Saturday 19 December 2015

Nothing Has Changed Except Everything

If you go back to the beginning posts of this blog you will see that I emphasize that the math of your trading plan has to work or you can't be CP.

That has not changed nor can it ever. The three legs of the stool ate win rate, average profit and average loss. Those three metrics have to work to enable CP. However, there are many permutations and computations of these three metrics. basically, a high win rate allows a lower average profit. That's how scalpers make a living, keeping losses small too.

Remember, you can still be marginally CP if your win rate is just 35% as long as the win to loss ratio is 2:1 or greater.

That being said, if one randomly puts on a trade either long or short there should be a 50% chance of profit. If that is the case then just putting on a trade and having your stop loss marginally smaller than your profit target should make you CP as long as commissions are covered too.

So why do most traders find it difficult to get to CP? The answer has to be that they don't follow the trading plan. As someone who is also guilty of that sin more often than I'd like to admit, I understand the problem. If this is the issue then putting the majority of your effort into becoming more disciplined must be at the top of every trader's To Do list.

My focus for the last year has been to use technology to help me better execute my trading plan. Its not the latest indicator. Its not the latest methodology. Its just following order flow and managing my trade so the math can work.


Happy Holidays to everyone and I wish you all a profitable 2016.

PS. The everything that has changed is the markets. No Locals except electronic locals and lots of algo action. But its still just order flow.

2 comments:

  1. "...if one randomly puts on a trade either long or short there should be a 50% chance of profit. If that is the case then just putting on a trade and having your stop loss marginally smaller than your profit target should make you CP as long as commissions are covered too."

    That is an incorrect statement. Having the stop loss marginally smaller than the profit target will result in a loss equal to costs (commissions, spread and slippage) if the entry is truly random. You need an entry that creates edge to nudge the numbers, in one way or another, into +ve expectancy...be it low WR higher R:R, lower RR and high WR etc.

    Of course, if you use dynamic trade management (rather than AIAO which was your example) then a good trader could create +ve E even with random entries.

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    1. Yes, I was being a little simplistic but that is the starting point of a trading plan.A big assumption is that the price will actually reach the profit target before the stop is hit. Testing is the answer as the stop has to be well out of the way. Position sizing, expectancy are all words to google.

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