it goes without saying that there is an inherent level of risk involved in trading the share market. To be consistently profitable, you need to assess whether the risk you are contemplating to take is justified. But how do you assess the risk and how do you ensure the odds are stacked in your favour?
Moreover, many traders often ask ‘when I have two stocks giving a buy signal, which is the best to buy?’ What they are really asking is, which stock will make the most amount of profit? So my response to this question is, ‘which stock will give you the lowest risk?’ So how much risk should you take, and how do you know with confidence the level of risk to set for each trade?
Another popular question is, ‘how much can I expect to make?’ When I hear this question, I immediately understand the person’s lack of experience. Those with knowledge and education have a process/structure to follow and they know how to determine the rules to buy and sell. Therefore, they can work this out independently.
All the answers to these questions will be revealed. How to answer your own questions
For those of you who have never back tested a stock before, this process is like a road test for your rules. Just like the road tested tyres on your car, you too need to test the rules over the historical data before using them. That way you will know the probability of a winning trade, the average profit, the average loss, the total profit you can achieve with the strategy over a particular time frame, the average time in the trade, and the minimum risk.