Trading is a game with a negative mathematical expectation. This means that when you open a trade, you have already received a loss in the amount of two trading fees for entering and exiting this trade.
That is, in order to simply enter the breakeven zone, you need to earn something.
If there were no trading fees, each of you before entering into a trade, at any time, could simply flip a coin and decide which way to trade – long or short.
With a sufficiently large sample and the same transaction parameters, your win rate would always be about 50%, that is, an equal number of profitable and unprofitable trades.
This is the law of mathematical expectation.
But trading fees disrupt this balance and enrich the market maker, just as the zero sector on the roulette wheel makes the casino owner a millionaire. At a distance, for a beginner, trading will always be unprofitable.
What should we do?
We have to create a mathematical advantage in our favor. Quite a small amount is enough, maybe just a few percent. But after a hundred trades with such a small advantage, our profit will be greater than the losses. This is what the trader earns.
How to get this advantage?
Stick to your trading strategy.
The most basic parameters that affect the mathematical advantage:
1. Always limit the risk. Can you hear me? Always. Do not dare to risk more than 2% of all your money in one trade.
2. Always calculate leverage based on the maximum allowable risk for this trade. Do you remember about the 2%?
3. Always plan your profit before entering the trade. You need to know how many points you want to earn and what you risk every time before you put your money on the table.
4. The risk-to-profit ratio in each trade should be at least 1 to 3. Get yourself a tattoo with this law. This is an incredibly important condition for your stable profitability.
5. After opening a trade, you have only two options: stop loss or take profit. Beat your hands, tie yourself to a chair, hide in a closet, but once the deal is open you can’t touch it anymore. You either won or lost. Bets are made, there are no more bets. I advise you to put notifications at these points and just turn off the laptop.
6. Do not change the pattern by which you enter the trade. Do you open a deal after the structure is broken? Or are you looking for a continuation of the trend? It doesn’t matter. The main thing is that your trades are of the same type for a sufficient amount of time. Don’t change your strategy after three stop losses. Trade the same pattern of 20, 30, 40 trades. Let the mathematical expectation show itself. Are you losing too much or are you scared? So you violated the laws written above.
7. What makes a trader rich is the difference between what he has earned and what he has lost. Accept the risk of losing money. Accept the uncertainty of each trade. Treat your winnings as indifferently as you treat your losses. Analyze your results not by one trade, but by ten trades. Thoughts are percentages, not dollars. Sum up the results of the week, month, year. Analyze your strengths and weaknesses. Mark the patterns in which you lose more often and get rid of it. Concentrate on the patterns where you win.
Look at trading not as chaos, but as the most accurate mechanism in the world and you will see the magic of mathematics.
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