When it comes to trading, it’s hard enough. It doesn’t matter what IT is here, it’s just hard enough. To make matters worse, if you’re going into battle half-prepared, how could one ever hope to come out alive?
There are the trade plans, strategies, setups, technicals, and everything in-between… but one thing that lingers out in the open, but unnoticed — Trader’s Math. How can we tell we are trading correctly and when things need to change? All of those answers can easily be drawn from our personal Trader’s Math.
Let me clarify what Trader’s Math is: It is the direct relationship between your wins and losses in size compared to your accuracy. A positive number is good, a negative number is bad. The more positive, the better your math and the better your odds of success. For example, when I am scalping my math typically comes out to +800 to +1,000. Use this in reference for later as an idea of how this works.
To get our number, we need to know 4 things or, at the very least 3. Our average winning size, average losing size, winning accuracy and losing accuracy. Let’s take easy math first. You flip a coin. If it lands on heads then you go long and short if tails. It lands on heads and you go long. If you set your target and stop at 50 ticks each, which is likely to hit first? The correct answer here should be something along the lines of “I have no idea”. Correct! So, you have a 50/50 trade and a risk:reward of 50t:50t. With that we can then do our math.
First, take our winning accuracy multiplied by our average winning size. 50*50 = 2,500.
Second, take our losing accuracy multiplied by our average losing size. 50*50 = 2,500.
Finally, take our Winning math minus our losing math for our end Trader’s Math: 2,500-2,500 = 0. Less commissions, this is a losing strategy.
Let’s take another approach. Let’s say you have a setup that you are not very sure about. You already know you are under 50/50 as you are unsure. At best it can’t be higher than 40% maybe. So, if you need to ensure this trade is profitable IN THE LONG RUN, the Trader’s math should dictate the size of our target. If, at best we are correct 40% of the time, we know a 1:1 isn’t going to cut it. Let’s step up to 2:1 meaning we are willing to risk half of what we want to make.
First, take our winning math: 40*100 = 4,000.
Then, take our losing math: 60*50 = 3,000.
Finally, finish the equation for our total Trader’s Math number: 4,000-3,000 = +1,000. We can see, this is a viable trade setup at 2:1 but nothing less than that as it would invert the math if it were to fall too far below the 40% threshold. Every trade taken or placed should have this math inherently built in to it and if it doesn’t you may have just found where your trouble stems from! I hope this helps and, as always, if you have questions feel free to ask!
Thanks, i needed that reminded to me, because so many times i get cought in the volatility and speed of price action that ignoring that proved to be damaging many times to my bottom line.