Trading Philosophy
I believe that the absolute number one key to successful trading is discipline. Discipline to develop your own trading rules and the discipline to follow those rules without hesitation.
In a class of 400 people, all exposed to the same trading rules, setups, and instructors, you will only find a handful of people that will become successful traders. I believe this is mostly related to discipline.Every trader develops a personal style that works for them. My style tends to be mostly in the high probability trades (in the 60%+ range) with limited reward and larger risk. It’s not unusual for me for risk $9 to make $1.
For those of you that are overly focused on risk vs. reward, I believe that you’re missing a large part of the equation. In order to be a proper investor you need to compute three requirements: risk, reward, and probability. If you leave out probability and only focus on risk vs. reward you might as well just play the lottery day after day. Where else can you risk a $1 with a potential reward of $83,000,000?
Here’s an example of probability and risk vs. reward. Let’s say your buddy will pay you $2 for every time you flip a coin and it comes up heads, and every time it comes up tails you pay him $1.
After say… 100,000 coin flips, you will have made the following:
50% (probability of heads vs. tails) x 100,000 flips = 50,000 heads x +$2 = +$100,000
50% (probability of tails vs. heads) x 100,000 flips = 50,000 tails x -$1 = -$50,000
Combined you made +$50,000 over 100,000 flips or +.50 a flip. Or a positive expectancy of 1.50 for every dollar invested. Does that make sense?
Now knowing this, do you think you could find anyone to play this game with you for long?
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Now, what if you had a trading style where you would win 60% of the time and make +.50 and 40% of the time you would lose -.50.
Over 100,000 trades you would:
60% x 100,000 trades = 60,000 wins x +.50 = +$30,000
40% x 100,000 trades = 40,000 loses x -.50 = -$20,000
Combined you made +10,000 over 100,000 trades or +.10 a trade for a positive expectancy of 1.10 for every dollar invested. Does that make sense?
Would you be willing to play that game???
That’s how I trade options.
