Posted by: joetradingplace | January 28, 2013

Think in Probabilities and Percentages

Human nature is afraid to be wrong or lose money, so even if you are consciously aware that this can hinder your trading, but subconsciously that’s the exact  thing you will do…So the conscious and subconscious  mind are in a tag of war. We all have losing trades and we all get it wrong some time, but it’s how you cut your losses that keep you in the game longer than other traders. Every trader no matter how big or how well-informed there are, they will have some losing trades. Losses cause traders to be doubtful about their ability to trade, it cause them to change strategies. But they fail to understand that losses are part of the game, they are cost of doing business. They are emotionally attached to every trade they take. One way to keep these emotions at bay is to think in probabilities.  Focusing your mind on the probabilities of your edge will definitely relieve the pressure of trying to predict what is going to happen next. When you take a trade, you will never know the outcome, because its random and unpredictable, but as long as you play the numbers game you will come out profitable every quarter. By numbers game I mean playing a big sample of trades, knowing that you have an edge and the odds are in your favour.

As long as a trader is risking a small portion of their account per trade, there is nothing to worry about. You have an edge and you know that the odds are in your favour. Bookies and casinos are playing the numbers game, they know that with the number of hands played, the odds are in their favour, that’s why they manage to stay in business.

I have noticed that a lot of new traders are attracted by pips..they are worried about how many pips you make a day/week. I think it shouldnt be about pips only, you should focus on percentage growth. I have never seen JP Morgan or Goldman Sachs recording their results in pips. Do you know that trader A can make 1000 pips a month compared to Trader B who makes 500 pips, but you will be surprised that trader B can have a higher percentage growth than  Trader A…its all about risk to reward ratio. Some new traders are asking  how can that be possible….

Trader A:

Takes 10 trades and let’s say they are all winners…so he is making 100pips per trade, but he is risking 1 percent to make 0.5 percent…so every 100 pips he makes equates to 0.5 percent of his account…for the ten trades, the account growth is 0.5*10 = 5 percent growth

Trader B 

Takes 10 trades and let’s say they are all winners…so he is making 50pips per trade, but he is risking 1 percent to make 2 percent…so every 50 pips he makes equates to 2 percent of his account…for the ten trades, the account growth is 2*10 = 20 percent growth

Trader A is making double the number of pips of Trader B, but Trader Bs account growth is 4 times that of Trader A. So making thousands of pips doesn’t mean much unless you know the risk/reward and the percentage growth. So to all the new traders, don’t just be attracted by the number of pips…think in probabilities and percentages.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: