25-One Liners for Traders (Read and Understand ) -Anirudh Sethi

  1.  If you need to spend your money in a relatively short period of time it doesn’t belong in the stock market.
  2.  If you want to earn higher returns you’re going to have to take more risk.
  3.  If you want more stability you’re going to have to accept lower returns.
  4.  The stock market goes up and down.
  5.  If you want to hedge against stock market risk the easiest thing to do is hold more cash.
  6.  Risk can change shape or form but it never really goes away.
  7.  No Trader is right all the time.
  8.  No  Trading strategy can outperform at all times.
  9.  Almost any Trader can outperform for a short period of time.
  10.  Size is the enemy of outperformance.
  11.  Brilliance doesn’t always translate into better Trading results.
  12.  “I don’t know” is almost always the correct answer when someone asks you what’s going to happen in the markets.
  13.  Watching your friends get rich makes it difficult to stick with a sound Trading plan.
  14.  Day trading is hard.
  15.  Outperforming the market is hard (but that doesn’t mean it’s impossible).
  16.  There is no signal known to man that can consistently get you out right before the market falls and get you back in right before it rises again.
  17.  Most backtests work better on a spreadsheet than in the real world because of competition, taxes, transaction costs and the fact that you can’t backtest your emotions.
  18.  It’s almost impossible to tell if you’re being disciplined or irrational by holding on when your investment strategy is underperforming.
  19.  Reasonable investment advice doesn’t really change all that much but most of the time people don’t want to hear reasonable investment advice.
  20.  Successful  Trading is more about behavior and temperament than IQ or education.
  21.  Don’t be surprised when we have bear markets or recessions. Everything is cyclical.
  22.  You are not George Soros or Jesse Livermore
  23.  The market doesn’t care how you feel about a stock or what price you paid for it.
  24.  The market doesn’t owe you high returns just because you need them.
  25.  Predicting the future is hard.

Trading Mathematics and Trend Following

Some quick points, to be making money, Profit Factor must be greater than 1.

  • Profit Factor (PF)
  • = Gross Gains / Gross Losses
  • = (Average win * number of wins) / (Average loss * number of losses)
  • = R * w / (1-w)
    • where R = Average win / Average loss
    • w = win rate, i.e. % number of winners compared to total number of trades

Re-arranging, we have

  • w = PF / (PF + R)
  • R = PF * (1 – w) / w

Sample numbers showing the minimum R required to break-even (i.e. PF = 1, assuming no transaction costs) for varying win rates.

  • w = 90% >> R = 0.11
  • w = 80% >> R = 0.25
  • w = 70% >> R = 0.43
  • w = 60% >> R = 0.67
  • w = 50% >> R = 1
  • w = 40% >> R = 1.5
  • w = 30% >> R = 2.33
  • w = 20% >> R = 4
  • w = 10% >> R = 9


Go to top