Episode #1: The Big Question
Hello and welcome to my Sunday podcast. So today I’m going to talk about something that has been bothering me for a while. I have talked about it in some of my videos from time to time. But this is something that everyone asks about. They are confused about it, but they reality is we shouldn’t be confused about this the way we are confused about it because it’s very simple.
So the question is, why are people getting confused when it is very simple? That is because it’s got two faces. It’s like a coin. So it’s the same thing, but you can look at either side of it. So the face that we see is the common one which everyone comes across and the problem is that we have to switch our brain the way we think about it and only then we’re able to we will be able to flip this coin and see the other side of it.
And that is. If this certain so there are patterns in the market that we trade and we trade those patterns based on the belief that it will make us money. But what I’ve noticed is that everyone generalizes the idea. And they take the decision based on emotions, so they’re taken emotional decision, but fail to look at the logic of it.
Now, it’s a great thing to have a pattern. But the ability for you to have the motivation to trade the pattern you have to logically understand it as well and the reason for that is that while the emotional reason for portraying that pattern is to actually get the emotional benefits from it, which is I want to trade this pattern because over the period of time it’s gonna make me money.
The logical reason is that this. Pattern has a statistical advantage, which means that if you traded a hundred times then there’s a higher probability that you will win more the sum total of all your winning trades will be more total of all the losing trades. It does not mean that all 100 trades are gonna be winners.
It states that based on testing last 30 years of data and thousands of patterns. Identified. We have a certain advantage and to simplify it we have a 66% win rate where 33% is a loss rate so in any 100 trades and if you trade 1%, you will lose 33% of your account.
But 66% of the time you will win out of the 66% about 40% of the time you will win when you will have profit of 2% so that’s 80% in the rest of them, you will not lose money, but you won’t make much money as well, so you will make 80% or 60% at the lowest from your.
Winning trades and you will lose 30 to 35% from you losing trades, so if you have the highest amount of losing trades in that hundred. Trades batch and the lowest then you will probably make 15 to 20%, but if you had the best month where you’ll have the losing the losing side is the lowest let’s say you had 30% of losing trade that 30%.
30 points loss, and and if you had the best obviously if you’re 30 and you have the best side yeah, let’s say a 40% of the trades work winners, you would have made 80% so 80 minus 30, there will be 50% so your wins per every 100 trades per and most probably per 120 every 20 trades.
It’s going to be something like this, so let’s suppose you traded a thousand trades and then you went on and checked every. Every 100 trades you will find that some of the 100 trades batch will have 40 35 percent winners and others will have 40 45 percent so it’s all different so when I say 6 to 6 percent it’s the average of all that sometimes you even have 70 percent win rate or sometimes it would drop to about 60 percent win rate and that doesn’t invalidate this so if you don’t try to understand this.
And only go on the emotional side what happens is that when you go through the thing that we call a losing streak, then it becomes a problem you have bad emotions involved to it and you have to then take a decision based on your emotions, that’s where you need your logical side to kick in to say look.
We understand the losing stream and for those of you who don’t understand losing streak, it’s this that for every given set of events, let’s say a hundred or a thousand events, there will be there is a probability of a streak of winners in a streak of losers and it’s not that hard to find out.
If you know the wind rate of a system you can actually find out what is the probability of a five six seven or ten losing trades streak so based on our analysis there is quite a high probability of having three winners or three three losers. And slower probability of having five or six winners or losers in a row and as the number goes up the probability the decreases so is it possible to have ten losers in a row yes it is possible how often the probability of that is quite lower than twenty percent but that doesn’t mean it won’t happen it can happen and so what do you do and the reason for that is you you do your risk management correctly.
So you you’re saying okay can I take as you have to prepare for this so if it’s a possibility then you have to have something in your trade plan so that means that if you lose ten trades in a row and if you risk one percent in every trade you’ll be down ten percent but imagine this you just had a one batch where you increase your account by fifty percent and then the next batch you had ten losing trades now you’re down to 40 percent, but if you look at the overall thing, you’re still up by 40 percent, so it doesn’t really hurt you much.
It only hurts when by chance when you start trading and there is a higher probability of this happening in the beginning it’s because you probably would lose discipline because of your emotional state because you are not used to trading much so that so the more emotional you are the more prone to mistakes you are so there are two things so.
The probability of you losing discipline can having a losing streak that’s a different thing it’s a separate thing to the valid streak of the system so the system can have its own streak without you losing discipline and this is the important thing that we talk about in our T20 challenge so more on this later and now.
I wish you all have a great rest of the Sunday our Sunday is gone and we are ready for probably the final week of trading this year see you later.
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