That edge is there for the taking no matter if it’s you or somebody else trading it…

No matter if you are trading that edge with $10,000 and the other guy has $100,000.

The statistical “Expected Value” or “EV” is what it is...

Whether you take the trades or not…

Any deviations from that mathematical expectation are coming entirely from shifts in behavior.

To calculate the EV for any given trading strategy, you will need a statistically significant sample of back tested or paper trades.

You can dive in deep into statistics, with “P” factors and “T-studies” if you like…

These are the calculations that are done by any researcher who is designing a market survey, political poll etc…

But to save you all that bother, here is how I do it…

First, I am a big fan of MANUAL testing.

It takes a lot of time, but if you have a profitable trading strategy, it is likely worth millions of dollars…

So, let that motivate you...

Then, buckle down and do your research!

The reason why I test a strategy by going through each instance that I can find manually by scrolling back and forth through a chart...

Is that I have found that going setup by setup and logging the results...

My mind gets in tune with the market behaviors that lead up to the entry and exit signals.

During this process, I often notice patterns that are present when a trade sets up, then fails to produce a loss…

This allows me to discover “quality filters” and ranking factors that really boost my win rate and make the new setup MUCH more profitable…

Trust me…

It’s worth the extra work!

So…

Let’s assume that you have an idea for a new trading strategy…

The triggers could come from anywhere…

Fundamental analysis…

Technical analysis…

Technical indicators either public or customized…

A trade “setup” is defined as some series of indications that come from OBJECTIVE and measurable sources that when observed indicate that there is a favorable investment opportunity.

Let’s assume that you have developed an oscillator that will alert you that the market is “stretched” too far and is ready to reverse.

It seems like it will work “very well”…

But what does “very well” mean in mathematical terms?

It’s time to go to work and find out…

You pick a stock at random and scroll back as far as you can in your historical data.

You open a new spreadsheet in order to track your data and set it up with the following columns…

• Direction of entry
• Time of day (If intra-day)
• Maximum Favorable Excursion (How far did it go for you in the best case scenario)
• Maximum Negative Excursion (How far did it go against you in the worst case scenario)

After you have gone through 25-50 setups, take a break and think back…

Was there anything obvious that happened with consistency before you logged a winning setup?

Was there anything obvious that happened with consistency before you logged a losing setup?

If the answer was yes.. go back through the same data and use this new information to filter out setups and see if your number of winners rise.

Rinse and repeat this process with the first 25-50 trades until you think you have a powerful edge in the market.

Then using all your filters and indicators that you discovered during the initial testing phase, start logging setups until you get a total sample size of 250 trades.

Then, graph out the winners and losers to discover where the majority of the profit potential is.

You will see that most trades will fall within a narrow band of Maximum Favorable Excursion and Maximum Negative Excursion.

Experiment with profit expectations and stop loss settings until you find a sweet spot that delivers you the maximum reward for the minimum risk…

Then do find another 250 setup samples from the past and log their profit and loss according to your optimized parameters.

Take the total profits accumulated, and divide by 250 and you will have the EV for that particular setup.

From this process, you will never have to hope or guess, but will confidently KNOW what your mathematical expectation for profit will be, every time you take a trade using this newly developed setup.

Expect that the majority of your development ideas will end in failure…

The methodology that we use at RBJ Financial Group took over 8,000 hours of development, and while that seems daunting, it is important to note that the edge which was developed during that time has produced consistently for many years and has required NO tweaking or adjusting...

So that investment of time and money was WELL worth it!

So start taking notes whenever you have an idea that could be developed into a profitable trading strategy, and then pick your most promising idea…

And…

Start testing it today!