This is the final piece in the risk puzzle.
Your system should give you an edge or in other words make a profit after a sustained period of trading. This concept is similar to the way that casinos always end up in profit despite the fact that they always seem to be paying out large amounts of money to winning gamblers.
The Casino have a slight edge, which means that as long as people keep playing they will always make more money from the losing gamblers than they lose to the winning gamblers.
If you have an edge it doesn’t matter how good it is as long as you keep trading you will always make more from your winning trades than you give up on your losing trades.
An edge is basically your trading plan, it dictates how, when and where you enter and exit the markets on all of your trades.
The other really curious fact about edges or plans is that they are actually really simple to put together, the hardest part of trading as I already mentioned is having the psychological strength to keep trading in line with your plan through draw downs and losing periods. Once again keeping your risk really small and controlled will help you in this regard.
Once you have come up with a method or edge that you like you must put it through the 30 trade test. Take 30 trades based on the method that you have created before trading the method on a live account. This is the first step before moving on to trading a live account and until you have completed this step, and the system has passed this test you should absolutely not be trading a live account.
The market is driven by two forces, one of which is news and the other is support and resistance, you really need to bear this in mind if you do decide to try and create your own system.
Take away: Always trade with a proven edge.
Next: Summary