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· In scenario 2 the risk of losing your money after 10 trades is less than 1%, but you have a fair chance of making $200. Therefore you need to define first how much you are willing to risk, since the amount you can make is a function of that risk. Make sense? I'll give you more specific examples later in this chapter.

Keep in mind that there's a difference between the amount you need to trade and the amount you're willing to risk. Your broker is always asking your for a "margin", and you need to fund your account with that margin requirement + your risk. In our previous example you funded your account with $5,000, but you only risked $1,000. More on that later. What to expect when trading a system.

There's a common misconception about what to expect when trading a system:

Trading a system does NOT mean having an ATM in your front yard. There will be months when your trading system is over performing, making more money than your expected, and there are months when your trading system is underperforming. Don't assume you'll get a check at the end of each month!

Here's an example:

The performance report of our e-mini S&P Trading System Coin Collector shows an average profit per trade of $36 over the past 733 trades:

• In between March 14-21, 2005 the system was over performing and we realized $963 in profits with 17 trades. These yields to an average profit per trade of $57, way above the "expected" average profit of $36 (see below):
• When daytrading system you have to keep in mind that you are working with averages:
• If your back testing shows an average profit per trade of $36 then you can be almost sure that the system will not suddenly jump to $57 average profit per trade.

In trading we have good weeks and bad weeks. Losses are part of our business. After a slow week there might be an extraordinary week. After a winning streak we will realize a loss.

• Looking at the performance of that week a correction was inevitable. And it happened: Tuesday, March 22nd, we realized a loss of $712.50.
• Such a loss hurts. You quickly forget all the nice profits of the past week and focus on the loss. You may start questioning your system and think that it stopped working, and so you stop trading. You start looking around for the next system. You don't give the system a chance to come back to "normal". You see an extraordinary week like the week from March 14 - 21, 2005 and think that you will continue making profits like this forever.