bbmac
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it is true to say that no money is earned by a trade entry,...it is the exit that determines whether a trade is successful or not. In theory a random entry system with the right risk:reward parametres optimised to the strike rate achieved from the random entry could make money.
it is also true to say that the highest probability trading opportunities occur when a confluence of technical factors come together-and that an emphasis on hi-probability outcome trading should be favoured. Here are the reasons;
1. As stated above you can theortically make money in trading from an arbitrary entry so long as the correct risk:reward strategy is employed and adhered to. Even without an arbritary entry employing say a 3:1 risk:reward ratio on a 33% strike rate (winning trades as a % of total trades) would over any sample of entries, prove profitable. It is rightly said that it is not the entry, but the exit that makes you the money.
But here's the thing...when in a trade it is common to experience discomfort and the body communicates that to our brains, resulting in the all too common response to ending that discomfort...by exiting the trade early. (Our bodys react to perceived dangers by preparing to 'Fight or Flee.' )
In trading a lower strike rate system/methodology there are naturally more losing trades and crucially more consecutive losing trades. Our brains remember past losses and irrationally place more emhasis on them than the winners, resulting in it fearing more losses to come. It's mechanism to protect us from this discomfort is to secrete adrenaline and noradrenaline (which comes from the adrenal glands above the kidneys.) The release of these hormones results in the body increasing the flow of fatty sugars through the liver which causes the feelings of discomfort resulting in a much decreased ability to make objective judegements. To put it another way;
'..Your Neo-Cortex (the thinking part of your brain) shuts down and the survival mechanism in the middle and lower more primitive parts of the brain take over. As a result you can react to things and stop thinking things through rationally. Basic emotions like fear and anger take over from more complicated sophisticated higher function emotions.'
So our ability to adhere to strict risk:reward ratios necessary to ensure overall net profitability with a lower strike rate system is severely impaired with the greater number of losses and consecutive losses with this type of trading system. The greater the consecutive run of losses the greater the impairment, and again, crucially, the less experience/understanding one has of this, the greater the discomfort one might experience resulting in non-adherence with the critical risk:reward ratio.
Further to this, such a consecutive run of losing trades can also interfere with the ability to actually place the next trade when the trading edge presents itself, fearfull of further losses, thus interfering with the natural flow of probability upon which all trading edges rely.
Physical discomfort and Fear are powerful debilitating factors on the ability to profit from a trading edge.
The only effective solution in helping to overcome these potential neurological and physiological barriers, available to inexperienced trader is to seek a trading edge that has a high strike rate over any sample of set-ups. This trading system/methodology achieves that.
In knowing the strike rate of a trading edge, a user can calculate the probability and likely size of any consecutive losing run, (and therefore safely optimise risk/leverage to it.)
A 50% strike rate for example is liable to suffer consecutive losing runs of 6-7, a 33% strike rate liable to experience losing runs of 11+ at some point. A 90% strike rate is liable to experience a consecutive losing run of max 2, more commonly 1, when it occurs.
A user should ensure that if should such a consecutive losing run is encountered it falls within their tolerance for risk/drawdown by optminising their leverage to your trading edge.
Whatever the trading style, a user should;
a. Try and develop/obtain a high probability trading egde
b. Optimise risk/leverage to the strike rate of the trading edge.
2. The second reason to seek a high strike rate trading edge is rate of recovery, the following table shows the recovery needed as a % of the remaining account after drawdown, to re-establish the starting balance. It is clear from the table below that it becomes exponentially more difficult to recover an account to it’s starting balance. The loss of account is more likely with low strike rate trading system/methodologies for the reasons given in point 1 above.
% Loss intial capital % profit required to Recover
5-----------------------------5.3
10---------------------------11.1
15---------------------------17.6
20---------------------------25
25---------------------------33.3
30---------------------------42.9
35---------------------------53.8
40---------------------------66.7
45---------------------------81.8
50---------------------------100
55---------------------------122
60---------------------------150
65---------------------------186
70---------------------------233
75---------------------------300
80---------------------------400
85---------------------------567
90---------------------------900
3. The third reason why high probability trading is so important is the risk of ruin.
Confidence in a trading edge can be shaken because it's user does not understand it's potential for delivering a consecutive losing run over any given sample and how long that consecutive losing run can be. This in turn can lead to the mis-management of the trading edge re money and risk/reward optimisation resulting in a destabilising run of losses that can result in the trading edge being discarded.
The table below shows the most probable longest consecutive losing run at any given strike rate, that can, and probably will - over any extended sample, occur. Obviously a trading edge with a high strike rate (winning trades as a % of total trades) derived from hi-probability trading opportunities is at less risk of causing the user to suffer a destabilising loss/run of losing trades that might see them discard an other wise potentially profitable edge (over a larger sample,) before the sample has played out. Such a de-stabilising loss can occur by being over-leveraged at the prevailing strike rate of the trading edge, being achieved.
Optimising the money and risk/reward parametres such that a trading edge cannot cause a user to suffer destabilising losses that might see them discard an other wise potentially profitable edge is key, -but- having a high strike rate trading edge ensures that one potentially negative eventuality that threatens trading suceess is removed.
it is also true to say that the highest probability trading opportunities occur when a confluence of technical factors come together-and that an emphasis on hi-probability outcome trading should be favoured. Here are the reasons;
1. As stated above you can theortically make money in trading from an arbitrary entry so long as the correct risk:reward strategy is employed and adhered to. Even without an arbritary entry employing say a 3:1 risk:reward ratio on a 33% strike rate (winning trades as a % of total trades) would over any sample of entries, prove profitable. It is rightly said that it is not the entry, but the exit that makes you the money.
But here's the thing...when in a trade it is common to experience discomfort and the body communicates that to our brains, resulting in the all too common response to ending that discomfort...by exiting the trade early. (Our bodys react to perceived dangers by preparing to 'Fight or Flee.' )
In trading a lower strike rate system/methodology there are naturally more losing trades and crucially more consecutive losing trades. Our brains remember past losses and irrationally place more emhasis on them than the winners, resulting in it fearing more losses to come. It's mechanism to protect us from this discomfort is to secrete adrenaline and noradrenaline (which comes from the adrenal glands above the kidneys.) The release of these hormones results in the body increasing the flow of fatty sugars through the liver which causes the feelings of discomfort resulting in a much decreased ability to make objective judegements. To put it another way;
'..Your Neo-Cortex (the thinking part of your brain) shuts down and the survival mechanism in the middle and lower more primitive parts of the brain take over. As a result you can react to things and stop thinking things through rationally. Basic emotions like fear and anger take over from more complicated sophisticated higher function emotions.'
So our ability to adhere to strict risk:reward ratios necessary to ensure overall net profitability with a lower strike rate system is severely impaired with the greater number of losses and consecutive losses with this type of trading system. The greater the consecutive run of losses the greater the impairment, and again, crucially, the less experience/understanding one has of this, the greater the discomfort one might experience resulting in non-adherence with the critical risk:reward ratio.
Further to this, such a consecutive run of losing trades can also interfere with the ability to actually place the next trade when the trading edge presents itself, fearfull of further losses, thus interfering with the natural flow of probability upon which all trading edges rely.
Physical discomfort and Fear are powerful debilitating factors on the ability to profit from a trading edge.
The only effective solution in helping to overcome these potential neurological and physiological barriers, available to inexperienced trader is to seek a trading edge that has a high strike rate over any sample of set-ups. This trading system/methodology achieves that.
In knowing the strike rate of a trading edge, a user can calculate the probability and likely size of any consecutive losing run, (and therefore safely optimise risk/leverage to it.)
A 50% strike rate for example is liable to suffer consecutive losing runs of 6-7, a 33% strike rate liable to experience losing runs of 11+ at some point. A 90% strike rate is liable to experience a consecutive losing run of max 2, more commonly 1, when it occurs.
A user should ensure that if should such a consecutive losing run is encountered it falls within their tolerance for risk/drawdown by optminising their leverage to your trading edge.
Whatever the trading style, a user should;
a. Try and develop/obtain a high probability trading egde
b. Optimise risk/leverage to the strike rate of the trading edge.
2. The second reason to seek a high strike rate trading edge is rate of recovery, the following table shows the recovery needed as a % of the remaining account after drawdown, to re-establish the starting balance. It is clear from the table below that it becomes exponentially more difficult to recover an account to it’s starting balance. The loss of account is more likely with low strike rate trading system/methodologies for the reasons given in point 1 above.
% Loss intial capital % profit required to Recover
5-----------------------------5.3
10---------------------------11.1
15---------------------------17.6
20---------------------------25
25---------------------------33.3
30---------------------------42.9
35---------------------------53.8
40---------------------------66.7
45---------------------------81.8
50---------------------------100
55---------------------------122
60---------------------------150
65---------------------------186
70---------------------------233
75---------------------------300
80---------------------------400
85---------------------------567
90---------------------------900
3. The third reason why high probability trading is so important is the risk of ruin.
Confidence in a trading edge can be shaken because it's user does not understand it's potential for delivering a consecutive losing run over any given sample and how long that consecutive losing run can be. This in turn can lead to the mis-management of the trading edge re money and risk/reward optimisation resulting in a destabilising run of losses that can result in the trading edge being discarded.
The table below shows the most probable longest consecutive losing run at any given strike rate, that can, and probably will - over any extended sample, occur. Obviously a trading edge with a high strike rate (winning trades as a % of total trades) derived from hi-probability trading opportunities is at less risk of causing the user to suffer a destabilising loss/run of losing trades that might see them discard an other wise potentially profitable edge (over a larger sample,) before the sample has played out. Such a de-stabilising loss can occur by being over-leveraged at the prevailing strike rate of the trading edge, being achieved.
Optimising the money and risk/reward parametres such that a trading edge cannot cause a user to suffer destabilising losses that might see them discard an other wise potentially profitable edge is key, -but- having a high strike rate trading edge ensures that one potentially negative eventuality that threatens trading suceess is removed.
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