“The best we can ever hope to achieve as traders, is a favorable probability from trading our “perceptions of market behavior”!.
Archives of “probability” tag
rssOverTrading
Overtrading is also the result of improper trade preparation. It’s difficult to overtrade when you begin the day fully prepared. Trade what you see not what you hear or feel during the day. Plan your trades and trade your plan. Prior planning can prevent and severely limit these problems. Overtrading as I see it is the essence of trading frustration. Trying to “catch” a good trade regardless of risk involved is the ultimate in trading suicide. Overtrading will greatly reduce your probability of success because you are trading without a plan.
Expectancy
Expectancy along with position sizing are probably the two most important factors in trading/investing success. Sadly most people have never even heard of the concept.
Expectancy is the average amount you can expect to win (or lose) per rupee at risk.
Here’s the formula for expectancy:
Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)
As an example let’s say that a trader has a system that produces winning trades 30% of the time. That trader’s average winning trade nets 10% while losing trades lose 3%.
Expectancy, position-sizing and other aspects of money management are far more important than discovering the holy grail entry system or indicator(s). Unfortunately entry techniques are where the vast majority of books and talking heads focus their attention. You could have the greatest stock picking system in the world but unless you take these money management issue into consideration you may not have any money left to trade the system. Having a system that gives you a positive expectancy should be in the forefront of your mind when putting together a trading plan.
“The goal of a successful trader is to make the best trades. Money is secondary.”
==== Money is secondary? What the hell? Is Alexander joking?
Well, if we take some time and analyse this quote, Mr Elder has a very important point to make. How can good trades be better than money ? Why are we indoctrinated to think that money is the primary goal?
Don’t worry I was subject to this way of thinking for a long time but realized it has huge fundamental issues. The problem is that anyone can have a great trade, a lucky trade, a momentum trade, but the question is, can you replicate this performance in the future in the long term?
I repeat, can you replicate this trade in 10 years time?
Lets think soccer, is it more important to score a goal every match or to have a system of playing the game to have high probability of scoring opportunities?
Do you prefer to have one perfect trade or many high probability trades?
If you are in this for the long term, focusing on making the highest probability trades possible is a more sustainable way for a future success. If you spend time in analyzing your entries, exits, risk management on a consistent level, you have a higher probability of achieving your goal.
Desire and Fear in Trading
Desire and fear alternate in the minds of traders as they go through the day. But let me ask you whether desire or fear dominates your thoughts and feelings as you trade?
For many traders the primary emotion is fear. They fear loss: losing profits, losing money, losing equity and even their margin. Some fear losing their touch, their feel for the market, their focus, their luck, the respect of their boss, colleagues, or mate, or worse, their own self esteem.
Other traders are flooded with the emotion of desire. They look forward to what the day will produce. They like the thrill of the chase. They have a sense of unlimited potential and abundant opportunities for profit. They anticipate improving their skills, intuition, and understanding as they go through the trading day and week.
Keep in mind that desire is not greed. Greed is an inordinate wanting. It is excessive desire and comes from a sense of scarcity, a feeling that there is not and will not be enough. Desire is healthy: greed is unhealthy.
What you feel depends upon your mental focus. Do you place your conscious and unconscious attention on the possibility of loss or the probability (hopefully) of gain?
What you hold in your conscious attention colors your reality and becomes the quality and fabric of your life and trading. In your life, do you look for what’s missing, or do you pay attention to what you have and can create? Do you think about terrible things that have happened and could happen again, or do you think about wonderful experiences you’ve had and expect even better things ahead? Trading is a microcosm of life. What you do in life, you’ll do in trading. (more…)
Probability game
There is a random distribution between wins and losses for any given set of variables that defines an edge.In other words ,based on the past performance of your edge ,you may know that out of the next 20 trades ,12 will be winners and 8 will will be losers.What you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades.This truth makes trading a probability or numbers game.When you really believe that trading is simply a probability game ,concepts like “right “and “wrong ” or “win ” and “lose ” no longer have the same significance.As a result ,your expectations will be in harmony with the possibilities.
Poor Traders & Rich Traders
Poor traders have ‘picks’, rich traders have “high probability entries”.
- Poor traders “make great calls”, rich traders have robust systems.
- Poor traders have ‘conviction’, rich traders follow price action.
- Poor traders have ‘opinions’, rich traders follow trends and chart patterns.
- Poor traders ‘like’ certain stocks, rich traders like to make money.
- Poor traders make predictions, rich traders have quantified entries and exit levels.
- Poor traders ‘go all in’, rich traders have maximum bet sizes.
- Poor traders are gamblers, rich traders are casinos.
Poor traders have hope, rich traders have mathematical probabilities.
Dont Take Too Much Risk
One of the most devastating mistakes any trader can make is risking too much of their capital on a single trade. One thing is certain in trading and that is if you lose all your capital you are out of the game. Why risk so much you could be prevented from continuing? There is a saying in poker than going all-in (risking all your chips) works every time but once. This is true of trading.
If you risk all your account on every trade it only takes one loser to wipe you out (and no trading method is 100% accurate), so you will be out of the game at some point it is only a question of time.
In general, we only risk 1-3% of the available capital allocated to a system on any individual trade. This is calculated using the size and, the difference between our entry price and our maximum stop price, and the amount of capital allocated to the system. With the win probability and ratio of size of winning trades to losing trades we are almost certain never to lose all of our trading capital. In fact, the chance of us hitting our maximum drawdown for the year is tiny. (more…)
The obstacles of the day trader are :
| Fear – Fear causes the day trader to hesitate and freeze when positions should be entered and exited. Fear can also cause day traders to take losses, Doubt – Doubt causes great opportunity to be missed and causes a mind to be scattered and without firm direction. Greed – Greed will cause day traders to hold onto positions too long often causing profit to turn into loss. Hope – Hope will cloud the eyes of probability. Hope is not for day traders. |
10 Rules for Traders
Never add too a losing trade. In adding to a losing trade you are already wrong but now become more wrong with a bigger trading size. Adding to losers makes you a counter trend trader that usually ends badly.
- Never lose more than 1% to 2% of your trading capital on any one trade. This means use position sizing and stop losses so when you are wrong the loss is not a big deal.
- Never trade anything you do not understand 100%. Stay away from trading futures, forex, or options until you understand the risk and how exactly they work.
- Always trade with the trend in your own time frame.
- Only look for low risk, high reward, high probability setups , when there is nothing to trade, trade nothing.
- Trade the chart and price action, not your own opinions or predictions.
- You have to trade your own way, the trading style that you are comfortable with that fits you.
- If you do not have a full trading plan with rules on entries, exits and risk management stop trading until you create one.
- The size of your wins and losses ultimately determine your trading success regardless of your winning percentage.
Your risk management rules will ultimately determine the success of your technical trading system.
