Success by the numbers

An intro to probability

WIN-RATE IS NOT the only CONSIDERation

Here is an Example of this:

if 70% of your trades are losers, 30% are winners — but the average winner is much bigger than the average loser — you can still be profitable, over the longer-term

How did it Turn up to be a Profitable Trade Plan?

Imagine a dice-roll game..

Everytime you roll 3,4,5,6 – you pay a $100

Everytime you roll 1 or 2 – you’ll be paid $600

The probability of getting a win is ~33.3% vs a probability of getting a loser at ~66.6%

So the ratio between those is 1:2,

But the Ratio between potential profit and the potential loss is 6:1

And that’s a key point — the lower your win:loss ratio (e.g. 1:2, as above), the more likely you are to get a string of losses in a row —- purely due to the laws of mathematical probability

Here is a Dice Simulation to better understand what is mentioned above:

This only shows that with a lot number of trades(dice rolls), you’ll be winning in the longer-term

These are the essential concepts that we need to understand before we focus on
Charts etc.

Another Example is, you sent out an Email to 100 Clients,
Leading to 10 sales of $100 each, and Sending out the email costs you $500.
You’ll end up Profitable and then you start sending out more emails that get more people to buy.

The key to this is, knowing how much the costs is per Email Sent, wether the client buys or not.

So that is,

100 Emails Sent, $1000 Profit Returned. $500 Cost

The Total is,

$1000 – $500 = $500 Profit

$500 Profit divided by 100 Emails Sent = $5 per sent Email

So in Context:

100 Trades Placed. $1000 Total Profit Returned. $500 Total loss.
Every Trading Opportunity is worth $5 win or lose

 

“The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.” – Paul Tudor Jones

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