A little bit about systems, probability and expectations...
A very good reason why new traders fail to make any money, and indeed lose money, is the search for the so called holy grail, that elusive system that never loses and always wins. I used to do it myself all the time, try out a system and after 2 wins, 2 break evens and 3 losses I would determine that it was no good and go on to the next one. Experienced traders of course know that if your system is expected to give you a 40% strike rate at 2:1 risk/reward that is sufficient to make money. Also, given those figures, you can expect 4 wins out of 10 trades and maybe 2 or 3 break evens with the rest losses. This represents a solidly profitable system. What can't be known is over 100 trades what order the wins, break evens and losses will come. With a 40% strike rate it is not inconceivable that you will incur 5 or 6 or more losses in a row before you reach a winner. Of course it can and does happen the other way round and you experience a run of winners. So why when most people profess to know this will they only work a system for 10 to 20 trades before abandoning it if it doesn't perform?
It is my feeling that it is more or less impossible to predict with any degree of accuracy a sustained direction for any market. What a trading system does is increase the probability of your trade working out and making you money against a randomly placed trade. A trading system is not a licence to print money but merely a way of identifying patterns and/or situations which have a higher percentage chance of making you money than a random guess.
What really makes the difference between traders that make money and those that don't is that winning traders are willing to be wrong quickly and willing to be right for longer. In other words, and taking into account the randomness of the markets we trade, if it really is that a trading system will have winners and losers and we can't know in which order they will come then it is vital to accept and close the losing trades quickly and unless you are working with a fixed take profit to take advantage of a high probability situation you should hold on to your winning trades until you have a solid reason to close them.
I hope this makes sense and helps someone?
A very good reason why new traders fail to make any money, and indeed lose money, is the search for the so called holy grail, that elusive system that never loses and always wins. I used to do it myself all the time, try out a system and after 2 wins, 2 break evens and 3 losses I would determine that it was no good and go on to the next one. Experienced traders of course know that if your system is expected to give you a 40% strike rate at 2:1 risk/reward that is sufficient to make money. Also, given those figures, you can expect 4 wins out of 10 trades and maybe 2 or 3 break evens with the rest losses. This represents a solidly profitable system. What can't be known is over 100 trades what order the wins, break evens and losses will come. With a 40% strike rate it is not inconceivable that you will incur 5 or 6 or more losses in a row before you reach a winner. Of course it can and does happen the other way round and you experience a run of winners. So why when most people profess to know this will they only work a system for 10 to 20 trades before abandoning it if it doesn't perform?
It is my feeling that it is more or less impossible to predict with any degree of accuracy a sustained direction for any market. What a trading system does is increase the probability of your trade working out and making you money against a randomly placed trade. A trading system is not a licence to print money but merely a way of identifying patterns and/or situations which have a higher percentage chance of making you money than a random guess.
What really makes the difference between traders that make money and those that don't is that winning traders are willing to be wrong quickly and willing to be right for longer. In other words, and taking into account the randomness of the markets we trade, if it really is that a trading system will have winners and losers and we can't know in which order they will come then it is vital to accept and close the losing trades quickly and unless you are working with a fixed take profit to take advantage of a high probability situation you should hold on to your winning trades until you have a solid reason to close them.
I hope this makes sense and helps someone?
