BC TRADING
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THE TRADER'S EDGE: THINKING IN PROBABILITIES

Casinos make consistent profits day after day and year after year, doing something random

At the same time, most traders believe that the outcome of the market's behavior is not random,yet can't produce consistent profits

Thread 🧵

 What casino owners ,professional traders know is that probable outcomes can also produce consistent results if you " Have an edge" and trade on a large enough sample size.

The best traders treat trading like a numbers game.

1. To illustrate, let's look at the game of blackjack-
In blackjack, the casinos have approximately a 4.5-percent edge over the player.

This means that casinos will make profit over a large enough sample size, even after several winning streaks and big profits of many players.
At the end of the day, week, month, or year, the casino always ends up with approximately 4.5 percent of the total amount wagered.

That 4.5 percent might not sound like a lot, but let's put it in perspective.
Suppose a total of $100 million dollars is wagered collectively at all of a casino's blackjack tables over the course of a year. The casino will net $4.5 million.

What casino owners and pro traders understand about the nature of probabilities is that each individual hand played
is statistically independent of every other hand.

This means that each individual hand is a unique event, where the outcome is random.

If you focus on each hand individually, there will be a random, unpredictable distribution between winning and losing hands.
But on a collective basis, just the opposite is true.

If a large enough number of hands is played, patterns will emerge that produce a consistent, predictable, and statistically reliable outcome.
HOW TO THINK IN PROBABILITIES-

1. You have to believe in the uncertainty and unpredictability of each individual trade.

2. You have to believe that the outcome over a series of hands played is relatively certain and predictable.
Why, because there are many variable on which the result of each trade will depend ,

In trading, the known variables (from each individual trader's perspective) are the results of their market analysis.
Market analysis finds behavior patterns in the collective actions of everyone participating in a market.

In trading, the unknown variables are all other traders who have the potential to come into the market to put on or take off a trade.
The known variable is the result of the analytical tools we use, support and resistance, trend lines, moving averages .

Suppose you are putting on a trade based on a breakout and you are buying because you think that the buying will continue to be there in stock.
But the outcome of trade is not in your hand , is it?

It’s the unknown variables or the other traders whose collective behavior will determine the outcome of that trade.

They will be acting on their beliefs about what is a breakout?
At any given moment, some percentage of other traders will contribute to an outcome favorable to our edge, and the participation of some percentage of traders will negate our edge.

So there's no way of knowing how other traders will react on a given condition ,
so the results of a single trade are random and should not be predicted.

Since all trades have an uncertain outcome, then like gambling, each trade has to be statistically independent of the next trade, the last trade, or any trades in the future.
Also, there must also be a random distribution between wins and losses in any given set of trades, even though the odds of success for each individual trade may be in the traders favor.

Casino operators have learned that all they have to do is keep the odds in their favor
and have a large enough sample size of events so that their edges have ample opportunity to work.

So ,keep putting up the trade if you have a statistical edge ,and you will win over a large enough sample size of the trades.

Thanks for reading till here.

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Holy grail- A strategy Which can make money all the time.

After going through two phases of a traders journey, the initial success phase, and Only why do i get loss phase, Traders enter the third phase -

THE SEARCH FOR THE HOLY GRAIL PHASE.

This phase has no limits, It can end in 1 month and it may not end till lifetime.

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When a trader covers all the basics, they know how to lower their losses, they know the power of risk management.

And few of them may even develop their edges and systems over time.

But after some time, they feel that they are doing something wrong and there is more to trading than what they know.


THEN COMES THE HOLY GRAIL PART-

Few of them start to Read more books about trading,finding articles about “How to win 100% of the time” and listening to Youtube videos of few big traders who make big in trading.
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Life is a continuous journey of going through peaks and troughs of Happiness and struggle.

We can only see the Happy part of other lives, but ignore what they might have gone through to achieve that.


But let me tell you, even if someone is at ease right now, doesn't mean that he will continue to be at ease for their whole life.

The struggle will come again and we will have to go through it ,whatever we do, whoever we are , we have to cross that river of pain.

Even,In trading there are times when nothing works out, you go through long time and money draw-downs.

Even if you think you are a master, you have to go through it.

If you are struggling right now, don't lose hope as the tables will turn.

But remember to work as hard as you can and do as much good work as you can in your ease or Joyful time of life, because the tables will turn again.

Thank you for reading.

Trader knight.
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Pyramiding 2.0

A thread-


What is pyramiding?

It is simply adding to your winners.

Why use pyramiding?

1. It makes your winners bigger than your losers.

• Because you are adding positions when your trades are going your way, you are increasing your gains but your losers will be small comparatively.

2. You lose less during Draw-down time ( it saves you from losing big during whipsaws )

• Many times when the market is in sideways mode, Entering a trade with full risk might not be the best idea.

• So, you test the waters with a small position first, it could be ⅓ or ¼ of your total risk.

• So if the Breakout fails or whipsaws come, then you will only lose a small part of your overall risk.

• Then when position starts to go in your favor you can add to it.

3. It helps you to concentrate on a few trades,

They say that don’t put all your eggs in one basket, but don’t put them in too many either.

• See, Everyone can see charts and find breakouts, pullbacks etc.
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Trader knight
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Objectivity- Undistorted by emotions or personal bias.

What is objective Trading?

Trading in which decisions are taken on pre-decide rules, decisions in objective trading are not decided by Feelings or opinions.


What is subjective trading?

It is discretionary trading, in which one uses his intuitions and Analysis to take trading decisions.

Is one superior to other?

The rules in a mechanical system are going to be decided by you, the plan is going to be made by you,

the positions sizing and all other aspects are going to be made by you.

So your psychology is going to filter the information coming towards you, even in a mechanical system as well as in discretion.

WHATS THE USE OF OBJECTIVITY-

I am a Discretionary - Rule based trader.


So, I take trades based on my analysis, my entries are discretion based, but the exits , position sizing and Risk management rules are pre decided.

WHY USE SUBJECTIVE TRADING?

The biggest benefit that objective trading do is that it makes the chances of you thinking less during the time of taking an execution decision.

As a beginner trader you will not have much experience, and you will inevitably do a lot of mistakes.
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How position sizing can affect your trading performance-

Assuming that you are trading a Trend-following system with Big RR and low win-rate.

For example, assume that you risk one percent per trade on a 100,000 account
and you have 20 straight losses.

That one percent is of your remaining equity and at the end of 20 losses, you would be down to 81,790.60.

Now if you got a 30R winner and you are risking one percent of your balance of 81,790.60, your new equity would be 106,327.9,


You’ve had 20 losses and one winner though you are still up 10Rplus your equity is up by 6.3R percent.

Now, let’s say you risk five percent per trade on your balance. At the end of 20 straight losses, you would be down to 35,772.89 or down 64 percent.


If you risk five percent on this amount and get a 30R winner, you would be up to 89,621.48. You are up 10R, but because of your position sizing, your equity is still down over 10 percent.

#positionsizing
#Trading
#nifty50

This is why position sizing is the most important factor in trading if you get it right and you have an edge, you will do good.

Thanks for reading till here.
@AnandableAnand @jitendrajain @quatltd @sohamtweet
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Entering a trade without ascertaining a certain things is gambling.

In this masterclass we will learn the pre-requisites to enter a trade.

DON'T ENTER A TRADE WITHOUT DETERMINNG THE FOLLOWING.

Please share.

We understand what reward to risk (popularly called risk to reward) is.
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Trader X -

Net-worth - 5 Cr
Trading capital - 25 lakh

Trader Y -

Net-worth - 30 lakh
Trading capital - 25 lakh

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