Using the NBA analogy, if your team is winning by 2 points at the 4th quarter, with 20 seconds left at the shot clock, wouldnt michael jordan just hang on to the ball till time is up? Coz if he takes a shot (however good his shot percentage is), he risks missing it and giving the opportunity to the other team.
In trading, one concept i see a number of people agreeing and following is trading to make 2 points ($100 per contract) per day and increase the amount of contracts traded over time instead of taking more trades to increase profit...
I feel like it doesnt make senses if you have a positive expectation every time you take a trade but concerned as well that am I missing out on some kind of wisdom here?
This boils down to the expectancy of your trading system / strategy.
What is the maximum win per trade : 2 points
What is the maximum loss per trade (risk) : ?
What is the win / loss rate ? :
Now calculate the expectancy
The statistical term for edge is Expectancy, which is a mathematical formula that shows the expected value of a system or strategy.
Expectancy is calculated by combining the accuracy and reward-to-risk of any given strategy.
The formula is: (% winners x $ per winner) - (% losers x $ per loser)
See if you have a positive expectancy. A positive expectancy means that you have an edge in the market. A zero expectancy means you have no edge. A negative expectancy means that you have a negative edge.
As you can see, knowing the statistics for your system is really important. If you don't know the probability of your trading system, how can you think in probabilities ?
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I understand 'expectancy'. I came from a poker background, we use the term 'expected value' a lot to calculate every decision.
What i would like to know is fellow members' trading plan. Do you trade a particular time frame and just take as many trades that fit your strategy? or is it X amount of trades a day?
I'm still figuring out what kind of trading plan makes sense because, unlike poker, in trading, you can trade more contracts to make more money, whereas in poker, if you move higher in stakes, the game gets tougher.
So, it kind of does make sense to find a strategy that can nett 2 points a day, and move up in terms of contracts traded, instead of more trades taken...
Still trying to figure things out...
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In trading you take trades with positive expectancy. Simple as that. X amount of trades per day is irrelevant. You might have a goal of 10 trades per day when in reality you might only get 3 setups for that day, or maybe it happens you get 20 setups.
Understanding yourself is just as important as understanding markets.
My trading plan has around 20 strategies based on a combination of Volume Profile, Market Profile and Market Internals. For e.g today I just had 2 trades for a total of 38 points. I paper traded these strategies for over 6 months, while learning them few years back, collected all the statistics for few years (I still do ). All the strategies I use have a positive expectancy backed by statistics from real trades over the past few years.
Since you have a poker background, did you learn a strategy to win just two games per day ?. I am sure you learned about every aspect of the game, so that you can consistently win in the long run and develop a psychology to handle tilts.
In trading there are no shortcuts. You are required to dedicate screen time to learn or create your strategy, backtest them for few years, create statistics and gain confidence in the system. Even if you purchase a blackbox system, you will have to adapt to suit it to your personality. Every trade that form as per the same strategy are not equal, it greatly depends on the context you are trading. Gaining these knowledge to read the market and its context so that you can gauge the probability of a trade formed as per your strategy is paramount for successful trading.
why are we all forgetting something beside thinking about just 2pts
how do we know if we can make 2 pts or 4 pts average everyday backtest or forward test
I didnt know about my strategy until I "forward tested" for 9 months, of course (after backtesting), so I knew which months it was bad and gave me a drawdown
not sure if someone else can do in 3months, how can you catch best and worst months for "your method"
Comes down to
- lifestyle: how much time each day do you want to spend trading?
- mentality: do you need to win frequently to feel emotionally satisfied? or would you rather make more money holding on longer but maybe at a reduced win rate?
- expectancy: does a 2pt profit target system have positive expectancty? have you tested it?
- expectations: the market may not give you enough positively expectant trading trades in a day to make 2pts, so if that is the case are you going to force trades to hit your target? what if the market gives you dozens of opptys in a day? quitting at 2pts leaves those behind.
- style: are you a "smash and grab" scalper trader? or can you be patient enough to place swing trades on higher time frames where there is less noise?
Last edited by shodson; July 16th, 2015 at 12:35 PM.
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