Playing a Game You Can Win
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. |
Other Trading System Articles
Biker Business.... With motorcycle gang violence again under scrutiny, it’s worth remembering an ominous warning about a biker blueprint for consolidating and carving up territory amongst the strongest clubs to maximise illicit incomes.The warning was contained in a confidential assessment prepared in New Zealand on the activities of the Bandidos and the Hi ...What Should I Be Doing In The Stock Market? "Every day the bull market continues, brings us one day closer to the next bear market."Jeff Bryant, HomeTrader Trainer"Should I be trading the long or short side of the market now?""Should I wait a couple of months until the market looks better?"These are a couple of the questions my students have been ask ...The Good & The Bad of Online Stock Trading In order to get consistently positive results from the online stock trading system, you have to have a system of your own. You wont consistently pull positive returns from online stocks if you follow a rag tag system. To help with your investing, here are a couple methods that will give you some direction as to where to start with your online st ...Forex Trading 'Must Do': Instant Guide For Forex Beginners It is believe that more than 50% of Forex traders are losing money long term in the foreign currency exchange market. Yet, there are still a lot of Forex traders jump in to the market, trade blindly and lost their money. Trade after trade, its surprising to see that 'normally-losing' traders keep betting (not investing!) their money into Forex m ...Trading Tips No 1: Learn How to Trade The Moment of Truth So you have learned how to trade the markets by mastering a few trading tools like Moving Averages, Channels, Stochastics, MACD, or RSI - that is a great accomplishment achieved by only a few. However, having the tools and rules to trade markets successfully, year in and year out, is only half of the challenge. The other half is far more dauntin ...E-currency Trading Business "Being a Trader, Having more Money and Freedom" You just heard about Electronic Currency Trading. You hear about people making money with it. You wonder if you can make money with it. Is it too complex? Is it a scam? Could you double your income with it? Read on to find the answers.Can you really make money with the E-currency Trading Business ? How can I get started? Will I be able to ...Burning Incense Incense has always played an important role in the religious ceremonies and rites of people all over the world.Records tell us that in ancient Babylon, an immense amount of incense was burnt in offerings to the gods. It has always been an integral part in the life of the people in Asian countries where the floral perfumes were blended wi ...Alcohol: A Health Malefactor Many people consider alcohol as a social drink because its associated with parties, relaxation and adventures. Since the dawn of civilization, mankind has been aware of the benefits and harms of alcohol. Today, for some alcohol is part of an everyday complete meal. Because evidence has proven alcohol a health benefactor when consumed moderately, ...Is Laser Teeth Whitening the Way Forward? Many people who have previously discounted teeth whitening processes, due to the perceived discomfort and the number of sessions it takes, have had renewed interest in tooth whitening as a result of laser teeth whitening techniques.Laser light teeth whitening under brand names such as Zoom Teeth whitening, Rembrandt or BriteSmile have bou ...Divorce: Secrets To Coping With A Divorce Announcement During a wedding ceremony, when people are joined together in matrimony, they swear and vow to honor and respect each other and to remain partners both during good and bad times.But in most marriages, this is not always the case.One out of every two marriages in America is failing and will explode in divorce.It takes two ...Life Insurance Software A reliable insurance software program allows agents and insurers to use the Internet for life insurance purposes. They can determine eligibility rate, quote, bind, document issue and collect payment – in very short period of time. This reduction in time allows for increased sales and reduced rates for the consumer.The following are some v ...Trading System - Is It Really Worth Your Money? If you want to get into trading, a trading system can help. It is often hard to know if failure or lack of success in trading is the result of poor marketing or lack of knowledge about trading systems; either way, if things start to falter you may end up thinking that the system you are considering looks like a get rich quick scheme.It pr ...Stock Trading Systems You can’t make money in the market unless you take a serious approach to trading. To achieve substantial returns on a regular basis, you have to choose a stock trading system that has passed the test of time.First, let us find out what a trading system means. It is a group of specific parameters that determine entry and exit points for a ...Forex Software - Choosing the Best When it comes to forex trading the forex software you choose is essential. There are so many forex trading companies all competing for your business that choosing the right forex software can be quite a difficult task. Most of the forex software products available offers live online forex trading platforms but what other components are vital w ...Forex Trading 101: Learning Guide for FX Beginners Being new to FOREX trading? Don’t worry, getting started in FOREX trading is easy and you can always test your skills first in a demo account before you go ‘live’ with real money. To get started in FOREX trading, we have to get to know what FOREX is. For the inexperienced, FOREX trading involves buying and selling the different currencies of the ...Beginner Day Traders - Easy Money? In day trading you are pitting your wits against every other person in the market. Every dollar you make is on the back of someone else's losses.Every losing trader has failed at trading. Every successful trader has also failed at trading in their past.It is a very rare individual that can make money off capital loaned - the psycho ...The Demand for Water and Water Privatisation On TV recently you have Indian villagers complaining that coca cola had built a bottling plant in their region and were using all the water from the underground aquifer, leaving the farmers and local population without water. Only the local bureaucrats that collected the taxes seemed happy with the situation. Water infrastructure in the developi ...How To Choose a Good MLM or Network Marketing Company? You've heard many horror stories about MLM /network marketing programs. But what you are really hearing about are stories relating to illegal programs or pyramid schemes. Basically, pyramid schemes have no real, viable and worthy product. Obviously, you do not want to participate in such schemes. You want to be associated with a high quality ...Natural Dental Care: Keep Your Mouth Clean the All-Natural Way So you think you need harsh chemicals to fight gingivitis, bad breath or tooth plaque? Not so! Natural therapies for oral hygiene can boost your gum disease fighting power both inside and out. Let's examine a few of the most popular natural therapies used today.Herbal Natural Therapies for Oral HygieneCertain herbs have anti ...Top 10 Principles for Positive Business Ethics This morning, I read about a company using on-line auctions to defraud customers. Last week, I consulted on an ethics complaint where a business coach betrayed a client’s confidentiality. And, recently a Physician was convicted of insider trading based on information from a patient, a violation of both business ethics and her professional ethics ...Forex Day Trading Tips You Need to Know The popularity of forex currency trading system continues to grow as more and more people have realized the potential income that they can earn from forex trading.With a massive daily profit of $1.5 trillion, forex trading has definitely surpassed the combined profits of bond market and global stock market. This is probably the main reaso ...Currency-Trading: Finding Your Niche Currency-trading is quite similar to trading stocks on the market. While you may or may not have any familiarity with those options, you should know that trading in this form is quite popular and it keeps gaining in popularity. There are many reasons for that but in most cases it is popular because it works and is quite straightforward which m ...Making More Money With Sports Arbitrage Trading Sports arbitrage trading is a growing business in the United States. It is growing fast, because it’s a great way for people to earn money online. If you haven’t herd of arbitrage trading do not worry. I am sure most of you haven’t. You don’t need to know anything about sports, or sports betting. Your not evening going to be betting. Your ...North America’s #1 Ranked Fund Manager Names His Favorites StockInterview: How do you feel about uranium, which fuels nuclear reactors and generates electricity, and the uranium bull market for stocks that we’re in right now?J-F Tardif: We are very bullish. We’re extremely bullish on uranium as a firm, not only for uranium, but we’re also very bullish on energy. Everything is inter-connected beca ...Passive Income Online From e-Currency Exchange Building passive income is something that everyone wishes they could do, some people will spend countless hours and thousands of dollars searching for that one passive income opportunity.Sadly most people never find it. In the end they get know where fast, and think everyone and everything is out to get them and their money. Well t ...Beware: The Dangers of Selling on EBay 101 It's obvious that eBay provides internet users with an online flea market where buyers and sellers from around the world meet to conduct trade.However, like most traders who are faced with an innovation of this sort, the first question will always be: It is safe?The answer is yes, but devious scammers seem to be plotting daily to f ...Make Money Fast – Part 1 Your Plan For Building Wealth Quickly! Here we are going to look at how to make money fast and build REAL wealth trading financial markets, don’t worry if you have never traded before – We will tell you all you need to know, to make TRIPLE digit annual gains.Let’s get started and look at how to make moeny fastThe Right AttitudeAs with Any venture you need to appr ...How To Write More Powerful Online Text Although there are significant differences among the various types of online communication, there all have one critical thing in common - they're read off a screen. There are substantial benefits, too, in that while your message is on someone's screen usually it has their undivided attention. You are genuinely "one-to-one" wit ...Black Pepper - Piperaceae - Helps To Increase Circulation Black pepper information and how it is used as a herb in alternative herbal treatments, to treat ailments and problems, such as stimulating the entire body, boosting circulation, fighting food poisoning and dysentery, helping to relieve diarrhea, as well as nasal congestion and sinusitis.Although we believe in the therapeutic and healing ...
|
