Sunday, August 7, 2016

Trading successfully - It's all about statistics

Challenge #9 update: approaching the 20% profit target, after 4 weeks, challenge started on July, 11.

We expect to reach that target early this week, all we know is that if we take all the setups our system triggers, profits will take care of themselves giving us 70%+ of winning trades, all we have to do is to watch the market waiting for those patterns that fit our criteria and when they show up, we pull the trigger without hesitating, a trading system is nothing more than a group of specific rules that determine entry and exit spots for a given instrument.

As our main instrument for day trading is the ES (E-mini S&P 500 futures), our minimum target for each trade is 4 points while our average STOP loss is 2 points, giving us a risk reward of 2:1.

So, do the math: if we're profitable in 70%+ of the trades (7 out of 10 trades are winners) then in a 50 trade sequence we would have a possible outcome like below:

50 trades ==> 35 winning trades = 35 X 4 points = 140 points
                       15 losing trades     = 15 X 2 points = -30 points

Total in points after 50 trades: +110 points X US$ 50.00 = US$ 5,500.00 per contract

This is the average outcome you can expect if you follow the rules of our trading methodology, but it also depends on the volatility at the time, when we have more volatility we may be able to take more trades and besides that we can increase the quantity of winning trades, taking the winning ratio from 70% to 80 or even 90%+, but, on the other hand, we will also see short periods of lower win ratio, from 60 to 65%, so let's illustrate that with a pessimist example of an outcome of only 50% win ratio, it would be something like this:

50 trades ==> 25 winning trades =  25 X 4 points = 100 points
                       25 losing trades     = 25 X 2 points = -50 points

Total points after 50 trades: +50 points X US$ 50.00 = US$ 2,500.00 per contract!

Discipline & rules profit, even with a 40% win ratio you'd still be profitable, you'd need to lose on over 65% of the trades to be in a losing position after that sequence of 50 trades.

Have in mind that when we have a higher volatility the number of trades we take increase, then that sequence would take less than 2 weeks to be done.

The Diamond Setups members know that in the last 5 years or so we've never experienced a losing ratio below 50-60%, we are certain that in that sequence of trades we will see profits, the only thing we don't know is how the sequence of winners & losers we will come up, it might be something like this: win, win, win, lose, lose, win, lose, win, win, win... and so on.

Just do the right thing and follow the rules, profits will be automatic, it feels really good when we're sure about that, if we do the work we'll be rewarded and be in the exclusive club of consistent winners.

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Have a great trading week, best of luck!