The Traders Equation - Trading with Wingz #1
I've been a professional trader for more than 5 years, in front of multiple monitors looking at the price tick by tick and bar by bar on a chart. I've also read dozens of books on technical analysis, fundamental analysis and psychology.
I want to share the process of what's worked best for me from first principles. As a trader I'm still a continually evolving work in progress, I hope that by consolidating and sharing what I've learnt I can push myself to the next level. Please jump in and grill me with any questions you have, I'll be happy for any challenge.
The Traders Equation
The most important concept to be aware of as a trader is having an 'edge'. At a simple level an edge is 'making more money than you lose'. But how does that work? On a trade by trade basis?
That’s where the traders equation comes in. Something that should be in the mind of all traders, let's keep it simple to start. If after a series of trades, let's say 20..
Your average winner X number of winners > Your average loser X number of losers
Then you're making money, you have a positive expectancy.
So if you make 20 trades and on average you make $10 per winner for 10 trades and lose $5 for 10 trades then you have an edge. After 20 trades you'll make $50 overall. In this case you have 50% winning trades and your risk:reward ratio is 1:2 , i.e. you make 2x your risk on average.
Let's try and incorporate this information into a more complete equation that we can use on a trade by trade basis.
Reward x (probability of winner) > Risk x (probability of loser) = POSITIVE EDGE
Reward x (probability of winner) < Risk x (probability of loser) = NEGATIVE EDGE
Reward x (probability of winner) = Risk x (probability of loser) = BREAKEVEN
You can play with the probability of your winners to losers or the difference between the amount of your winners to losers… but it all comes down to whether you make more than you lose, whether you have an edge. You can make money with 10% winners as long as your winners are much larger than your losers or with 90% winners allowing for much larger losers on average.
Some people will say you need to have a certain % of winners or a certain risk reward ratio to be successful, It's only one piece of the puzzle. Look at the maths. You need to take into account both pieces of information and make sure you tip the equation in your favour.
You have the freedom to decide whether you like a higher winning % or you prefer larger winners with a lower winning %.
You generally can't have both, in order for markets to function someone else has to take the other side of the trade to you, if there were opportunities where you could make high rewards with a high probability of success then there will have to be someone else on the other side of that trade taking low rewards with a low probability of success. This does not happen in the long run in markets, the person taking the other side to you would eventually lose all of their trading capital.
So it comes down to a choice, do you want a high probability or do you want high rewards? You have the power, you have the option... craft something that fits with your personality...
In my next post I'll break down the markets into three 'states' - trending, ranging and reversing.
No fancy indicators, just the context of the market, what is it doing? How can you see the probabilities and how can you potentially have a positive edge.. and make more money than you lose?
Leave comments, let me know what you think. Leave ridiculously difficult questions! It'll be fun :P
Awesome trading advice. You describe what an "edge" is perfectly. My question is this though.
How do you know what to invest in next? Like for example BTC is dropping now and XMR seem to be following very similar patterns to it. So how do I know which altcoin to choose?
Great question. If you take a step back you start to see that an 'edge' isn't something you can pull out here and there to 'predict' markets.
An edge occurs over a series of trades. Similar to a casino. In roulette for example you get odds of 36-1, however there are 38 (in the US) outcomes, the 36 numbers and the 0 and 00.
The casino knows that in the long run they'll make money because they are paying out 36-1 odds on a 38-1 bet. They however don't know what the outcome of the next spin will be.
So trading isn't about predicting the future, knowing what investment is good next. It's about finding opportunities where you're more likely to make money (over a series of trades) than lose money. Just like the casino.
What you're talking about is a correlation between XMR and BTC - if, and only IF this is part of a larger statistical correlation and not an 'anecdotal' relationship... and you determine specific entries and exits that work over a series of trades to make money. Then technically you have an edge.
At the same time however, if you're glued to your trading screen for enough time you can develop a gut feel for when trades will work. Due to that unconscious competence.
Long story short.. to answer your question, if you've seen that correlation play out multiple times, then put a little money on the line and see what happens. You'll most likely lose it, but make note of the emotions you go through and the data you can pick up.... you may just find an edge that will make you a decent chunk of money in the long run. As for the alt coins to trade, again, it comes down to the data or experience you have.
Sorry if this comes across as really abstract... that's just the nature of probabilities :P ... and edges :)
Exactly, the edge is mostly just a guideline to follow in all of a persons trades. Yet it doesn't guide where to trade.
aaahh I see so it's more about the guarantee that you'll profit by your average winnings! Be the casiono, not the player.
Mmm I am still having difficulty, I have the moment were I invest in an alt thinking it might go up only to see it dumped like crazzy in the next hour. Then I emotionally sell on a low :(
Ok so experiment with small amount of money, I think I understand. Thanks!
The edge is more than a guideline, it's a traders mathematical deity.
The way I make sense of it, in my head. Is to ask myself
.. is this a casino or a gamblers trade?
If you can explain to yourself why it's a casino's trade... Then take it. Otherwise, keep looking for opportunities.
There are more than you can handle out there.
When beginners start trading they generally have the belief that they're only taking a trade to make money. But knowing the traders equation. You know you won't make money in every trade. All you can hope for as a trader is to take a 'type' of trade that will work in the long run.
You don't care about the trade in front of you, you only care about the average of the next 20 or so trades ahead of you.
In your particular example, you only saw the trade in front of you, take a step back and see the next 20 trades. You'll soon realise that you don't feel that emotional about the next trade in front of you... It's just one of twenty. You'll be better able to take advantage of the opportunities.
Lol the deity! Wow so I need to change my whole perspective on trading! There is no "one trade" that matter; It is always an average, correct?
Always be the casino, never the gambler!
That definitely describes me, I have been choosing these trade and putting all my hope into each one instead of making an average! Another difficulty is when to know to sell or when to hold!
Yeah I am starting to understand that now! Yeah, you win some you lose some. What is the best way to keep track of all your trades to make that average. You write down each one using a specific software or program?
Honestly from my experience you can win every time if you only get what you want out of the market and not to always look for that big trade that you think will make you wealthy. I'm still struggling due to trading with low capital and time constraint. For example, they say " if you can't trade with small money then you can't trade with big money " 0r vice versa l0l. That's true to a certain extent but I've noticed that Big money is way easier to trade. The hard part is knowing when to STOP trading. Over-trading is a traders WORST nightmare! And so, with small money i'm under pressure when I find my family wanting to go some where or need help with paying bills & what not, then I find myself over-trading trying to get that BIG paycheck, feel me!
But small 0r big money, you can be successful by not over-trading and taking ONLY what YOU want from the market. Say the market is poised to head up very high but you exist when you hit your set mark OR when it goes up a nice amount of pips(forex), set you STOP-LOSS@break-even. I will get it soon, I just have to have time on my side. 0nce I get my account back to a $1000, it's a wrap!
Right, So no going all in on the "big win" trade! I have low capital to actually. only 1 BTC to work with. I definitely understand.
Right a trade is a trade regardless of what you wager! I still need to learn how stop losses work a little more but I am starting to understand them now.
You simply look & observe for opportunities is all! When you find Volume(movement), you start to see recognizable patterns that will trigger your brain what to do based off of what you learned or experienced. Hope this helps ;)
Nicely put :)
I need to learn and focus more on the volume thing you are talking about! I really do not fully understand that yet!
Movement is all. Money can be made when price moves. Consolidation is a period of rest sort of speak with very much movement. When Price breaks out either way is when price starts to move@a pace for the participants to make money;)
Yeah I understand that! that is what volume is. So when there is a change in that it signal that the price is going to move up or down, correct? Which means a possible opportunity to make money.
Correct!
solid questions my man. I just put up my milestone post and heading offline, I am drained. Have a good weekend sir
Indeed, I commented and upvoted your milestone post. Good night to you too!
TY for everything man, honestly.
Your welcome, Happy to help. You seem like a cool guy!
Bonjour,
Je me nomme Mme leonie Duchet, je vis en France. En bref, je fais don de mes biens à une personne honnête et dans le besoin. Je souffre d'une grave maladie qui me condamne à une mort certaine, c'est le cancer de gorge, et je dispose d'une somme de 60.000 euros, dont je voudrais faire une donation à une personne de confiance et d'honnête afin qu'il en fasse bon usage. Je suis propriétaire d'une entreprise d'importation d'huile rouge au France, Finlande, Belgique, Italie, Suisse, et j'ai perdu mon épouse il y a de cela 6 ans, ce qui m'a beaucoup affecté et je n'ai pu me remarier jusqu'à ce jour, nous n'avions pas d'enfants. Je voudrais faire de cette somme un don avant ma mort puisse que mes jours sont compté faute de cette maladie à laquelle je n'ai eu de remède mais un calmant en Belgique je voudrais par la suite savoir si vous pouvez bénéficier de ce don ?
Je vous prie de me répondre sur ce mail : [email protected]
This is however, the best trading post I've read since being here on Steemit and I've bn here since what, August ;)
Another tip I will throw out there is to pay close attention to the cross-overs of moving averages(M.A.). Say you happen to catch a cross on the 15min chart and so you enter(long 0r short). This will allow for you to capture some fish(money) either for a nice quick scalp 0r for a chance to stay in the trade by simply observing the higher time-frames(future) and setting your trade for a breakeven once it reaches a certain amount of pips, points, whatever it is you trade lol Then if or when it heads higher or lower(depending on what direction you are in), you can move STOP(s) accordingly so that if you were to get STOPPED out, you can get STOPPED out in PROFIT.
I would also highly suggest learning Heikin-Ashi Candles as this allows for easier entries and exits ;)
Thanks for the compliment! haha
Yeah I've been down that route, I found MA crossovers went through periods of chop, where I'd lose out more than gain. Heiken-Ashi smooths the charts out quite nicely, I've used them before.
After my overly elaborate TA journey i decided to settle on price action. It works for me. I find myself getting overly analytical when indicators come into play and shooting myself in the foot. But they work for some people so I can't disregard them.
Ha! same here. Price Action is the best indicator hands-down and is mostly how I look@it. I use very few indicators. Use too many and they make you go coo coo
Bonjour,
Je me nomme Mme leonie Duchet, je vis en France. En bref, je fais don de mes biens à une personne honnête et dans le besoin. Je souffre d'une grave maladie qui me condamne à une mort certaine, c'est le cancer de gorge, et je dispose d'une somme de 60.000 euros, dont je voudrais faire une donation à une personne de confiance et d'honnête afin qu'il en fasse bon usage. Je suis propriétaire d'une entreprise d'importation d'huile rouge au France, Finlande, Belgique, Italie, Suisse, et j'ai perdu mon épouse il y a de cela 6 ans, ce qui m'a beaucoup affecté et je n'ai pu me remarier jusqu'à ce jour, nous n'avions pas d'enfants. Je voudrais faire de cette somme un don avant ma mort puisse que mes jours sont compté faute de cette maladie à laquelle je n'ai eu de remède mais un calmant en Belgique je voudrais par la suite savoir si vous pouvez bénéficier de ce don ?
Je vous prie de me répondre sur ce mail : [email protected]
Wow, this post proves that I have so much to learn about all of this!
UV and RS for you.
Have a good weekend.
Hey @barrydutton , what do you mean by UV and RS?
He meant upvoted and resteemed. He resteemed you and that's how I found this article. Great post :) I'll follow you for your next installment
Haha, it all makes sense now. Thanks @greatdabu I'll keep an eye out for you :)
was wondering myself!,seen answered below. Dang Acronyms....
Upvote and ReSteem
Outstanding info. Thank you for sharing. ☆☆☆☆☆😎
Bonjour,
Je me nomme Mme leonie Duchet, je vis en France. En bref, je fais don de mes biens à une personne honnête et dans le besoin. Je souffre d'une grave maladie qui me condamne à une mort certaine, c'est le cancer de gorge, et je dispose d'une somme de 60.000 euros, dont je voudrais faire une donation à une personne de confiance et d'honnête afin qu'il en fasse bon usage. Je suis propriétaire d'une entreprise d'importation d'huile rouge au France, Finlande, Belgique, Italie, Suisse, et j'ai perdu mon épouse il y a de cela 6 ans, ce qui m'a beaucoup affecté et je n'ai pu me remarier jusqu'à ce jour, nous n'avions pas d'enfants. Je voudrais faire de cette somme un don avant ma mort puisse que mes jours sont compté faute de cette maladie à laquelle je n'ai eu de remède mais un calmant en Belgique je voudrais par la suite savoir si vous pouvez bénéficier de ce don ?
Je vous prie de me répondre sur ce mail : [email protected]
I think you should replace the greater sign by an equal sign in the breakeven equation, shouldn't you?
Very nice reading by the way. It sounds logical, and one easily forgets about this.
Thanks @lemouth , I've made the correction :)
Wow,insight into trading, as a newbee this is just what i need!.Thankyou very much- Followed,UpVoted Re-STEEMed
Hey @roydowding , glad you got some value out of it. I have a few posts lined up going into more practical detail, so stick around. Hopefully we can have have a chat here and there, looking forward to it.
Fantastico!
I agree, @wingz has helped me learn a lot!