Golden Rules of Trading
Every time you place a trade, you have to calculate the probability of success or failure.
You wouldn't enter a trade if you don't think you would make money.
You make a decision the particular trade that has a high probability of success.
The question is how much of an edge you have on that event?
In theory,if you have an edge,then eventually you will make money or if you don't have an edge but the winning events far surpass the losing events, you will make money too.
Other factors have to be taken into consideration such as varieable expenses and commissions.
Let's say you have a method of trading with a 60% of probability of success.
Doesn't that mean for every 100 trade you will win 6 out of ten?
Not necessarily!
Win tends to be skewed.
They are skewed in two ways.
a)There tend to be a few big, big winner and
a lot of smaller winners.
b)You have no ways to know which trade
is a winner.
You can test this simple theory by tossing a coin.
Is it possible you have an extreme result like this in tossing your coin just ten times?
Yes.
It is possible that you can have 10 heads and 0 tails or 10 tails and 0 heads.
Bad run can and it will happen to you at some stage and there is no way of knowing when.
You know from statistic : in a long run,you still have a consistent result of 50% of heads and 50% of tails out of thousands times of tossing a coin.
This is the approach you have to apply to your trading system even you tested for hundreds of times.
Don't just quite if you have a few of bad run in your trading. Back-test your system again and make sure it run on paper consistenly.
Try your luck again. A big winner may be just around the corner.
This is why it is so important....
You have some working knowledge of probability before you trade in order to maximize your trading technique.
This is why risk manangement is the single most important of your trading plan.
Without it nothing works.
Cutting your losses short is the only way of how you can buy cheap insurance again your bad day.
Traders are not gamblers.
They are statisticians.You have to look at the markets like a scientist would.
If you do X, will you get Y?
You have to record your result and keep a trading log of what happens in your trading.
Weep out the lossers and keep the winners running.
That is where you have the advantages as a knowledable traders
because you know:
a)Good selection criteria to buy your stocks.
b) How to enter and exit the financial markets.
c)How to get helps from tools available on the
Internet monitoring your stocks.
d)How to manage your risk in order to maximize
the return.
e)How to avoid mistakes to preserve your hard
earning money.
f) How to spot the bottom and top of the markets
to maximize your return and to minimize
their risk.
