Let's go back to the probability in our trading investments. Many people think that if you want to make a profit in the market, you have to have a probability advantage. If you make an order with a success rate of more than 50% in the same amount of profit and loss each time, you will be profitable in the long run.
In our trading, due to the highly unpredictability and uncertainty of the market, it is not easy to make a probability of more than 50%, whether it is a long or short line, and it is often possible to lose money on the trend. Every day, there are many opportunities that seem to be false, often to execute a stop-loss position, especially in cash, and our friends with short futures are estimated to be deeply realized. In the long run, how many high performers with a probability of more than 50%?
And in actual trading, even if there is a probability advantage in the number of trades, it is not necessarily profitable in the long term. The profit alone is often less than expected, but the amount of loss is much larger than planned. Everyone does not take too much responsibility, this situation will often occur, this is human nature, one of the weaknesses of human nature.
Lost, lost, lost!
I started to think about the question of why losses occurred in the first two years in the maze. After reading some books and articles about trading, it is mentioned that to make a long-term profit, you must establish your own trading system, that is, to have your own trading method, to enter and exit, to have your own basis. I tried for more than a year, this method felt good, strictly disciplined and executed units can still maintain overall profitability, except for some uncontrolled failure to execute stop-loss trades, but the results of these uncontrolled results are almost fatal, large losses are not explosive.
When I realized that there was nothing wrong with our approach, that we were bound to make mistakes, that we were bound to lose, I became convinced that a stop-loss strategy was deadly. I have had this experience, and I have met several very experienced clients, who have been doing stocks for many years, discipline is very strong, continuous systematic stopping losses, account funds are shrinking, and confidence is hit hard.
In fact, I've been reading a lot about the positive expectations that I learned in high school, also called the average:
E=Xi*Pi ((i=1,2,3...), Xi is the probability of each occurrence, Pi is the probability of each occurrence, X has several values i take 1 to several. For example, we play a dice game with a total of six faces, numbers 1 to 6, and the probability of each face being thrown is the same, i.e. 1/6, so the positive expected value of a roll of the dice is
E=1*1/6+2*1/6+3*1/6+4*1/6+5*1/6+6*1/6=3.5
Let's play a game of dice, we give you a 1-6 dice, you need 3 bucks for each bet (cost), according to the number of points you put on the side, you give you the corresponding money (profit), that is, you pay me 3 bucks first, if you bet 6 bucks I give you 6 bucks. You don't play? Of course you do.
We've taken this principle to our transactions. Let's look at some real-world examples first.
Let's imagine our trading system in a simple way: let's take the example of spot gold, and let's say we set a stop loss value of an average of 6 USD/oz ((the unit of spot gold is USD/oz, for simplicity's sake, we'll substitute the unit below with a dot and a dot).); how large the stop loss setting is, to combine with your own position and personal psychological acceptance, everyone should be different, but setting too large means a heavy loss, not meaningful, setting too small the stop loss rate, high execution, and vice versa unfavorable.
The positive expected value of the shock trading system (approach) is:
E=X+*P+
If we set a stop loss of 6 points for each trade (including the processing fee), there are 7 losses and 3 gains in 10 trades, that is, we try to find a profit opportunity with 3 to 4 trials and errors. It is almost impossible for us to buy at the lowest point and sell at the highest point, we only catch about 60% of them, and we take 20 points to calculate. E = 200.3—60.8 = 1.2... i.e. in 10 trades, an average profit of 1.2 points per trade, a total profit of 12 points in 10 trades... extend the time, increase the number of trades, theoretically we can make a profit... in a big shock, exactly how many trading opportunities are there, varies from person to person.0.35—60.65 = 4.15! In 10 trades, the average profit is 4.15 points per trade, with a total profit of 41.5 points in 10 trades. From here we can see that the difference between us and the good guys is that they do a little better than us, but the result is different in quality!
The logic is simple, the theory is beautiful, also operable, 10 times to do 3 times, the requirements for yourself are not very high? But what about reality? recall the situation of your previous losses. After winning four or five points, you can't stand a flat profit, losses are staggering, the profit probability P + itself is not high, X + is small, X is very large, how to make a profit?
If you look at the trade as a career, see it as a business, the loss is the cost of doing business. There is no cost to pay, where is the profit? The essence of the trading method is trial and error, the ability and vision are not enough, the cost is naturally high employment, one line or not?
Translated from the original language.