In this episode of Truth About FX, Walter digs into finding the right strategy based on your account size and maximizing your profits. He unravels Ralph Vince’s principle and the best way to use this depending on your rules and goals.

And, what is this critical piece that every trader should keep in mind when using this principle?

Download (Duration: 04:53 / 5.59 MB)

In This Episode:

00:51 – maximize your account

01:16 – horrendous drawdowns

02:33 – realistic goal

03:49 – what’s going to cost you to fail?

Tweetables:

Stick with your strategy [Click To Tweet].

Build up confidence by backtesting  [Click To Tweet].

Understand what you believe [Click To Tweet].

Hugh: Hi, Walter. Somebody wrote in and asked: How do I design a suitable trading plan for a particular account size?

Walter: This is interesting. I think there’s a subtext here which is “I really have a small account and I want to make it grow as fast as I can. How do I find a strategy?”

Do you know what I mean?

I think that’s kind of the underlying thing here. I can understand that but here’s the thing. If you want to maximize your account, then you’re going to have to trade something along the lines of Optimal F which we all know is Ralph Vince’s thing.

Optimal F Defined

Basically, here’s how it works and people don’t think of this but the higher the win rate of your strategy… So, the Optimal F is the percentage of your account that you should risk on every trade if you want to grow your accounts to as much as possible.

That’s what Optimal F is.

The problem is it leads to horrendous drawdowns. What people don’t know is actually the higher your win rate, the more it’s going, the higher the number of the Optimal F.

If you have an 80% win rate system, Optimal F might be like risking 35% of your account on any given trade.

Whereas, if you have 20% win rate, Optimal F might be risking 9% on any given trade. I don’t know, I’m just playing numbers out of my rear but that’s basically what happens with Optimal F.

What does that mean? If you have a high win rate system and you’re risking a lot per trade, that means your drawdown is going to be a lot.

The paradoxical thing about Optimal F is that the higher you risk per trade, because you have a higher win rates, the higher the win rate you have, the more deeper your drawdowns are.

Isn’t that crazy? That’s because they know that you’re going to eventually get out of it more quickly but that’s kind of the stock answer.

Use Optimal F before you grow your account as quickly as possible. The problem is anyone who’s taken an account down 90% so they’re left with 8 or 9% of the original bounds knows that it’s hard to keep trading after that happens.  

Hugh: Oh, yeah.

Walter: It’s really easy to go, “Ah, I blew it.” With Optimal F, you have to keep powering on. This is what I would say about trading your account size for a particular strategy. Think about what is a realistic goal.

What is something that you think would make sense for you over time? Is it 30% a year? 50% a year,