Boiling it Down

Let's talk about trading.... this idea of going into the market day by day to extract cash. The game is simple, and we must all start out as armatures. There is no part time market, no armature league. The person placing their first order is doing so in the same pools as the twenty year veteran. Yet, so many fail to understand the most basic concepts of what they are trying to accomplish in the market.

Let's look at essentially what the market is, then compare that to a casino model.

Let f  be a function for how a trade in the market works:

f(entry,risk,exit) = random outcome > max risk

This is really it... it is this simple. All the trader can control is their entry, how much they are willing to risk to find out if that trade will be a winner or looser, and when they exit.

This is very much similar to that of a Black Jack table. The gambler can define when they play (hot deck?), how much they risk, and when they exit. Yet, there is one critical difference between the trader and the gambler. The trader can gain more than they risk on a given "hand" or trade, as well as limit downside risk as the round progresses.

Casinos are able to make money because they have a slight edge in win percent over the gambler and with a large enough sample size they know it will yield a positive expectancy. This is why the casino manager does not worry when a big shot comes in and puts down a large bet. The manager knows that as long as they keep betting the casino will win. This is why they pump the room with oxygen and give out free drinks.

The Job of a Trader

Thus, the diagram above represents the true job of a trader. All you can do is use ever fiber of your body to create a system that lets you generate a trade with a random outcome and an asymmetrical risk profile.

Many of the best traders in the world have a win percent in the low 40%. To be wrong more often than right and still able to be the top performer is the proof of the power that asymmetrical risk provides. If you can eliminate the big loss with proper risk management, all you have to do then is allow for your winners to have the opportunity to run farther than the risk it was given.

All too often, the trader focuses too much on finding the perfect system or best trade thesis. However, at the end of the day it is a random outcome of winners and looser most strategies can provide that random outcome. It is far better for the developing trader to put more emphasis on risk control and proper trade management habits that yield asymmetrical real risk returns, than a new flashy indicator.

If 90% fail in 90 days it is 90% of the time (likely more) due to a lack of proper risk management. With proper risk control, your risk of ruin and account longevity is under your control. Then, it is fine tuning what kind of ideas you put into the magic box, that is the market, and see what comes out.

I challenge every trader to take a look in the mirror and take accountability of your risk controls. Real traders use stops, real traders take less heat, the best average up.