|
Author: Paul King Article source: http://www.jpservicez-searcharticles.com/. Used with author's permission.
Imagine a simple coin-tossing game where you win whatever you stake if heads comes up, lose what you stake if tails comes up, and you are charged 1% of your stake each turn to play. Can you win money at this game? If you are familiar with the concept of expectancy, then you will probably answer 'No' since over many turns the amount won will be equal to the amount lost (assuming the coin is a fair one) and after factoring in the 1% cost of playing you will lose money overall.
In fact, there is a way to win this game, and that is to understand that the longer you play, the more you will lose, so the optimum strategy is to bet everything you have on just one toss of the coin; just like Ashley Revell did when he sold everything he owned, took the $135,300 to Las Vegas, and bet it all on 'Red' on one spin of the roulette wheel. Mr. Revell was fortunate and he won, but I am not recommending that you bet everything you have on one trade!
Obviously risking everything on one trade is not a useful strategy since we want a game we can play for long periods of time to generate a consistent income. So how can we change the game so that we can win? There are three aspects to the game which can be adjusted to increase our chances of winning consistently:
• We can tip the chance of a winner in our favor from 50/50
• We can increase the size of the payout from 1:1
• We can reduce the cost of playing the game
Tipping the chances of a winner is not possible in a fair coin toss game, but it is possible in trading. There are two ways to approach this: identify conditions that are more favorable to your winners and include them in your system definition, or identify circumstances where a loser is more likely, and skip those trades. For example, if you notice that most of your winners are entered on days where the overall market has moved in the same direction as your trade, then only enter trades when the overall market is moving in the correct direction. This means that your trade is in the same direction of the overall market, rather than against it.
Another example might be that trades that are entered just before major news announcements, like earnings calls, often get stopped out as losers due to increased volatility, so you should skip those trades.
There may be many patterns of winners and losers that you can identify for your own systems and careful study of past trades is definitely worthwhile. Note that we do not want to increase our win percentage too significantly (i.e. to greater than 60%) since this would indicate that we have 'curve-fitted' our system to historical results that are unlikely to continue into the future.
It is also important to note that for some types of trading (i.e. long-term trend following strategies) it may not be possible to have a win percentage that is greater than 50% (and it may be much lower) and that is where the second aspect of improving your system comes into play: the average size of winners versus losers.
Increasing the size of the payout so that the winners win more on average than the losers lose depends on the way you handle your stops. Having large winners in relation to losers can make up for a low win percentage, and mean that you will still make money playing the game. One method is to have a trailing stop that moves up as a trade becomes a winner. If you have fixed stops for losing trades that limit losses, but trailing stops for winning ones that allow winners to grow, then you are increasing your chances of your average winner being larger than your average loser. Generally it is better to be strict on losers by having tighter stops that keep losses to a minimum and generous with winners by having stops that allow profits to grow. In any case you want to make losers small and winners large, so never add to a losing trade - that would be doing the opposite of what you want to achieve.
Lastly, reducing the costs of trading is probably the simplest change you can make, and can mean the difference between winning and losing overall - especially for systems that have lower expectancy. There are many online brokers now that charge 1c per share for equity trades (and comparably low fees for other instrument types) and there is no reason why you should be paying more than this if you are trading electronically.
Every trader should do whatever they can to maximize the expectancy of their trading system or method by considering each of the 3 aspects just described. If we do some, or all, of these things then the amount we win now becomes a
factor of how much we stake, and how often we play because we have created a true 'edge' where we know that the system we are trading should make money (if traded accurately). Calculating the expectancy of your trading system or method
tells you whether you are playing a game you can win, and is a very important piece of information that every trader should know before they risk real money.
If the game is rigged against you because your trading methods lose money regardless of how accurately you implement them, how can you ever be a successful trader? Paul King is owner and head trader of PMKing Trading LLC, a Vermont-based proprietary trading company founded in May 2002. Paul has published a series of eBooks and articles about what he considers to be the important aspects of trading.
Visit http://www.pmkingtrading.com for more details.
Listening Your Way to Greatness
What you listen for in your conversations with others determines what you will get out of them. All too often, we listen to others in a casual or unfocused way....
Internet Marketing Online: How To Eliminate Your Competition Without Bloodshed
Business thrives on competition.
Extramarital online dating is now becoming part of the mainstream dating scene
Extramarital online dating is now becoming part of the mainstream dating scene.
The Best Gift You Can Give Yourself for the Holidays
Do you and your family get anxious or stressed during the holidays? Would you like to enjoy all the Seasonal Events even more? Do your expectations create stres...
Selling More Effectively as a Trusted Sales Professional - Thirteen Tips
Do you want to sell more successfully using an honorable and straightforward approach? Read these thirteen sales tips to help you be perceived as a trusted sale...
What is Travel Insurance?
Travel Insurance is designed to protect your health, belongings, and your financial investment in your trip.
Your Health is Important Get Fit For Life
Choosing fitness equipment for your personal use can be a rather daunting task. You can't turn on the TV without seeing ads that promise or imply that if you bu...
Close Kept Secrets to Weight Loss #1
Peel back the layers of emotional stuff that is keeping you from moving forward in your weight loss goals.
5 Solid Reasons: Why Your Child Can Be An Achiever
Your child has what it takes to function at optimum level--to be the best student, to be the best in its career, and to perform efficiently in every area of lif...
Public Relations for New Enterprises
Five Reasons Why a New Company Should Employ a Public Relations Expert
Vacations in Manhattan
Are you considering a vacation to Manhattan? Did you know Manhattan is the home of the Empire State Building? For more information about Manhattan, click on t...
Laminate Flooring Is Attractive And Long Lasting
Laminate flooring is perfect for people who want to install a floor covering that is easy to install and combines the rich look of hardwood with the easy care o...
A Mothers Love
There is nothing as strong as a mother's love. Our children may grow up and leave us but the bond remains, an intangible thread that ties us despite time and d...
The Key to Permanent Weight Loss
Unfortunately, there is no "Magic Pill" that will make you lose fat and build muscle. You may have tried many popular diets and found that either they do not wo...
The Benefits of HEPA Air Purifiers
The military designed the first HEPA filter in the 1940s for use in the Manhattan Project, when safety from free-floating nuclear material was a primary concern...
Buying a Franchise
Buying a franchise is not for everyone. This guide will help you evaluate whether buying a franchise is right for you.
Fedoras & Floppy Hats - Hot Hot Hot for 2005 & 2006
For those of you that love hats you'll be in your glory - hats are hot this coming season - in fact floppy hats and fedoras are hot hot hot!!
Authentic Relationships - 5-Question Exercise to Explore How You Show Up In Relationship
The focus of this article is to explore what it means to be authentic in the context of being single in the dating world and/or in the context of coaching singl...
Womens Health: Cervical Smears
Information about women's health: cervical smears
Why Dont They Just Get It Done: 7 Performance Tactics for CEOs
Why Don't They Just Get It Done: 7 Performance Tactics for CEO's Otan Logi - Tactical Advisor Associates Buckling under the weight of chronic corporate restruc...
Get Outsiders on Your Side
Especially good advice for business, non-profit and association managers whose job success depends in large part on the behaviors of their key external audience...
What Are Bottom Water Tropical Fish?
Bottom water fish are those that prefer living at the lowest level of the aquarium. It's not that they can't swim into the upper regions, they will when spurre...
The Happy Secretary
If you want to ensure longevity and productivity from your secretary, just treat her right!
Casino Food 101
Over the years, the various gambling games and the gambling joints or the casinos have undergone a change, making the experience riskier, adventurous and uniqu...
|
Print this page