In the above hypothetical example, you initially calculated (0.5% of your initial capital) and you know your R before you place any trade. But what if you do not know the R value for a system?
This happens with many system, for example, in our MCX GOLD Trading system you are always in a position, whether long or short. And this system flips the position depending on the market conditions. In this condition, you do not know when the market will flip, and you do not place any stop-loss. So how will you determine the R value which will dictate your loss?
Now let's look at all the 65 signals that the system generated. You can see, first trade is a winner, then next trade is a loss. This is continuous system. In the first trade. the system went 'Short', at 28048. It closed the short at 28011 with a gain of 37 points and went long there (2nd trade) exactly at 28011. The second trade is closed at a loss of 191 points at 27820. In the third trade, it then again went short at 27820 and closed it at 27574 with a 246 points profit. And this way it continues trading one after another. Notice the system has positions always in the market, either long or short. It is thus operating without any pre-defined Stop-Loss or Take-Profit level and flipping between long or short depending on the market conditions. Notice the 4th trade it holds for 13 days and made a very good gain of 3034 points. This is the beauty of any trend-following system, but it occurs very rare. May be just 3-4 big trends in a year. And also notice that, unlike our first hypothetical system that has a fixed Stop-Loss of INR 484, this system has made different kind of losses in different trades.
So, it seems this system has no fixed 'R' value compared to the previous hypothetical one.
What will you do in this kind of system where you don't know your risk, your 'R' value? How do you determine at the first trade, how much to risk from your capital?
The most generalized method to determine your 'R' is the average of all losses over many samples of trades. Statistically at least 30 trades as bare minimum. The more the better. A good value is 100 trades. So, in such cases, before you put real money, either you have to back-test or do some real market demo-test to gather at least 30 trade data.
So let's do a little calculation for the MCX GOLD Trading System. We have 65 trades at hand.